tag:blogger.com,1999:blog-970611666708740586.post3843384020892227686..comments2023-08-28T11:48:39.554-07:00Comments on Reserved Place: Easing understandingRebelEconomisthttp://www.blogger.com/profile/13241098878248190971noreply@blogger.comBlogger25125tag:blogger.com,1999:blog-970611666708740586.post-65999281216068112592012-12-22T13:37:51.022-08:002012-12-22T13:37:51.022-08:00off topic, but I should have asked this like half ...off topic, but I should have asked this like half a year ago.<br /><br />Reading economics papers, often more for implementing, I came repeatedly across severe errors, not just typos, missing footnotes ....,<br />but lethal construction problems, IMHO.<br /><br />I would be very interested, if somebody versed in the field would take a look at my argument, and maybe tell me what I got wrong.<br /><br />1. Cobb-Douglas 1928<br />2. Solow 1957<br />3. reception of that by Barro, Krugman 1992, in references to an intermediate paper, I have to find<br /><br />Interested ?<br /><br />Or any suggestion, where, who might be helpful with that?<br />genauerhttps://www.blogger.com/profile/13492377118433913487noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-64634378438536892192011-10-21T14:54:34.247-07:002011-10-21T14:54:34.247-07:00Anonymous,
If you read paragraph 5 again, you wil...Anonymous,<br /><br />If you read paragraph 5 again, you will see that I am making a generic point about all definitions of money stock. They are often called money supply, but none of them are flows. It is just an attempt to dispel all possible confusion before moving on in what is supposed to be an explanation from first principles.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-3081847201376663942011-10-21T10:55:46.265-07:002011-10-21T10:55:46.265-07:00You say "money supply" is confused with ...You say "money supply" is confused with a flow. But this is exactly what it is. The monetary base, if called "money supply" has been inaccurately named. It is not a "supply".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-80317080846736109582011-07-24T10:03:54.849-07:002011-07-24T10:03:54.849-07:00I see what you mean but the definition of not prin...I see what you mean but the definition of not printing money assumes that the MBS's which the FED bought are "remarketable" on at least a break-even basis. I believe that this is the concensus. Let us hope so. Thanks again for your answers.guitrynoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-23664167138622872382011-07-24T03:10:16.579-07:002011-07-24T03:10:16.579-07:00Actually, in this case, I agree with Bernanke. I ...Actually, in this case, I agree with Bernanke. I discuss and define "printing money" in paragraph 41 of the post, and it remains the case that no major central bank has yet consented to print money according to my definition. Because the demand for safe assets like reserves is high due to financial uncertainty and because reserves bear some interest, the "moneyness" of reserves is presently quite low, so QE has not obviously been inflationary. QE can be seen as an exchange of assets, in which the Fed exploits the elevated demand for reserves to buy longer term and less creditworthy bonds, in the hope that lowering their yields will prompt more issuance of such bonds by the private sector and hence boost economic activity. That is a reasonable policy for now, but Bernanke's real test comes when QE is no longer needed, and reversing the asset swap is necessary to avoid inflation, but probably costly.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-56073898305553574922011-07-22T19:31:25.679-07:002011-07-22T19:31:25.679-07:00Thank you, Rebel, for your clarifying reply. That ...Thank you, Rebel, for your clarifying reply. That leads me to think that BB is being disengeneous when he states that he is not printing money but merely adding to the Fed's reserve.guitrynoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-35920332313298175012011-07-20T01:45:06.528-07:002011-07-20T01:45:06.528-07:00Not stupid at all. In both cases the Treasury rec...Not stupid at all. In both cases the Treasury receives credit in their current account at the Fed.<br /><br />Although you, as, I assume, a retail investor, do not have a current account at the Fed, your bank probably does (and if not, it will have a current account at a correspondent bank that does). When you buy a bond from the Treasury, you write an instruction (eg a cheque) to your bank to pay the Treasury, and, in turn, your bank instructs the Fed to pay the Treasury (ie to move credit from the bank's current account at the Fed to the Treasury's), while debiting your current account with your bank for the value of your bond purchase.<br /><br />What can get confusing is that credit in a bank's Fed current account counts as reserves, whereas credit in the Treasury's Fed current account does not. The idea is that banks' Fed current account credit is effectively money which the banks and their customers can choose to circulate, and may therefore have an influence on prices generally. However, I find it hard to imagine why the Treasury would be selling bonds to obtain reserves that it does not intend to spend, and thereby pass on to, the non-government sector, so I would say that the distinction between Fed current account credit held by banks and by the Treasury is of limited economic meaning. (One other minor difference is that the Treasury does not receive interest on its Fed current account credit, whereas the banks do).<br /><br />So, hopefully I have explained that there is no difference in the nature of what the Treasury receives in either case. I suspect, however, that you are really wondering why it matters whether the Treasury sells a bond to the Fed rather than to the private sector. It matters because when the Fed itself pays, it typically creates current account credit that did not previously exist ("typically", because an alternative possibility is that the Fed could sell its own bonds to obtain current account credit from the private sector), and hence (as soon as the Treasury spends that current account credit) reserves and effectively money. And, other things equal, more money chasing the same number of items means higher prices - ie inflation. Naturally, other things are not equal. Given the present lack of economic confidence, the public are more than usually inclined to hold money than to circulate it, so that Treasury borrowing from the Fed may not be inflationary for now, but if the economy improves, to avoid inflation, the Fed would probably have to sell the bonds it bought from the Treasury to withdraw reserves.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-82867744648268612212011-07-19T16:14:40.238-07:002011-07-19T16:14:40.238-07:00I am sorry to be so stupid but please someone expl...I am sorry to be so stupid but please someone explain to me just one thing: What EXACTY does the Treasury receive when they SELL bonds to the Federal Reserve Bank that is different than what it receives when I buy a Treasury bond?<br />guitry@ca.rr.comguitry@ca.rr.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-69410989510967511772010-10-05T03:54:39.963-07:002010-10-05T03:54:39.963-07:00Note to self:
The Bank of Japan began to pay inte...Note to self:<br /><br />The Bank of Japan began to pay interest on non-required (ie excess) reserves following an <a href="http://www.boj.or.jp/en/type/release/adhoc/k081031.pdf" rel="nofollow">announcement on 31 October 2008</a>. When introduced, the scheme, called the "complimentary deposit facility", was described as temporary and an expiry date of 16 March 2009 was set, but <a href="http://www.boj.or.jp/en/type/release/adhoc09/mok0902c.pdf" rel="nofollow">the life of the scheme was subsequently extended</a> repeatedly and it remains in operation at the time of writing.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-84207350745037568132010-05-26T13:44:23.208-07:002010-05-26T13:44:23.208-07:00Thanks for the comments Flow5 - I was surprised to...Thanks for the comments Flow5 - I was surprised to find someone reading this post after so long!<br /><br />I sometimes find your comments a bit cryptic, but I think I see what you mean here. Base money might be supplied by trading it against one particular type of debt, but the terms of that exchange will be affected by the the exchange rates between money and all other items that might be traded against money. I do agree with you that the "price of money" strictly ought to be expressed in terms of the prices of all these items.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-70814337046259434992010-05-25T18:55:50.313-07:002010-05-25T18:55:50.313-07:00The money supply can never be managed by any attem...The money supply can never be managed by any attempt to control the cost of credit.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-78583692041783937992010-05-25T10:32:23.643-07:002010-05-25T10:32:23.643-07:00I've have a couple of minor criticisms. "...I've have a couple of minor criticisms. "money demand curve" This is old school. It's more accurate to talk of the demand for and the supply of money, because in your sense, the meaning is just the opposite. <br /><br />I.e, Alfred Marshall: money thus is truly a paradox - by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money - and reduce its velocity.<br /><br />Interest rates are the price of loan-funds. Interest rates are not the price of money. The “price of money is the reciprocal of the price level.<br /><br />It was apparently this confusion (Keynesian training), that led to the assumption that interest rate manipulation could achieve the proper level and rate of growth in the money supply.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-82486419095087465832009-12-13T11:44:47.857-08:002009-12-13T11:44:47.857-08:00Rebel, I left you a couple of responses at WCI if ...Rebel, I left you a couple of responses at WCI if you're interested:<br /><br />http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/money-banks-loans-reserves-capital-and-loan-officers.html?cid=6a00d83451688169e20120a74a98fa970b#comment-6a00d83451688169e20120a74a98fa970b<br /><br />http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/money-banks-loans-reserves-capital-and-loan-officers.html?cid=6a00d83451688169e20128764de141970c#comment-6a00d83451688169e20128764de141970cAdam Pnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-70484791847379331542009-06-11T05:15:41.312-07:002009-06-11T05:15:41.312-07:00Devin,
This makes a lot of sense to me. In fact,...Devin,<br /><br />This makes a lot of sense to me. In fact, I had a similar idea as an alternative to the UK's VAT cut - cut the withholding tax on savings interest instead, to narrow the gap between deposit and lending interest rates. An interest subsidy as you propose is probably a better idea, because its value is not less (in fact, proportionately more) at lower interest rates. A withholding tax cut would only benefit domestic taxpayers, which may or may not be an advantage.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-17512699694576859442009-06-10T22:02:38.794-07:002009-06-10T22:02:38.794-07:00If the nominal value of all paper backed by the US...<i>If the nominal value of all paper backed by the US government was increased, then who would bear the cost? This is a particularly important question in the case of an FDIC-backed deposit. Presumably you do not intend the bank or its borrowers to have to come up with 30% greater redemption proceeds?</i><br /><br />No, the Fed would print enough money to back the 30% increase in deposits and proceeds. <br /><br /><i>I dare say that such a scheme would involve creating a lot of money and would certainly generate inflation, but many creditors (eg China) would come out at least whole.</i><br /><br />The point is to counter the existing deflation. The existing deflation is caused by shock in the demand for money, and that must be met with a corresponding increase in the supply of money. Note that inflation is usually bad for two reasons:<br /><br />1) It transfers wealth from savers to the inflater <br />2) It destroys demand for the dollar, which creates bubbles, financial instability, and potentially a currency run<br /><br />The plan I have posited has neither drawback. Because the money is injected into the hands of current holders of USG liabilities, in direct proportion to their current holdings, it neither transfers wealth nor penalizes dollar holders. Thus the Fed can counter the deflationary spiral, without creating nasty side effects.Devin Finbarrhttp://intellectual-detox.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-58952759957151766742009-05-25T08:10:09.364-07:002009-05-25T08:10:09.364-07:00I am grateful for your attention and appreciation,...I am grateful for your attention and appreciation, JKH.<br /><br />I tried here to come up with an explanation of easing that worked whether the lower constraint on a bank's holding of reserves was provided by a regulatory reserve requirement or a ban on end-of-day overdrafts; maybe that was an abstraction that did not work well.<br /><br />To me, the definition of quantitative easing ought to justify the use of the word "quantitative", so I do not like your definition (surely even under conventional monetary policy there is some relationship between the volume of excess reserves and the target interest rate, which would, by your definition, make any easing quantitative) but I do agree that the term has not been carefully used. I think the term applies best to the BoJ policy. Incidentally, watching that policy evolve as an investor in the JGB market got me interested in the details of monetary policy operations.<br /><br />I have not forgotten <A HREF="http://blogs.cfr.org/setser/2007/05/11/rising-deficit-in-the-us-rising-surplus-in-china/#comments" REL="nofollow">our long discussion about how central banks control interest rates on Brad Setser's blog in May 2007</A> and my thinking is still much the same. I made the mistake of mentioning the money multiplier in explaining my understanding to you though! The interpretation of the multiplier that you liked here was deliberately written to be acceptable to you! If you recall, the main point I was trying to make then was that I could not see how central banks could control interest rates without (a) becoming one side of the market, and (b) losing money in the process. And I would say that what subsequently happened - a massive expansion of the Fed's balance sheet as it tried to drive down interest rates and an unresolved problem of how to emerge from QE - has confirmed my thinking. But that is a subject for another post, for which this one is meant to provide some preparation.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-24779760258240909242009-05-25T06:46:42.100-07:002009-05-25T06:46:42.100-07:00I am intrigued by your comment Devin, but not quit...I am intrigued by your comment Devin, but not quite sure what to make of it. If the nominal value of all paper backed by the US government was increased, then who would bear the cost? This is a particularly important question in the case of an FDIC-backed deposit. Presumably you do not intend the bank or its borrowers to have to come up with 30% greater redemption proceeds? But if not the bank or its borrowers, do you mean the central bank, backed by the government? I dare say that such a scheme would involve creating a lot of money and would certainly generate inflation, but many creditors (eg China) would come out at least whole.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-81146862720292731992009-05-24T20:19:55.497-07:002009-05-24T20:19:55.497-07:00RebelEconomist,
You’ve produced a very good post ...RebelEconomist,<br /><br />You’ve produced a very good post here; coherently structured, informative, and well written. The blogosphere is weak on central bank operations; a lot of money theory with tidal waves of policy criticism and prescription flowing from flimsy operational grasp. By contrast, this is an excellent reference piece.<br /><br />Since I agree with most everything you’ve written, I have just a couple of brief comments.<br /><br />First, I think it’s important to be clear when one is referring to the banking system versus individual banks within it. Nothing specific here in terms of what you’ve written, but in my own case I often think/write about system dynamics implicitly, assuming away individual bank dynamics. That can be confusing to others. But the distinction is crucial in understanding how banks respond individually and collectively to central bank policy.<br /><br />Second, I believe that there is broad failure to differentiate properly among different elements of the monetary base. You’ve done a good job, although I would push the point further. The various pieces behave in different ways that are critical to understanding monetary policy at both the operational and strategic levels. E.g. it is impossible to understand properly what’s going on in the current environment without rigorously differentiating between excess reserves, required reserves, and currency. I’ve given up pointing this out to people, particularly when they insist that such differentiation is not important. Since you understand how a central bank balance sheet works, you probably know what I’m driving at.<br /><br />As a minor observation, I find the definition of “quantitative easing” to be a mug’s game. The varied application of the term is symptomatic of superficial treatment of central bank operations. There aren’t any shortcuts in describing what they do and how they do it. Witness the length of your post. For what it’s worth, my preferred definition is any increase in excess reserves greater than or equal to one cent. But that’s as much an expression of disdain for the phrase, including its original application in the case of Japan, as it is a preference for unambiguous meaning. The term itself is an insult to the true integrated nature of central bank asset-liability management.<br /><br />Finally, I was pleased to see your interpretation of the reserve multiplier:<br /><br />“Note that interest rate targeting means that the textbook account of deposit money creation, in which the central bank supplies base money followed by an iterative process of bank lending and customers re-depositing base money that creates some multiple of the initial injection of base money, is unrealistic. Actually, money creation is generally initiated by bank lending, with lending generating deposits and deposits in turn generating a need for reserves which are reactively supplied by the central bank in order to fix its targeted interest rate.”<br /><br />Perhaps my memory is wrong, but I didn’t think you held such a view at the time of our long discussion on Setser’s blog. In any event, it doesn’t matter. What you’ve written on this issue and in total is very good.<br /><br />JKHJKHnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-77522643646161330622009-05-10T21:45:00.000-07:002009-05-10T21:45:00.000-07:00The reason I was picking at the nits, is that some...The reason I was picking at the nits, is that some monetarists seem to think that creating a small amount of base will lead to a much bigger inflationary impact. This did not seem right to me, so I was trying to ask you because you seem to know more about the mechanics of the reserve system.<br /><br /><I>But let me repeat, I think the Fed would be unwise to inflate. It may mitigate the immediate economic problems, but in the medium run, inflation would make matters worse. </I>The logic behind reflation is pretty clear cut. There have been a cascade of collapsing bubbles ( debt, housing, and stocks) wiping out 20-50% of paper wealth. As a result, demand for dollars has increased dramatically as people repair their expenditures to paper wealth ratio. But doing so requires cutting spending on luxuries and durables leading to massive unemployment. The problem is purely nominal, the Fed can simply directly alter people's balance sheets to fix the ratio without any need for unemployment.<br /><br />The cleanest way to inflate would simply be to make an accounting of all paper backed by the full faith and credit of USG ( reserves, FDIC insured accounts, treasury bills, perhaps money market funds), and then increase the face value by 20-30%. I wake up tomorrow and my CD says $13K instead of $10K.<br /><br />In this way you can restore the paper wealth to expenditures ratio, without the side effect of destroying demand for dollars or T-Bonds.Devin Finbarrhttp://intellectual-detox.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-77419926748505590432009-05-07T04:10:00.000-07:002009-05-07T04:10:00.000-07:00Devin,
You are picking the nits that I wanted you...Devin,<br /><br />You are picking the nits that I wanted you to avoid (by saying "I know it is not as simple as that")!<br /><br />My point was just that the stock of assets that the Fed could buy to supply base money is so large that the Fed could expand the base money stock many fold without having a huge impact on the (relative) market price of those assets (eg they could spread their purchases over stocks, foreign assets etc). In other words, a policy of general reflation can be distinguished from a policy of lowering interest rates on particular types of debt. Arguably, the BoJ tried the former and the Fed has so far been trying the latter.<br /><br />Could a policy of general reflation work? I think it could, but as you say, not unless the Fed set its policy rate to practically zero - which they now have. You cite the extreme case of what I call printing money (paragraph 41) - the Fed lends to the government - in which case the base money supply can be expanded without limit. Even if the initial inclination of people receiving cheques from the government is to simply hold their additional dollar wealth (meaning that their bank holds extra reserves and the Fed funds rate is allowed to fall to practically zero), eventually, people will receive enough money that they will start to spend. Note that it is not necessary for the banks to lend for this money to be used - it can either pass from person to person via bank accounts (in which case the banks involved transfer reserves when the payments are settled) or it can be withdrawn as banknotes (as in Zimbabwe). Nor is bank capital a constraint when (zero risk-weighted) reserves are the addition to banks' assets. I have no doubt that the Fed can inflate if they want to.<br /><br />But let me repeat, I think the Fed would be unwise to inflate. It may mitigate the immediate economic problems, but in the medium run, inflation would make matters worse. First, overseas lenders will demand a higher interest rate to lend in dollars, so unless the US is prepared to stop borrowing (including rolling over existing debt), Americans will pay the price for inflationary repudiation of their debts (in fact this was the subject of <A HREF="http://reservedplace.blogspot.com/2008/01/it-is-often-asserted-eg-in-brad-setsers.html" REL="nofollow">my first ever post</A>). Second, as I said in my previous comment, pressing the inflationary reset button would extend the moral hazard that, in my view, is the major cause of the present crisis. I lived through such a period in Britain in the 1970s, and my conclusion was that it was worse than futile.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-12538406919685927122009-05-06T18:20:00.000-07:002009-05-06T18:20:00.000-07:00Rebel-
Given that the stock of currency in circul...Rebel-<br /><br /><I>Given that the stock of currency in circulation is about $900bn, one might expect for example, that, creating another $900bn of currency might double the general price level, which would probably be more than enough to ensure that practically all prices rise in nominal terms and that the toxic asset problem would disappear</I>I am a little unclear how creating $900bn of base currency would double the price level. For instance, let's say that the Federal Reserve creates $900 billion out of thin air, and then mails every adult American a check for $4,000. I can see how this would increase the price level, but not double it. Four thousand dollars is still just a fraction of average annual income. People would not be able to suddenly double their spending.<br /><br />If everyone immediately deposited the checks, bank reserves would double. But in order maintain the Federal Funds rate at the desired level, wouldn't the Fed then have to engage in open market operations to remove the excess reserves? Or - in other words - is increasing the base to stimulate inflation the exact same operation as lowering the Federal Funds rate?<br /><br />And even, if the Fed did not immediately pull out the reserves, aren't the banks still constrained by capital requirements and the lack of credit worthy borrowers? So wouldn't the reserves just pile up and sit there?Devin Finbarrhttp://intellectual-detox.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-50711667502249184552009-05-04T06:54:00.000-07:002009-05-04T06:54:00.000-07:00Congratulations on getting through the post, Devin...Congratulations on getting through the post, Devin, assuming that you read the whole thing!<br /><br />One should be careful with the use of the word "reflate". To me, to reflate means to increase the amount of money circulating to raise a wide range of prices – if not the general price level – that have previously fallen. In other words, re-inflation. If this was what the Fed was trying to do, the key would be to increase the stock of money rather than targeting particular types of asset. Given that the base money supply directly controlled by the Fed is small in relation to the total stock of US assets, the Fed could supply more than enough money to reflate by spreading their purchases over such a wide variety of assets (eg stocks, real estate, public infrastructure etc) that the impact of Fed buying on their relative prices would be negligible. Given that the stock of currency in circulation is about $900bn, one might expect for example, that, creating another $900bn of currency might double the general price level, which would probably be more than enough to ensure that practically all prices rise in nominal terms and that the toxic asset problem would disappear. I know it is not as simple as that, and that the demand for base money might change, but the point is that, if they really want, the Fed can blow up the general price level without an unfeasibly large amount of asset purchases. It would be a case of pressing the inflationary reset button.<br /><br />While I would not be surprised if the Fed is eventually forced to press the inflationary reset button, this would create other problems, so it is not what the Fed is trying to do now. What the Fed is trying to do now is to raise certain economically influential asset prices such as the price of mortgage debt, without, officially at least, raising the general price level. For this purpose, the Fed does want to buy enough of these assets to raise their market prices in both absolute and relative terms. Ideally this would boost aggregate demand via reviving depressed parts of the economy such as construction. While you are right that this benefits the owners of mortgage debt and houses, the Fed would no doubt say that (a) the prices of these particular assets are unrealistically depressed so that it is case of mitigating unfortunate losses rather giving their owners a windfall and (b) that any distortion is a price worth paying to avoid depression. While I am wary about expressing controversial opinions without supporting analysis, my inclination is to agree with you – the Fed is bailing out reckless investors at the expense of those who did the right thing, and this represents the continuation of <A HREF="http://reservedplace.blogspot.com/2008/06/greenspan-put.html" REL="nofollow">a pattern</A> of bailouts sustaining a moral hazard culture that will eventually make the US economic situation worse. Personally, I think that the option of a Mellon-style liquidation, albeit followed by aggressive monetary and fiscal easing if necessary, was dismissed too readily. But then I do sometimes say that I was too conservative to be a central banker!<br /><br />You are right that the dollar is not defined in real terms, but that does not mean that the dollar does not have real value. The dollar has real value because it can be used to pay US taxes, which entitles the citizen to various government services. In theory, a fiat currency should be superior to, say, a gold standard, because it does not depend on the relative value of a single unproductive commodity. But it is essential for a fiat currency to be controlled by highly principled people, and that, in practice, is the Achilles heel of fiat currencies.<br /><br />I am not an expert in the legal powers of the Fed, but I believe that the Fed has no constraints on its power to issue base money, other than its statutory objectives of low inflation, unemployment and long-term interest rates. A treasury bill does not imply the forward creation of base money; in fact its sale and maturity proceeds need not even be paid in base money if the government banks outside the central bank.<br /><br />I do not think that the numerous Fed easing programmes are stealth schemes to print money, but I do believe that they could make printing money inevitable, and I do agree that the Fed is getting involved with the government in ways that it should not do. If the elected government believes that public support for, say, the housing market, is desirable, it should either raise taxes or borrow to pay for that support. For example, assuming that a tax rise to fund the purchase of MBS to drive down mortgage rates would not be considered appropriate in a recession, the government should sell treasuries and buy MBS on its own account. This presents two problems. One problem is that the need to raise the debt ceiling would force the government to convince Congress to approve the scheme, and its approval might be withheld or come with strings. The second problem is that, if the scheme makes a loss, the government would be forced to either raise taxes or borrow more to cover the cost. Getting the Fed to buy the MBS funded by interest-bearing reserves circumvents the debt ceiling and allows any losses to be stealthily absorbed in reduced seigniorage payments from the Fed to the US Treasury. Nevertheless, any losses do ultimately make the government's fiscal situation worse, which increases the temptation to press the inflationary reset button referred to above.<br /><br />By the way, I checked out your blog, and you have a dubious link in the most recent comment!RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-51216424689881223942009-05-04T06:03:00.000-07:002009-05-04T06:03:00.000-07:00Thanks Anon,
I must admit I was knocked back by W...Thanks Anon,<br /><br />I must admit I was knocked back by Willem Buiter’s refusal to acknowledge my early quite developed proposal of the good bank spin-off idea. My nom de plume reflects a history of making myself unpopular as a central banker by questioning comfortable thinking (eg about the danger posed by rising asset prices) and as an academic by preferring an accessible style of analysis and teaching (eg minimal use of equations). I therefore write a blog as a way of presenting, free of the constraints of these two fields, challenging but hopefully reasonable economic ideas in a style that tries to be rigorous yet readable. I don’t expect to attract a large audience – I lack the productivity to sustain their attention anyway – but I would hope that enough interested readers see my ideas to give them a chance of being taken up, and that my posts at least provide a public account of the ideas that I can refer to in comments on more famous blogs. So it was demoralising to find that, when one of my ideas did become popular, established commentators, even if they arrived independently at the same conclusion as me, would not acknowledge that an unrecognised outsider had travelled the path well before them. I particularly resent such behaviour from Buiter, because he is often critical of what he sees as insider privilege and, I note in his recent post on Google, breaches of copyright. Moreover, occasional misconceptions in Buiter’s writing – for example, that mentioned in paragraph 32 here – suggest that he can learn from a wider range of contributors.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-49509877666816908302009-05-03T12:59:00.000-07:002009-05-03T12:59:00.000-07:00Awesome post, this was really informative.
Quanti...Awesome post, this was really informative.<br /><br />Quantitative easing has never quite made sense to me. If I understand it correctly, the goal of quantitative easing is to reflate and increase aggregate demand, thus preventing a sharp recession or depression.<br /><br />But for an individual or a company, spending is determined by the balance sheet. When I log into my investment accounts, and its higher than expected, I can go on a nice vacation. If it's too low, I have to cut back spending. This is how every company and individual operates. <br /><br />Thus if a central bank buys up assets at <I>market prices</I>, it is not reflating. If I am a retiree, and the Fed buys up my house at market price, I cannot suddenly start spending more money. The market price of the house was already factored into my long term spending plans. Selling the house at market price has not changed my balance sheet, and so I cannot suddenly increase my spending.<br /><br />The only way quantitative easing can reflate is if the Fed buys at above market prices, or buys enough to push market prices up. But if it does this, the Fed has engaged in a massive transfer of wealth to the owners of these assets. In my opinion, financial crises should not be used to transfer wealth and real resources from one person or institution to another. A reflation should be as neutral as possible.<br /><br /><I>Modern money (as opposed to commodity money such as gold coins) is debt; a readily transferable and widely accepted type of continuously redeemable debt.</I>Debt means an obligation to pay a quantity of good X at time Y. If money is the debt obligation, what is the good X? <br /><br />In my understanding, the dollar is not debt, it is simply a fiat currency. A dollar is a collectible, an intermediary good. <br /><br /><I>Base money is created when the government draws down the loan.</I>Do you have any idea what the legal limitations are on the Fed and the Treasury with regards to print money? If the Fed wishes to create base money and buy assets, can it do so at will? Or is that considered an extraordinary measure that requires Congressional approval? And when a treasury bill matures, does it simply become base money? Or does the money come out of the Treasury's account at the Fed (with risk of overdraft if the necessary money is not there)? <br /><br />The reason I ask these questions is that a lot of the Fed's actions seem like elaborate schemes to print money without actually printing money. I was wondering if this is because the Fed is pushing the legal limits of what it is allowed to do.Devin Finbarrhttp://intellectual-detox.comnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-37209192337730156612009-05-01T09:39:00.000-07:002009-05-01T09:39:00.000-07:00Glad to see Buiter's plagiarism hasn't deterred yo...Glad to see Buiter's plagiarism hasn't deterred you from posting!Anonymousnoreply@blogger.com