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Response to jeff47 (Reply #21)

Wed May 9, 2012, 02:21 PM

25. How has MMT been proven wrong by this current crisis?

Last edited Thu May 10, 2012, 06:43 AM - Edit history (13)

Back up that statement.

I did end up reading the rest of your comment. It seems as if you are more interested in picking a fight than having a real discussion.

I have absolutely no idea why it matters to you which government body does the shredding. My point was that money sent to the IRS gets destroyed, removed from the economy. You ignored the larger point and went off on a tangent.

Oh for fuck sake, you don't even understand the difference between loans from the Fed and private loans?

Private lending has declined. Lending by the Fed has MASSIVELY increased.

You didn't answer my question about what would happen if the only way to get money into the economy was through lending, as you claimed. What would ultimately happen when borrowers needed to repay their debts rather than spend the borrowed money? (Here's a hint: read Fisher)

Fed lending has increased, but bank lending has still declined since before the crisis. The Fed lends to banks, it doesn't lend directly to consumers and it can't force the banks to lend to consumers, therefore the money has not made its way into the real economy. The Fed is operating under the failed neoclassical assumption that reserves fuel lending. In reality, demand from qualified borrowers is what drives lending. Banks are never reserve constrained to begin with. That's why we can't depend on monetary policy to pull us out of this crisis. We need real fiscal solutions.

Once again, I will ask you to reconsider the question. Pretend that the banks aren't lending and that we're running a trade deficit (precisely our circumstance after the global financial collapse). How can our GDP grow if the only way to get money into the economy is through lending? How can tax revenue and domestic demand for government debt increase? Where is this magical money coming from? Don't say Fed loans again! We've just established that the banks aren't lending, so the Fed could loan the banks $500 trillion and it wouldn't matter!

The GDP did go up, despite the conditions mentioned above. I will save you the trouble of explaining where the money came from. The government spent it into existence in the form of the stimulus package, increased use of food stamps, unemployment compensation, welfare etc (this is exactly why these programs are called "automatic stabilizers".

No, it creates money via a printing press.

Very little of our money supply is actually printed. Most money gets added to the economy in the manner I described, via the government directly crediting accounts. Only a tiny fraction of our money supply circulates as dollars (or coins). ETA: less than $1 trillion, or 1/16 of M3

But lets say printing is the means by which all of our money is created. After the money is printed, how does it find its way into the economy? Random helicopter drops?

You: The government doesn't have any bank accounts. It shreds and prints money as needed.
Me: Then what was the debt ceiling crisis about? If you were correct, they'd just keep shredding and printing money.

I never said the government doesn't have accounts. Don't put words in my mouth. What I said is that our government can always meet its same currency debt obligations. There is absolutely no danger of default, unless Congress chooses to default (which would only happen if the majority went insane) and the President refuses to use Treasury's Constitutional authority to mint. A sovereign fiat currency government literally cannot run out of money. That's what people mean when they say the crisis was fake.

Well lookie here, you aren't reading this properly....

This is private lending, not public debt. Public debt doesn't involve loans from banks....

Lending from the Fed to banks. Not public debt. In fact, the exact opposite with private entities borrowing from the government.

Here is a Bernanke quote on the Fed controlling the yield curve. If you want to go up against the central bank because you believe they can't control rates, go for it! Bet the farm.

[div class="excerpt" bg="blue"]However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

I picked this particular quote to demonstrate that a sovereign currency government with a strong central bank can manage rates even under fairly adverse conditions. Deficit hysteria is a scare tactic, it's not a real problem for us right now.

Well lookie here, you aren't reading this properly....

This is private lending, not public debt. Public debt doesn't involve loans from banks....

Lending from the Fed to banks. Not public debt. In fact, the exact opposite with private entities borrowing from the government.

ETA: Looking once again at these comments, I think you have serious confusion on this topic, which is normal, most people do. The way the FOMC reduces rates is primarily by buying government securities from the banks. This keeps the demand for government securities high which keeps the rates on our public debt low. Forcing Treasury rates down in this manner also lowers the rates for private lending. The two are inextricably linked in our economy. Again, I'd like you to stop and think it through for yourself and if you do, you should quickly realize why this is the case.

Your claim: Central banks can set the interest rate at which they sell public debt.
My question: Ireland, Spain and Greece have central banks selling their debt at massively high interest rates. If central banks can set whatever interest rate they want for public debt, how come they can't? I pointed out they don't have their own currency, but you never claimed those banks needed their own currency to set the interest rate.

I only said our central bank controls the rate, I never said the same was true of the ECB (In fact, I explicitly stated that the ECB has never functioned as a true central bank). Once again, you have to resort to putting words in my mouth, either because you didn't bother to actually comprehend what I've written or you are desperate to "score points".

I also did specify "Bond vigilantes do not exist for sovereign currency issuer bonds." I guess you overlooked this detail? Eurozone nations have their own sovereign currencies, but their debt is denominated in Euro and their home currencies are tied to the Euro at a fixed rate.

The ECB is the central bank in control of Euro. The problem is that they prefer to act in a manner that benefits Germany at the expense of Greece, Spain, Ireland, etc. Imagine our Federal Reserve putting the interests of California ahead of Alabama, then you would have a fair analogy.

If you'd prefer something without the currency problem, how come the Fed isn't selling our debt at 1% or less? Would save us a fortune in interest, and you do claim they have complete control over the interest rate for our debt.

I think the Fed should target a higher rate. The interest the government pays on our debt is another way in which it can get money into the real economy, something we desperately need right now.

If you want to know precisely why the Fed has chosen its current target rate, you can read their minutes. The Fed's goal is not simply to get the lowest rate possible. They also have a mandate to control inflation and board members debate and decide what they think is best according to their own ideologies.

Or maybe it doesn't work like you think it does.

Of course it works the way I think it does. Read the excerpt from Bernanke again.

The risk is demonstrably false. Because the economy has done much better when the top marginal tax rate was much higher. If a small tax increase on a small number of people has the destructive power you fear, you have to explain how the economy boomed with a 90% top marginal rate in the 1950s. If you'd prefer something more modern, Clinton passed a tax increase in his first year, and then the economy boomed.

The 90% rate you cite was not the effective rate, but more importantly, once again you are giving examples from periods of credit expansion and (government) fiscal expansion. Clinton was able to raise taxes and run a budget surplus without doing too much economic damage because the private sector was net spending. Of course, once the internet bubble burst we ended up in a recession.

History didn't start yesterday. This is something "Freshwater" economists forgot, and have so far failed to re-learn.

Your proclamation about freshwater economists being ignorant of history is laughable. The economists I cited all have signifcant bodies of work full of historical information. Try reading a book rather than just relying on your imagination.

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