MMT and the scope for seigniorage

The central idea of Modern Monetary Theory (MMT), as I understand it, is that, rather than worrying about budget balances, governments and monetary authority should set taxation levels, for a given level of public expenditure, so that the amount of money issued is consistent with low and stable inflation. In this context, the value of the net increase in money issue is referred to as seigniorage. To the extent that seigniorage is consistent with stable inflation, it is achieved by mobilising previously unemployed resources.

A crucial question is: what is the scope for seigniorage? In particular (expressing things in MMT terms), is the scope for seigniorage sufficient to permit the introduction of ambitious programs like a Green New Deal without the need for higher taxes to prevent inflation.

The recent episode of Quantitative Expansion in the US provides some evidence here. Contrary to the dire predictions of some critics, QE did not lead to runaway inflation. This is consistent with the view, shared by MMT advocates and mainstream Keynesians, that, in the context of a liquidity trap and zero interest rates, there is substantial scope for monetary expansion.

How much is “substantial”?

According to the St Louis Fed, the monetary base grew from around $800 billion to just over $4 trillion between 2008 and 2016. That’s an increase of $3.2 trillion, which is a lot of money. Expressed in terms of GDP, though, it doesn’t seem quite as large. Over eight years, $3.2 trillion is $400 billion a year or around 2 per cent of US GDP ($20 trillion).

Assuming that this is an upper bound for the scope of seigniorage, it’s much smaller than the amount needed to finance, say, a Green New Deal.

What qualifications need to be made here? First, it might be argued that QE should have been more aggressive than it was. Certainly, looking at things with a focus on the real economy, as traditional Keynesians do, the stance of fiscal and monetary policy overall was too restrictive. But, if you assess things on the MMT criterion of low and stable inflation, the Fed got it pretty much right. Deflation was avoided, and the inflation rate was restored to the target level of 2 per cent in a reasonably short time. That’s continued as QE has been partially reversed in recent years.

A second point is that QE wasn’t (directly) an expansionary fiscal policy of the kind Keynesians favour. Rather, the budget deficit (smaller than it should have beeb) was financed with bonds. The sale of these bonds to the public would have depressed demand, but instead the Fed bought them (and also some high-grade corporate bonds). That’s not the best way to stimulate the economy, but from an MMT viewpoint it’s not obvious that it matters (interested to get comments on this).

Overall, the evidence of QE suggests to me that the basic idea of MMT is sound, at least in the context of a llquidity trap. On the other hand, the same episode shows that a widespread interpretation of MMT, that we can greatly expand public expenditure with no corresponding increase in taxation, is both wrong and inconsistent with the core idea of MMT.

88 thoughts on “MMT and the scope for seigniorage

  1. MMT talks about flexible exchange rate as it recognises the trilemma

    Currency regimes and policy space: conclusion.

    Let usquickly review the connection between choice of exchange rate regime and thedegree of domestic policy independence accorded, from most to least:

    *Floating rate, sovereign currency most policy space; government can “afford” anything for sale in its own currency. No default risk in its own currency. Inflation and currency depreciation are possible outcomes if government spends too much.

    *Managed float, sovereign currency less policy space; government can “afford” anything for sale in its own currency, but must be wary of effects on its exchange rate since policy could generate pressure that would move the currency outside the desired exchange rate range.

    *Pegged exchange rate, sovereign currency àleast policy space of these options; government can “afford” anything for sale in its own currency, but must maintain sufficient foreign currency reserves to maintain its peg. Depending on the circumstances, this can severely constrain domestic policy space. Loss of reserves can lead to an outright default on its commitment to convert at the fixed exchange rate.
    http://neweconomicperspectives.org/2011/11/mmp-blog-26-sovereign-currency-and.html

  2. I’m incredibly sorry about the multiple posts but I had to scroll up and down to see what I am responding to. Hopefully I’ve answered most of Ernestine’s questions now and my previous comment should address John’s question

    Ikonoclast question over descriptive or prescriptive does go to a central MMT insight specifically about the Job Guarantee

    Is the Job Guarantee (JG) central to MMT? Yes!

    It comes down to this:

    With ‘state currency’

    There necessarily is,

    Always has been,

    Always will be,

    A buffer stock policy.

    Call that the MMT insight if you wish.

    So it comes down to ‘pick one’-

    1. Gold

    2. Foreign Exchange

    3. Unemployment

    4. Employed/JG/

    5. Wheat

    Whatever!

    We pick employed/JG As it works best as a buffer stock based on any/all criteria for a buffer stock.

    It is important to understand the primary function of a JG is to provide price stability and act as an automatic stabilizer as explained in the link.
    http://neweconomicperspectives.org/2012/05/mmp-blog-50-mmt-without-the-jg-conclusion.html

    I think that’s all the questions covered.
    Other than the US specific platinum coin legal seigniorage option I’m not sure MMT deals in seigniorage. I agree with Ernestine about the effort for $1 vs $1 trillion today especially since most, if not all accounts are credited electronically with keystrokes these days. However I am happy to be corrected by an MMT academic 🙂

  3. Ernestine & Sennex,

    1. Ernestine,

    Thank you for your encouraging comments. As one of those who used to think he had “the answers” for “the economy”, I have certainly benefited from your perspectives over the months and years. I no longer think I have all the answers, that’s for sure. However, I have more questions than ever.

    2. Senexx,

    No need for apologies for multiple posts. I will certainly try to work through and understand them.

    3. All,

    The approach I am taking now, as a personal project, is to develop a variant of monist metaphysics. Obviously, this is a modest autodidact project which involves no tilting at windmills at all. 😉

    Nevertheless, the terrible Gordian knot that I and many others seem to tie ourselves into when contemplating economics in particular and the social sciences in general, seems to mandate a return to fundamentals. If one can’t propound what exists at the most basic and universal levels, how it exists and how existents interact, then one really cannot make any progress in developing a coherent theoretical system to deal with real systems and formal systems in the social sciences. I mean particularly a system which seeks to explains (or methodically doubts) connections, causations and laws and seeks to make sense of the complex emergent systems dealt with by the social sciences.

    Of course, propounding a basic ontology unavoidably means advancing a founding a priori assumption about existence. From that point, three questions matter;

    1. Does the founding a priori assumption have only doctrinal (dogmatic) justification or does it have some epistemic justification (via knowledge from experience).

    2. Can the founding a priori assumption be used deductively to develop a full metaphysical system internally consistent in every particular?

    3. Can the consistent metaphysical system then be shown to possess broad cross-consistency and contiguity of explanation with the known facts and knowledge areas of the hard sciences?

    As Hofstadter out it: “The problem is to state a provisional conception of reality which is as far as possible continuous with the goal of traditional metaphysics and which nevertheless is of empirical import.” A corollary of this statement taken to a slightly harder stance is this. We need to redevelop metaphysics so it is, as far as possible, consistent and contiguous with hard science. Yet, this redevelopment must not exclude the ability to make intelligible and supportable statements in the fields of economics and the social sciences.

    I hope people get what I am driving at here as a kind of mission statement for the project. As to method and philosophical-analytical process there is much to say about this too. I will try to put a bit more in the next sandpit but pitch it purely from the economic angle so as to provide an example of my theory and method. There is already a screed of 3 sections of just one draft chapter on the current Sandpit. It gives an idea of what I am up to.

    I haven’t forgotten my promise to post here my ideas about seigniorage.

    As Bob Dylan sang;

    “Seignior, seignior,
    Can you tell me where we’re headin’
    Lincoln County Road or Armageddon?
    I just can’t stand the suspense anymore.
    I’m ready when you are, seignior.”

    😉

  4. I find MMT confusing. You can fund deficits without raising taxes or issuing debt just by printing money without creating inflation. Well to a limited degree you can if people are adding to their money balances (e.g. transaction balances) to accommodate economic growth.

    Since 2008 the Fed’s purchases of Treasury bills from the banks have driven interest rates to historic lows and produced one of the biggest rallies in US equity markets in years. Private sector debt has surged but much of it has been spent on equities whose price increases have captured the inflationary impact. The fact that product prices and wages have not moved much does not mean that inflation has not occurred. MMT sounds like a snake oil recipe to me.

    BTW in the 1960s and 1970s seigniorage normally referred to the impact of inflation of money balances. The “inflation tax” meant things were sold to the government for a depreciating asset yielding a real transfer to the government. But I remember Robert Mundell mentioned, in passing in one of his articles, that the actual issuing of money yielded seigniorage for the government. Ideas recycle!

  5. My take on seigniorage. Let us first look at the Wikipedia definition.

    “Seigniorage is the difference between the value of money and the cost to produce and distribute it.

    The term can be applied in two ways:

    1. Seigniorage derived from specie (metal coins) is a tax added to the total price of a coin (metal content and production costs) that a customer of the mint had to pay, and which was sent to the sovereign of the political region.

    2. Seigniorage derived from notes is more indirect; it is the difference between interest earned on securities acquired in exchange for banknotes and the cost of producing and distributing the notes.”

    Definition 2. would seem to be more applicable today, To rephrase it for electronic money:

    3. Seigniorage derived from electronic is also more indirect. It is the difference between interest earned on securities acquired in exchange for electronic money and the cost of producing and distributing electronic money.”

    It seems to me that this kind of seigniorage would not be a significant income to the crown or fed. It could in some years even be negative depending on interest rates, wages of government employees, running costs of government / fed electronic systems including maintenance and new (sometimes costly) implementations.

    J.Q. seems to have a wider definition of seigniorage to mean all unfunded (true deficit) money printing. Is this what J.Q. is saying? In that case I say go for it.. to an extent. Print money (even electronically, in a true deficit, unfunded manner, but only do this as J.Q. says while maintaining stable inflation, achieving this by mobilising previously unemployed resources, hopefully.

    I would go further and endorse the JG (Job Guarantee) to augment this strategy. See Senexx’s posts above. Surely, we could experiment with a JG by implementing it in Tasmania first. See how it works in Tassie as a real economic laboratory. To some extent transfer payments from the rest of Australia would simply be switched from welfare to JG. Maybe a residency requirement for the experiment would be two years continuous residency in Tasmania in the last 5 years to reduce effects of new migration from the mainland on the experiment.

    Another important issue is that of the current oligopoly on debt money creation. The government has a monopoly on fiat money creation. However it licenses out debt money creation to an oligopoly of banks essentially. I would pull this right back and give the state not only a monopoly on fiat money creation but a monopoly on debt money creation. To Chinese wall it to some extent, the Reserve Bank for fiat money creation only at the orders of the Federal Govt. and a new National Commerce Bank for debt money creation. Commercial and Retail Banks would then seek to borrow from the National Commerce Bank before making commerical and retail (home and personal) loans. The new National Commerce Bank charges an interest rate and it ultimately controls and determines how much new debt money creation occurs. Just an idea of course. I think it could be used to better and more directly control total lending and take a proportion of Commercial and Retail Bank profits straight to the Commonwealth. Of course taxes on banks could be varied, maybe down, to cushion this if need be. But I think it would give government more direct levers on the economy.

  6. Senexx said “I think that’s all the questions covered.”. Not so fast…

    Sennexx, since you have deconstructed bilbo, easy Q’s for you… as Bill says “These assumptions serve to simplify the analysis and relaxing them does not alter the basic dynamics of the system.”.

    So… What does mmt say to this person and where are they included please?

    Q1. Does mmt assumes [asserts?] this person exists on their capital while markets restructure whole industries (and never has a gfc) and is at the mercy of “the costs associated with the flux of the economic activity as aggregate demand fluctuates.”? What might go wrong? Who picks up the wealth as it condenses again?
    Assumptions; 
    – sucked all savings due to industry being disrupted 3x by innovative and monopoly and monopsonies productivity gains internal to shareholders and executives. And via  “Economists call this response – wait unemployment.” As in “I’m waiting for my funds to run out, and then wait for employment and reduce my wage or go into debt to retrain [ 2 kids now 17 unemployed or becoming indebted, LVR on mortgage rising in sydney / melb and 50% of us are divorcing ] as I am not a property investor, major shareholder,  bonus’d exec or rights holder. – does mmt conflate”

    “Macroeconomic policy generally aims to reduce unintended unemployment.” Does this statement mean mmt conflates a states Policy with it’s own assumed mm theory?

    “””Thus the whole buffer stock analogy is flawed.”””

    https://ralphanomics.blogspot.com/2012/01/employer-of-last-resort-buffer-stocks.html

    Q2. As ” A central bank also acts as a lender of last resort to the banking sector during times of financial crisis” does mmt advocate for the cental bank to also lend to non capital property right holders? Say first mortgage for anyone for principal place of residence or debts under a non growth economic model? Why / why not?

    Q3. With mmt are all members of the state to which the central bank beholden and delivered via a democratic process also “the bank”? 

    Q4. Describe “full employment” via mmt and is any “one” person not included? 

    Q5. If price stability depends on market optimisation what happens when full employment is unachievable due to say a demographic shrinkage. Japan maybe or flight of workers from one state to another as in polish leaving UK vs Ukrainians being “price stabilizers”?

    Q6. To get our logic correct we might try this: The JG pool expands (declines) when private sector activity declines (expands). The JG thus fulfills an absorption function, which minimises the costs associated with the flux of the economic activity as aggregate demand fluctuates.”
    http://bilbo.economicoutlook.net/blog/?p=23887

    What if the private sector was used to act as an absorbtion function for demands of society? Sort of reverse mmt or modern mammal theory?

    Q7. Thought experiment 2. Or reverse again, what if the private sector offered “an unconditional, open-ended job offer at a given wage to anyone who desires to work” until they desired to leave the workforce. A good thought experiment for you to easily prove mmt. Reverse Bilbo with triple twist and dutch sandwich with no bread hiding contents; “When private [ read public ] economic activity picks up, workers [ read people ] would be bid out of the JG [ read private sector learning knowledge private sector controllers ] pool by employers [ read parteners ] and the buffer stock of jobs [ read buffer of pivate finances ] would contract.” Easy peasy to refute?

    Q8. “”In fact wages and prices can rise much faster than is acceptable long before the so called buffer stock runs out. Which makes the so called buffer stock very different from conventional buffer stocks. That is, as long as government has a finite stock of some commodity in its buffer stock, it can sell that stock and ameliorating price increases. The same does not apply to the ELR or unemployed so called buffer stock.”…

    “Thus the whole buffer stock analogy is flawed.”
    https://ralphanomics.blogspot.com/2012/01/employer-of-last-resort-buffer-stocks.html

    Considering above definition re buffer stocks “the so called buffer stock very different from conventional buffer stocks” does mmt consider meatspace analogous to rock piles or tanks of petrol or billets of steel?

    Q’s 9,10 11 etc. War, gfc, bio or envrio disasters above trendlines and say black swans ala AGW?

    Senexx thanks in anticipation,  KT2.

  7. “Another important issue is that of the current oligopoly on debt money creation. The government has a monopoly on fiat money creation. However it licenses out debt money creation to an oligopoly of banks essentially. I would pull this right back and give the state not only a monopoly on fiat money creation but a monopoly on debt money creation. ”

    Fiat money created by government is debt money. If you want to end private credit creation and give that to the state in a form of nationalized commercial banking system then this doesn’t have anything to do with MMT in a sense that this your worldview and It can be done. But perhaps you are suggesting that you want to end private liabilities creation in a banking system, no home loans etc?

  8. Senexx. Perhaps my quesrions were to vague. If you might just address this gut and Paul we may be able to get mmt.
    So a guest Q. from Sumner and Krugman…
    “Keynesianism, NeoFisherism, And MMT
    By Scott Sumner of Econlib.org

    Wednesday, February 27, 2019 12:47 AM EST
    The title of this post lists three macro models that I believe are wrong. But they are not all wrong in the same way.

    I’m not even sure I understand MMT, as when I try to engage with proponents of that theory they keep telling me that I’ve got it wrong. I say, “So you’re saying A, and here’s why that’s wrong.” They respond, “No, we aren’t saying A, we are saying B.” I respond, so you are saying B, here’s why that’s wrong.” And they respond, “No, we are not saying B, we are saying C.” Then I explain why C is wrong. It never ends.

    Perhaps it’s just me. But here’s the problem for the MMTers. Paul Krugman is sympathetic to many of their policy preferences. He’s also “on the left”. He likes some politicians who like MMT. But he has exactly the same reaction to the model as I do:

    Now, arguing with the MMTers generally feels like playing Calvinball, with the rules constantly changing: every time you think you’ve pinned them down on some proposition, they insist that you haven’t grasped their meaning.

    I don’t expect everyone to be able to explain their models in a way that a slow mind like me can understand. But they should be able to explain it to one of the half dozen most brilliant economists in the world.

    It seems to me that the problem with macro is that the underlying problems are so complex that there are a wide variety of ways to address these problems. For instance, just in the field of money, you have the interest rate approach, the quantity of money approach, and the price of money approach. Within each of those you have varying assumptions about price stickiness, Say’s Law, crowding out, rational expectations, Ricardian equivalence, market efficiency, and a host of other issues. The possible approaches quickly multiply, each developing different frameworks and even different languages.C + I + G = PY. MV = PY.IS/LM.AS/AD. Etc., etc. You end up with with a sort of Tower of Babel.”

  9. I should have included http://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-government-spending with an MMT take on Bonds which is really is just an Interest Rate Maintenance adjustment.

    MMT would agree with Harry Clarke above.

    For MMT in simplified form read Mosler’s 7 Deadly Innocent Frauds. As I put forward years ago I see 7 DIFs and Zombie Economics as complementary. As both debunk a lot of mainstream economic thinking.

    For the foundational work of MMT read Mosler’s Soft Currency Economics

    For most recent nutshell version of MMT which is just Macroeconomics done correctly read John Harvey in Forbes https://www.forbes.com/sites/johntharvey/2019/03/05/mmt-sense-or-nonsense/

    KT2 I hope to come back and will address any questions I consider myself capable of doing but by all questions covered I meant the ones raised by John and others in the comments thus far. I also put a little bit in the sandpit because I know John considers MMT an Idee fixe. I consider MMT thus far as an accurate construction of currency regimes and their constraints.

    Full employment under MMT is easily defined, everyone that wants a job has one. In more academic terms frictional unemployment. What we had post world war 2 until we regressed from some of Keynes views in the mid 70s.

    I did write a few things but I was unhappy with my word choices. The FAQs and their supporting links I left the link to in the sandpit will help answer many of your questions.

    MMT takes the description of how things operate, including the balance sheets (accounting) and then says now we know this, how can we use it better. From there you get MMT informed policy ideas.

  10. KT2, just saw your second post. MMT doesn’t consider itself a model though there is modelling done within MMT. It is a matter of a paradigm shift and a change in thinking. Hopefully my my comment and links above shall help you out. The John Harvey one I specifically recommend for you. 🙂

  11. James Wimberley says at March 8, 2019 at 6:56 am…..

    James, That’s a really interesting assertion. Is it true? I wonder if any MMT expert could tell us? If it is true, and we have two financial circuits hermetically sealed from each other, then what does that mean, I wonder?

    I can certainly think of cases where two hermetically sealed circuits can influence each other without flowing into each other (using hydraulic or electrical analogies). But there then has to be some other mechanism to transfer effects. This could mean that “electrons” or tags from one not turning up in the other is not a proof that hermetically sealing the “fluids” necessarily seals the two systems from affecting each other.

    But perhaps you were not asserting precisely that. If one circuit was about owning certain kinds of “fictitious capital”, meaning capitalisation on property ownership or tradeable paper claims to wealth and the other circuit was about paying for wages and trading commodities (essentially), then we have a special kind of two-circuit financial economy which could explain booming assets and very low inflation in wages and commodities.

    This is just a mental speculation on my part.

  12. My conclusion on MMT. Like other macro-economic models, MMT ‘theorists’ do not include the financial system in their models. By financial system, I mean non-government agents can issue a myriad of types of financial securities denominated in the official currency unit, in exchange for other financial securities, denominated in the same or other currency units, and these securities can be traded via a network of non-government agents almost anywhere in the global economy. There are many types of ‘debt’. There are many forms of payments, denominated in a currency unit (eg company X takes over company Y by means of issuing more of its shares in exchange for at least a controlling fraction of company Y shares, this is not necessarily without consequences for employees, suppliers, customers, and the tax office).

    MMT does not have a clear concept of money and they seem to confuse ‘money’ with ‘value’ and, at times, with ‘wealth’. (Writing M for money does not specify a concept; it is only a letter in the alphabet. Having an amount of M means to me there is an unspecified number of the letter M that is greater or equal to 1). The distinction between ‘money’ and value is captured in JQ’s question, money for nothing? in an earlier post on the topic MMT.

    Senexx MMT model no 1 is an example of an accountant rewriting (national) accounting equations. In relation to the topic of the thread, this model makes sense to me if the ‘the economy’ consists of 3 individuals. One is called P for private sector, one is called G for government sector and one is called F for ‘current account’. As soon as there are more than 3 individuals, the question is who gets any surplus. This model is ridiculously inadequate to address the question of how to finance the New Green deal! Prof Q can’t see how the New Green deal can be financed without increasing taxes and I can’t see it either. To start of with, the income and wealth inequality within the USA is a serious problem that cannot be solved by enlarging the Fed’s balance sheet (more zeros behind some integers that correspond to ‘printing of money” in the contemporary money technology). The time when the USA could ‘print’ more US$ to acquire real resources or waste them with war due to the absence of a competitor in the world of ‘money’ has all but gone. The Chinese are now more interested in buying up companies in the USA and in Europe and elsewhere instead of holding US denominated financial securities, if they are allowed (MMT theorists, please check your often mentioned notion of ‘sovereignty’) and the EURO is becoming a serious competitor to the US$ regarding international trade transactions. (Senexx, no offence if I don’t read the link for your item 2).

    MMT theorists have ideas that are in direct contradiction with observables.

    For example, I am told by Kristjan above that a) QE is not inflationary (but deflationary) and b) it has nothing to do with preventing the collapse of the (almost global) financial system and c) the monetary base does not influence the ‘real economy’. In short, what I say is wrong, false, rubbish …. Really?
    JQ’s post includes a diagram showing the graph of the time series of the adjusted (however defined) US monetary base from 1986 to 2018. This diagram shows a sharp increase (spike) in the monetary base in 2008, another one in 2011/12 and again in 2013/14. According to my conceptual framework, these spikes correspond to QE1, QE2 and QE3. Prior to 2008 there are 2 little blips in an otherwise smooth growth in this monetary aggregate. In my conceptual framework, these little blips are a reflection of short term monetary management via open market operations during times when there was some disturbance (eg the dot com bubble). I cannot use this graph to prove my explanation is true. But I can say that this graph is consistent with what I say is the reason for QE. If I were to take note of MMT, which I don’t, I would have to introduce some other hypothesis for these spikes, something like the decision makers decided for no economic reason to have a bit of fun with the monetary base – the graph of the diagram is too boring – leaving open the question why wasn’t there inflation as a consequence of this ‘mad’ QE behaviour. To get closer to substantiating my argument, some additional information is required. I don’t have to search very much.
    The beginning of the global financial crisis (as distinct from the built up to it), started with what is known with the Lehman event in 2008. It is a well recorded fact that at that time the debt markets froze (no borrowing or lending between banks and therefore no new lending to others). So the MMT story about there not being a liquidity constraint with flexible exchange rates is not consistent with empirical observations. The Fed, in consultation with the Federal Government (which in turn had discussions with the governments of other countries – I recall the Chinese government sent a public message to the effect that the US better sort out its mess) took steps to defrost the debt markets by buying up financial securities for which there was no market (ie nobody wanted them) in exchange for official currency money (“properly accounted for” as is evident from the above mentioned graph!). There was no new ‘money’ created. There was an exchange of financial securities, privately generated debt (a type of financial security) was exchanged for official currency units (which has an interest rate of zero because the value of say a $10 note at the time of redemption is $10).
    Now, while it is the case that QE did not affect ‘the real economy’ in the USA in the sense that individuals observed a change on their balance sheets, QE did affect the so-called real economy because I would not have liked to live in an economy anywhere in the global economy which is connected to the above mentioned financial system if QE had not happened, irrespective of my opinion of the institutional environment that underpins the contemporary international financial system. This is so because I don’t like starvation, mass unemployment, untended agricultural fields and survival being dependant on barter skills.

    The work of theoreticians is not the same as that of people having a strong opinion on what they would like.

    Finally, JQ raises the question of taxation regarding the New Green Deal. It seems to me taxation is not only important regarding the financing but also the related problem of income and wealth inequality.

  13. Ikonoclast:
    “James Wimberley says at March 8, 2019 at 6:56 am…..
    James, That’s a really interesting assertion. Is it true? I wonder if any MMT expert could tell us? If it is true, and we have two financial circuits hermetically sealed from each other, then what does that mean, I wonder?”

    I don’t see the March 8, 2019 at 6:56 am comment but in case you talk about commercial bank deposits and reserve balances then they are not hermetically sealed.

    Some examples, you make a payment to me for a car 10 000 dollars.. I have a bank account at a different bank than you do. You give instruction to your bank to make the transfer to my account. These deposit transfers in between banks involve corresponding reserve movement in between banks because banks don’t accept each others liabilities as payment settlement. My bank doesn’t accept a new liability in its books unless It gets corresponding asset with It (the corresponding asset is Fed liability, reserve balances). Same goes with government paying you for something, bank has to get a corresponding asset with It. Your deposit in a commercial bank is your asset and bank’s liability (debt to you, IOU, promise to pay government money to your your demand).

    When Fed buys a government security from you during QE then after that you have a deposit in your bank account and bank’s reserves increase, (monetary base, reserve balances). It “releases nothing” from anywhere, you could have sold your government security any time before. It is not about quantity, It is about price. Quantity is related to FED’s actions indirectly through price.

  14. Ernestine Gross:
    “By financial system, I mean non-government agents can issue a myriad of types of financial securities denominated in the official currency unit, in exchange for other financial securities, denominated in the same or other currency units, and these securities can be traded via a network of non-government agents almost anywhere in the global economy.”

    Even you can issue all kinds of liabilities and you can denominate them in whatever you like. The difference between you and a commercial bank is that commercial bank liabilities are easily converted to government liabilities(money, tax credits). In that sense they are private and public partnerships and MMT says that. Their activity should be regulated in such a way that It serves public purpose.

    They are doing QE in whatever reasons but there cannot be a situation when there is no liquidity in the system without payment system collapsing. Banks have to have access to liquidity. That doesn’t restore trust in interbank market when Fed is buying government securities (and that is what QE is). Now they having backward understanding of the system doesn’t refute MMT, does It?

  15. James Wimberley @ 8/3/2019 6:56

    I shall follow up your reference to Keynes distinction between flows of ‘money’ because it may turn out to be helpful in finding an angle to returning to some work from over a decade ago. At present the book-keeping system, the so-called balance sheet model of money, is not suitable for retrieving information quickly if at all. If you are interested in an alternative concept, namely that of ‘monetary objects’ (which does away with the distinction between ‘money’ and the ‘real economy’ and allows the tracing of transactions by issuer, currency unit and other characteristics within one coherent equation), I could send you a paper written by Andreas Furche and myself. (Furche was my PhD student. His background is in IT.) I don’t think it would be appropriate to upload this paper on this web-site and in particular not under this topic.

  16. Government securities are safe assets, the lending did not freeze because there was too many government securities in circulation. Does it make sense to start pumping reserves and draining government securities to restore lending and perhaps trust in interbank markets? At the time I saw too many youtube videos from mainstreamers who explained the QE is done in hopes that banks start lending again. Well they didn’t. I live in Estonia and Estonian Central Bank officials made statements to banks that they are lending them extra amount of reserves. Banks said: we don’t have lack of freserves.

  17. Kristjan, today at 9:43. I see no reason why I should change my conclusion on MMT as a consequence of any of your posts, including the last one. If you were to go back to my first post (which you can find by clicking the Older Posts, you can also find James Wimberley’s post there), you will find that I said the payment system was under threat to collapse at the critical time of the Lehman event. If you still can’t see that MMT has nothing to say on financial matters in general and with respect to QE in particular, then so be it. It is not my problem.

  18. Ernestine Goss:

    “For example, I am told by Kristjan above that a) QE is not inflationary (but deflationary) and b) it has nothing to do with preventing the collapse of the (almost global) financial system and c) the monetary base does not influence the ‘real economy’. In short, what I say is wrong, false, rubbish …. Really?”

    These are your words. They are wrong and rubbish. I have never said that monetary base doesn’t influence the real economy. Never? I said monetary base cannot be lent out to the real economy. Reserves versus government securities does very little to the real economy. There were all kinds of effects though, hyperinflationists started buying gold, speculation in asset prices etc. The ones talking about a link between QE and inflation (CPI) have to show me the link and explain why and how. I showed a logical link between deflation and QE: It removes interest income from private sector. Japan has clearly demonstrated that QE is deflationary.

  19. At least one MMT proponet that I know likes to downplay the role of taxes. I guess that is a politcal decsion on his part. Many MMT arguements that I have read seem to be designed to defend MMT from the attack of mainstream economists not people to the left of MMT. Yet if people want to make a last ditch effort to try to save the world the rich need to be taxed a lot. I am not talking a 70% tax rate on over 5 million a year income. No I am talking a 100% rate on over 300,000. There are two reasons for this. One is to try to maintain social cohesion during a time of a war like situation. The other is because if you allow the rich to keep their money they will work at cross purposes of governments trying to prevent human extinction. The rich have to have their power taken away from them. They have proven by thieir behavior that they have all the discernment of slugs anyways.
    If poeple do not want to try to save the world. In the USA the knowledge provided by MMT could be used to fund repatriations for slavery. One point five trillion dollars would be a good starting point. With that amount of money the descentdents of slaves could recieve an amount that would bring their family bank accounts up to parity with whites in the USA. 1.5 trillion dollars is really not all that much money.
    There are of course many other considerations though. First of a person could reasonably argue why should African Americans get more than 100,000 dollars per family when families in Haiti, the Congo, and Bangladesh live in even worse conditions. Well I think that the counter point to that arguement is because the game of life in the USA requires a much higher ante. If a person does not start with 25,000 dollars they can not even play the game. And then they are only on the 1 cent slot machines.
    Another consideration is how fast that money would be paid out. The faster that it is paid out the more inflationary it might be. It might not be inflationary even if it is all paid out at once. Because much of that money could go to funding imports, raising the rate of inflation overseas. That means that we are helping the poor in the USA by harming the poor internationally rather than holding Americans responsible for their own history. Conversly the slower the repatriation payments are made the less effective that they will be in helping African Americans in the USA develope their communties and to be able to defend themselves with financial means from the plans that outsiders have for them and their neighborhoods.
    Maybe brining up repatriations for slavery on a site read by so many New Zealanders is unappropriate.
    I just can not resist showing that something that gets treated as such a radical idea by so many people is really not all that radical at all. Repatriations is really nothing more than a large class action suit.

  20. Kristjan, The Lehman event did not happen in Estonia but in the USA. Estonia joined the Euro zone on 1 January 2011, after the Lehman event of 2008 in the USA. If you look at the monetary base of Estonia prior to 2011, you will find the graph of the time series looks very different from that of the USA.

    Yes it is true that you said the monetary base cannot be lent out to the real economy (and therefore cannot influence the real economy). But what does the monetary base reflect? The spikes in the graph of the time series in the USA monetary base does reflect the ‘liquidity’ made available to the banking sector (by the mechanism I have written about twice already), which, as you acknowledge is required for banks to lend. If they don’t lend it is most likely because there is no demand for debt. The conditions in Estonia were different from those in the USA but, since the proverbial Wall Street Bankers are a crucial link in the international financial system, there were some flow-on effects in other juristictions (çountries). In Australia, the government responded not through QE but by providing assurances for bank deposits up to a specified limit and by distributing a little bit of cash ($900 from memory) to all residents who had submitted a tax return in the previous financial year. These are not QE measures. The theoretical ‘liquidity trap’ was never reached in Australia. (It was also not reached in Estonia, as far as I can tell from the information available to me and it was not reached in Germany.)

    I did ask for a precise theoretical model (ie an math econ model) of MMT. There is none, it seems.

    I am very confident in saying you tube videos are most unlikely to assist in making any sense out of MMT.

    If you don’t mind, I would like to end this discussion here.

  21. There is huge quantity of MMT papers written by MMT academics available. On QE also.

    “Yes it is true that you said the monetary base cannot be lent out to the real economy (and therefore cannot influence the real economy”

    After “and therefore” is part hallucinated by you. I never said that. I cannot possibly say that when accumulated deficit spending by government can be entirely in monetary base theoretically, these are private sector net savings then and by government increasing them the net savings are added. By Fed increasing them the composition of government securities and reserve balances(monetary base) that private sector is holding is altered.

  22. Fed’s Bernanke focused on whether bond-buying works, Fisher says

    https://www.reuters.com/article/us-usa-fed-fisher-bernanke/feds-bernanke-focused-on-whether-bond-buying-works-fisher-says-idUSBRE99215M20131003

    LITTLE ROCK, Arkansas (Reuters) – The Federal Reserve’s powerful chairman and architect of the U.S. central bank’s massive bond-buying program is serious about questioning its effectiveness, a Fed policymaker known for his opposition to the program said on Thursday.

    “The difference I have with my colleagues is the question of efficacy,” Richard Fisher, president of the Dallas Federal Reserve Bank, told a group of CEOs in Little Rock, Arkansas. “To his great credit, Chairman Bernanke has made this the driving point of every discussion: Is this working or is it not working?” Fisher, repeating comments he made just hours earlier in his hometown of Dallas, said he believes it is not.
    The Fed, he said, has done enough, and it is up to Congress to create tax and regulatory certainty so that businesses feel comfortable hiring again.
    “I am not alone” at the Fed in doubting the program’s effectiveness, he said.

    Does anyone notice that the aim of the program is to stimulate economy?

    Wikipedia writes about Japan:

    https://en.wikipedia.org/wiki/Quantitative_easing#Japan_before_2007

    Quantitative easing was first used by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s.[14][27][28][29] According to the Bank of Japan, the central bank adopted quantitative easing (量的金融緩和, ryōteki kin’yū kanwa) on 19 March 2001.[30][31]
    The Bank of Japan had for many years, and as late as February 2001, claimed that “quantitative easing … is not effective” and rejected its use for monetary policy.[32] The BOJ had maintained short-term interest rates at close to zero since 1999. With quantitative easing, it flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves and therefore little risk of a liquidity shortage.[33] The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It later also bought asset-backedsecurities and equities and extended the terms of its commercial paper purchasing operation.[34]
    The BOJ increased the commercial bank current account balance from ¥5 trillion to ¥35 trillion (approximately US$300 billion) over a four-year period starting in March 2001. The BOJ also tripled the quantity of long-term Japan government bonds it could purchase on a monthly basis. In early October 2010, the BOJ announced that it would examine the purchase of ¥5 trillion (US$60 billion) in assets. This was an attempt to push down the value of the yen against the US dollar in order to stimulate the domestic economy by making Japanese exports cheaper; it did not work.

    Good luck trying the same all over again around the world!

  23. Ernestine, A rough model.

    The Ott and Ott twins of the 1960s (Ott and Ott, 1965)) introduced the government’s budget constraint. Letting D denote time derivative DM + DB = G- tY +rB where, in a simplified economy, M is (base) money, B the stock of public debt, G government spending, t the (proportional) tax rate, Y is the level of income and r is the interest rate on bonds (assume a consol). In words: The government deficit plus interest payments on debt must equal the growth in public debt and the growth in the money supply. In real terms, Dm+Db = g-ty + rb-p(m+b) where lower case letters denote corresponding real magnitudes and p is inflation . So MMT requires t be set so p=o so ty = (g + rb – Dm -Db) or tY = (G+rB-Dm-DB) since inflation is zero.

    So high levels of real government spending and interest payments on debt are consistent with constant taxes if you sell lots of bonds or print lots of money. Is that it? I have to admit I am a bit unclear on this MMT.

    Suppose an IS-LM model gave you Y and r. Then given G and B (the latter evolves sluggishly) you can also determine at each instant a tax rate t. i am too lazy but assuming a particular mode of deficit financing (pure money, pure debt) you could check to see whether this system is dynamically stable. I’ll bet it wouldn’t be with pure bond financing if you could borrow at a fixed rate on international capital markets – the interest payments might explode. Tax rates also might go beyond 100%. It might be with pure money financing and that’s the case MMT seems to focus on although you might want to, again, check that tax rates don’t explode.

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