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  • The U.S. Dollar As A Store Of Value [View article]
    Hi DV, always enjoy comparing notes on how we perceive this thing to actually work. No doubt you and I have spent long hours studying it. We are either talking a different language describing the same thing, or saying something largely different.

    Fed purchases, as I see them, do not so much increase the money supply (currency circulating the actual economy) as much as they provide liquidity for the financial markets (money circulating in the investment community.) Monetary policy is a supply side stimulus.

    I simply do not understand what you mean by the Fed "extracting" cash on the open market to buy bonds. The Fed simply inputs all the money it will ever need through keyboard strokes (creating liabilities), then credits the seller's account (crediting bank assets.) This is how excess reserves are created. It's a swap of cash for a bond. But it's not new cash, it's simply more liquid savings the bond holder already held as savings.

    If someone is banging on the door for repayment, they miss the fact the US can make good on it's debt denominated in dollars anytime - politically willing. They can either wait until maturity as contracted or sell it to someone else and hold (and spend) their dollar savings anyway they choose. It's never a matter of banging down the door to be the first to be repaid for fear of default, desiring to hold cash is a preference for liquidity over a timed savings account.

    It does not matter who holds them, someone will. Foreign investors hold them as a consequence of selling their wares to US consumers who settle in dollars. As long as they desire to sell to the US and earn dollars, there will always be buyers of US financial assets, including governments.

    "IMO it is careless and dishonest to tell people not to worry because in theory the US can't default or run out of money and no one wants to be repaid."

    Understood. But it's important to recognize there is no way for a monopoly issuer of the nation's currency to ever be fiscally unable to make good on it's debt denominated in the nation's currency. This is not true for you and I, because we can run out of money. The government simply cannot, unless it's a political decision to do so. The US can have as much money as congress authorizes it to have, so long as they do it responsibly and in accordance with the budget constraints.
    Sep 30 08:51 AM | Likes Like |Link to Comment
  • Common Sense And The Foolishness Of Income Redistribution [View article]
    Gary, your description of non material wealth sounds accurate. You may have no idea how much I respect you for making that observation. I've lived in many third world nations, and still do. I just do not see any parallels to Indian reservations flush with Keynesian-ism, apparently.

    Thinking about your casino capitalism metaphor, it's a place where 100 people enter. A few emerge as winners, some make a little something, a few break even, but the majority loose. All had a good time, though.

    This is kind of what I see in the third world. A guy down the street works very long hours every day of the week in a home based Kiosk just to make ends meet from very poor customers. It's a place where you can buy a single cigarette instead of a pack. No matter how hard he works, I believe dispelling the myth poor folks are poor because they are somehow lazy, he will never open the next Wal Mart.

    That may have more to do with corruption of liberty, as you say, but it's also a form of very free, pure competitive, Capitalism. He created his own employment, like the snake oil salesmen of old, and struggles everyday to work himself out of poverty almost to no avail. His wife is ill and most of his earnings goes to pay electric and medical bills. He has no health insurance and no benefits from the government at all. Neither do many of his customers, they are largely broke and struggle almost daily to put simple food on the table.

    One farmer I know catches and eats rat, along with his chickens, eggs, some crops, and maybe a pig from time to time. I broke "rat" with him and his wonderful family and was proud to have done so. He shared the nothing he has with me, to me that was enlightening. His crops fetch little from the market and are seasonal. He will never make it big despite his efforts and an occasional bottle of Brandy. Yet, he manages, somehow, to live just above absolute nothing taking what few short term jobs that might pop up. Or might not, and often do not.

    I dunno, I think those in America are simply better off under Keynesianism and capitalism with a hint of socialism (redistribution actually required to make our functioning monetary union function.) Otherwise we all become like Greece where financial capital concentrates as someone's savings and we go broke creating debt to support it.
    Sep 29 09:35 AM | 2 Likes Like |Link to Comment
  • Common Sense And The Foolishness Of Income Redistribution [View article]
    "If you want to see the end game for Keynesian Economics, Fiscal Policy, Income Redistribution and Nationalized Health Care, visit any one of America's in situ third world nations..."

    Here's an idea, try visiting an actual third world nation that has none of the above. Get off the beaten path of casinos, nice beaches, and tourist attractions. "Poverty, crime, filth, violence, and alcoholism run rampant," there, too.

    Actually, that's a bit of a stereotype. Think of American during the depression era, it's more like that.

    "The only exceptions are ones with casinos: palaces of risk-taking and capitalism."

    OMG! I am busting a gut... I seriously cannot tell if that was in jest or not. I hope it was in jest.
    Sep 29 07:21 AM | 1 Like Like |Link to Comment
  • The U.S. Dollar As A Store Of Value [View article]
    Uncle, sure, the supply of money has grown significantly since 1913. This is probably one reason, maybe the primary reason, a candy bar costs so much. (Apparently is has doubled or more since I was a kid, too. Candy was much cheaper, for sure. LOL)

    It wasn't the Fed creating all that money as it is our employed, creditworthy population. We create the money by going into debt, commercial bank lending creates most of the money circulating the globe buying goods and services and ending up as someone's savings. The Fed plays a role by setting the funds rate, but we choose whether or not to make a loan or whip out our credit cards. More people becoming relatively wealthy and forming a healthy middle class means the money supply is expanding along with or maybe ever faster than the economy.

    Of course the dollar is not a store of value unless invested in an interest bearing instrument. It has a slight hot potato effect as a medium of exchange. But, yes, I would accept Federal Reserve notes knowing I can exchange them, either for goods and services or an interest bearing savings instrument, at will whenever I wanted. I might even put them under a mattress for short periods to accumulate more and pay 2% inflation rather that 10% credit rates.
    Sep 28 09:30 PM | Likes Like |Link to Comment
  • The U.S. Dollar As A Store Of Value [View article]
    Uncle, The Fed does not create new money, it simply makes what money we already hold in bonds more liquid. It does so when the market demands liquidity - when banks fail and when returns are low and rates need to be lower. The number of dollars could have increased at zero interest, but the government is afraid of it's own debt. Government liabilities are private sector assets, and since the government is the monopoly supplier of the currency there's no one banging at the door to be repaid.
    Sep 27 08:00 PM | Likes Like |Link to Comment
  • The U.S. Dollar As A Store Of Value [View article]
    "I think Fed lost control of everything but they just keep ignoring it."

    The Fed does not really try to control anything other than the overnight funds rate. The rest of Fed accommodation is market driven, which is why it's policies are called "accommodation." The Fed does not directly control inflation, asset prices, nor the money supply in circulation. As Larry Kramer puts it nicely, if they accommodate too much we get inflation. If not enough, the market gives us deflation. With inflation just below target, the current level of accommodation is just about right.
    Sep 27 07:56 PM | Likes Like |Link to Comment
  • The U.S. Dollar As A Store Of Value [View article]
    I just do not think the BRIC development bank with it's $100bln capitalization can compete with the immense liquidity of the US dollar. In fact, some of it's holdings will be in dollars, if memory serves.
    Sep 27 07:50 PM | Likes Like |Link to Comment
  • The U.S. Dollar As A Store Of Value [View article]
    Swaps, the Fed cannot buy the bad stuff. We cannot base our money supply on anything but the best safe financial assets available, such as US government bonds. Early liquidity to banks was in the form of loans, QE is out right purchases. This seems to have supported asset prices as the Fed dampened supply. Once the liquidity issue was solved, banks stopped trying to sell their bad stuff driving down the price in an effort to get liquidity to meet their obligations. So, prices stabilized and banks held a lot of earning assets.
    Sep 27 07:44 PM | Likes Like |Link to Comment
  • A MMT View On The Theory Of Hyperinflations [View article]
    "But given the concern some people have about hyperinflation, it's worth discussing."

    Sep 27 07:34 PM | Likes Like |Link to Comment
  • A MMT View On The Theory Of Hyperinflations [View article]
    Here's an MMT version of hyperinflation, it models decreased productive capacity (as you say) and foreign denominated debt. Zimbabwe and Wiemar are often cited as classic cases, but these were the conditions present on both cases. But for those interested...Zimbabwe is an interesting case. Maybe it's not so easy to hyper inflate unless we do stupid things, again as you say, and regardless of the fear of excess reserves leaking into the domestic economy.

    "Zimbabwe for Hyperventilators 101"
    Sep 27 07:18 AM | Likes Like |Link to Comment
  • CMMT - Cate's Modern Monetary Theory [View article]
    On debiting and crediting bank reserves in the act of tax collection, in some cases bond buying, and spending, the amount of reserves change across the banking system affecting the funds rate. There is a reserve effect of government fiscal policy. The Fed manages accounts through out the banking system to defend it's funds rate as base money is debited and credited from and back into the banking system.

    If the government spends twice as much as its revenue, we may or may not have inflation. It all depends on how much money is circulating in the economy relative to the goods and services available for sale. The dollar is no longer pegged to gold, it is pegged to production. If the government spends exceeding output capacity, it puts upward pressure on prices causing inflation because of the monetary phenomenon. But, this is high inflation, not hyperinflation.

    Hyperinflation, according to MMT, is a different animal. Everyone likes to cite Zimbabwe as the money printing evil. Turns out, land reform in Zimbabwe caused production to plummet as less productive workers inherited land from very productive, former owners or capital. This caused an economic downturn and investors pressured Zimbabwe to refund their loans to the government denominated in foreign currencies. The central bank had to print to buy foreign currency to remit foreign denominated debt. This printing sent the exchange rate plummeting and increased the domestic money supply. Thus massive printing well above the inability to produce goods and services created heavy demand on a weak supply with a debased currency that rapidly became toilet paper.

    For Zimbabwe, it was the combination of a decimated economy and repaying foreign denominated debt that drove hyperinflation, not simply spending too much. The US has plenty of capacity, for now, and no foreign denominated debt.

    If China wants it's money back (dollars) is can simply sell it's bonds to someone else holding dollars then spend it's dollars as it sees fit. It makes no difference to anyone. China could dump all of it's dollars in dollar denominated assets overseas or domestically. If China dumped it's dollars back into the US buying everything for sale, it would be a wonderful time for the government to tax some of it's excess money out of existence.

    The thing about US debt is someone's liability is another's asset. Every dollar of US liabilities are someone's net financial asset...either cash or a bond. US debt should continually expand as our nation becomes financially wealthier and business and investors earn dollars through global trade courtesy of the US consumer who is creating most of the money supply (which pays savings and wages) through commercial bank lending, anyway. Just as a commercial bank liability is our money, the government's liabilities are someone's "money," too.

    The difference is, our debt money creation must be repaid eventually netting to zero (individually) while government liabilities can persist indefinitely since the government is the monopoly issuer of the currency, anyway. It can always make good on it's dollar denominated debt. The trick is to manage the dollar and to keep it somewhat healthy - without debasing it at some high nominal rate. Outside of some developing nation's currencies, the dollar has fared very well.
    Sep 27 06:59 AM | Likes Like |Link to Comment
  • CMMT - Cate's Modern Monetary Theory [View article]
    Vince, I think you're close but still misunderstand some concepts.

    Yes, taxation destroys money. When the government taxes (and it's a bit more complicated than this, but...) it simply debits a bank's reserves and our demand deposit by the same amount. It's just a simple check clearing process. Debiting a bank's reserve assets also means debiting their reserve holdings at the Fed. Those reserves are then credited to the Treasury's general checking account which is also a Fed liability. These reserves are what the government spends back into the economy later.

    Our deposit is simply debited and our money as a bank liability goes no where. Thus our taxed demand deposit money does not fund the government. It is simply debited out of existence. It's destroyed. At the same time, the reserves held at the Fed are credited to the Treasury which is not part of the base money supply. The government could pay off some debt crediting those reserves back into the banking system by crediting the bank's reserve assets thus crediting the bond holders account. The bond disappears and the former bond holder now has liquid cash credited to his account.

    The process of crediting and debiting bank reserve (bank asset) accounts, as Fed liability side transactions, similarly debits and credits our demand deposits (bank liabilities.) Our money appears and disappears accordingly.

    The process for a bond purchase is similar, except that the money really does not disappear. It is credited to a government bond, it's a savings account and not a fiscal funding tool. Our money is always a liability of something or someone. In the case of borrowing, the asset is a bond and the liability side of that bond is our money. It does not disappear, it just becomes less liquid and cannot be spent immediately. So, if we still hold our money in a safe government bond as a liability side entry to that asset, then who's money did the government spend? It spent reserves held at the Fed, it spent it's own money - money it created as a central bank liability when it bought the bond. And it affected the actual money supply we spend by debiting and crediting reserves in the banking system.

    Taxation destroys money, borrowing saves it in a less liquid form and pays interest for deferring our spending. Yes, these transactions are monetary in nature. When the government spends, it spends by crediting and debiting the commercial banking system with Fed reserve liabilities/bank assets of it's own creation backed (mostly) by it's own debt and by the government buying private sector debt.

    Lest one thinks they can cheat the system by holding FRNs directly, think about what happens when you hand carry cash to the IRS to pay your taxes. To withdraw money, you've already debited your account and bank vault cash by the same amount. Those FRNs still exist as a Fed liability. When you hand them over to the IRS, they cannot deposit Fed liabilities to the Fed's asset side on behalf of the Treasury. All that happens is the cash is accounted for and the Fed transfers some freed up reserve liabilities to the Treasury just as it would have done if you had written a check. Paying our taxation in cash claiming the government is spending our money, we simply debit the bank's vault cash and our own deposit manually. The IRS nor the government has any more use for those paper IOUs we held as our own as they simply cannot be spent by the government, anyway.
    Sep 27 06:34 AM | Likes Like |Link to Comment
  • Why Can't Academic Economists Understand Endogenous Money? [View article]
    Au, everything you say makes sense, except for the part above I could not make sense of. No biggie, it didn't make sense anyway as we both agree. But trying to figure out how banks actually lend their funds without depleting their assets and keeping liabilities when you say banks lend loan-able funds.

    I guess the bottom line is, commercial deposit taking banks do not get a deposit of $100 and lend $90 to someone outside the banking system. They get $100 in reserves through the payments system leaving them long and another bank (possibly) short on reserves. Reserves are not loaned as bank assets held as either vault cash nor deposits at the Fed. They simply ensure the liquidity of the payments system. Loan deposits are simply credited by a key stroke as an offsetting liability of the new loan asset.

    I mean, I do try and did years ago, understand what you're saying. It's just no correct in today's banking system. And far as I can tell, it never has been. Even in the days of a goldsmith, the goldsmith would never take 100oz of gold and loan 90oz of gold to someone else. This is essentially what you are saying when banks create new loans by lending their cash asset holdings to someone else. He would simply write a gold certificate (a liability side entry) to trade as money while he held onto his depositor's gold.

    Now it is entirely possible a bank could buy an interest bearing asset created by someone else and hold it as an earning asset on it's books. That could be done by crediting the sellers bank through the payments system resulting in a deposit credit to the seller. If a bank took in $100 on a deposit and was $90 long on reserves, it could invest, beg, borrow, steal, or buy an earning asset with the $90 excess in such a way.
    Sep 27 12:25 AM | Likes Like |Link to Comment
  • Monetary Madness [View article]
    "Its MUCH more likely to have more QE to lower the dollar & stimulate the crashing demand."

    Aggregate demand for goods and services or falling commodity prices? And this is something debasing the dollar from under the American consumer's feet is going to fix? It's important to remember the monetary illusion is, well, it's an illusion.
    Sep 26 05:55 PM | Likes Like |Link to Comment
  • Monetary Madness [View article]
    "A push for higher inflation would mean something like the adoption of a 4% inflation target (or a 5% nominal GDP target, take your pick), central banks promising to be a bit irresponsible."

    Hi SU, you're correct in that monetarism has some valid points to be made. The idea of jacking up the money supply so that wages and prices begin to rise, well, the whole idea for our sluggish growth seems to be the money supply. Apparently stock of currency in circulation and the rate of change over is too low. As you state, household balance sheets were hit pretty hard and it's only gradually getting better as credit conditions improve, stubborn unemployment improves with residual slack, and with sluggish growth.

    A nominal GDP target is a supply side policy. Inflation turns cash into a hot potato and the idea is investors will seek returns investing in risk to increase their net wealth despite the "irresponsibly" debased dollar. The problem seems to be, such returns are not to be found in a struggling economy. Dollars seek risk abroad where growth, inflation, employment, and credit availability is already strong. Those earnings are probably going to be had in foreign economies with a strengthening currency relative to the falling dollar and not so much domestically. And because domestic consumption remains weak, global US dollar savings falls (which seems to be why the Fed makes our dollar savings more liquid.) A healthy US consumer can put dollars into circulation to be captured by investors globally.

    The main problem with a nominal GDP or higher inflation target is in the mechanism of actually bolstering the monetary base and where any resulting inflation actually comes from. The Fed can increase the monetary base pretty much at will, so long as it accommodates the demand for liquidity. It can, indeed, buy the entire world turning the dollar into toilet paper at least in the global financial markets.

    But there is no multiplier effect between the monetary base and increased domestic consumer lending. If there were, there would be, what, $40 trillion dollars-ish circulating the domestic economy and fueling China's economy as well. We'd probably be hearing a bit more about Zimbabwe. So, while those with large dollar savings are flush, there is no guarantee the struggling domestic consumer will get their hands on enough of it to blow their nose with. So, we rely on developing nations for global aggregate demand.

    So, dollars circulate around the globe, which is perfectly fine, chasing interest bearing opportunities and pushing up the nominal prices of assets, commodities, and Cuban cigars. There is some pressure on producer input costs, some of that price pressure is endured by the beleaguered, underwater, broke, and unemployed domestic consumer who doesn't immediately reach for his credit card to make that last minute flat screen TV purchase before the price soars over his credit limit.

    Monetary policy is a blunt instrument and when all you have is a hammer... When the problem is slack demand, low or stagnant wages, low loan growth, and basically all aspects of a diminished money supply and slack aggregate demand, well that's what we have to smash with our policy tools. So, as said many times, I am with you on injecting directly into the veins of the economy. This puts dollars into circulation, consumers eat more fast food, and US dollar capital flows increase earnings and returns on investment without really having to cheapen the currency just for the halibut.
    Sep 26 05:19 PM | Likes Like |Link to Comment