By Scott Fullwiler
Clive Crook has an interesting article in Bloomberg that I wanted to quickly touch on as it relates to a number of things that have been central to MMT for years. Crook’s piece does a good job discussing the current realities of the macroeconomic policy mix in the next recession; it also provides a clear example for illustrating differences between MMT and most other economists with regard to how they view the macroeconomic policy mix.
Crook points out that so-called “unconventional” monetary policy operations aren’t unconventional anymore. We’ve had nearly 7 years of ZIRP and various forms of QE in the US alone, not to mention about 17 years in Japan. According to most, thanks to monetary policy, “The world avoided another Great Depression. Yet even in the U.S., this is a seriously sub-par recovery; growth in Europe and Japan has been worse still.” Worse still, Crook says, “Now imagine a big new financial shock. It’s quite possible that all three economies would fall back into recession. What then?”
I’d say a global recession in that case is highly probable, in fact, not just possible. The most recent recovery and current expansion, weak as they’ve been, are now ending their 6th year and starting their 7th, about the average length of postwar expansions. And we’ve already seen that real GDP apparently declined in the first quarter of this year, while Randy Wray and Steve Keen have been warning that private debt levels are rising to dangerous levels. So, yes—what then?
Crook notes that the “obvious answer” is fiscal policy, but adds there are obvious political difficulties with more debt (and he appears to also recognize at least to some degree that these concerns in the case of the US, UK, Japan, and other currency issuers are not warranted). Very true.
Unfortunately, the public at large doesn’t realize that the vast majority of run up in debt has been due to the automatic stabilizers of fiscal policy that place a floor under the economy rather than actual active use of fiscal policy to stimulate. In the US case, the Obama stimulus of 2009-2011 was about $800 billion while total deficits since 2009 totaled more than $5.6 trillion. In other countries, the balance is probably even more toward automatic stabilizers than that. (Note that the current deficit in the UK is about twice that in the US as a percent of GDP, even as the former actively tried to reduce deficits after the recession—as MMT’ers have noted, the budget deficit is a result of the economy as much as it is a cause.)
This is where Crook discusses “a new kind of unconventional monetary policy—helicopter money,” which many are calling for now, as the better solution. Crook’s definition of helicopter money is this: “If central banks need to expand demand — and interest rates can’t be cut any further — let them send a check to every citizen. Much of this money would be spent, boosting demand . . . . Nobody, so far as I’m aware, is arguing that it wouldn’t be effective.”
I completely agree that sending “a check to every citizen” could be effective. But the reason I think so is because helicopter money is in fact a fiscal operation, as I explained back in early 2010.
This brings me to the key point I want to make in this post—I find it completely counterproductive to have a theory of macroeconomics in which we define fiscal policy and monetary policy based on who is acting. If the US Congress and Treasury choose to send $1 trillion to households without raising taxes, it’s called fiscal policy. But if the Fed does the exact same thing, it’s apparently called monetary policy. I think this only confuses our understanding of the macroeconomic policy mix and makes it more difficult to have an economics profession that can give good policy advice.
Many will object to my labeling of helicopter drops as fiscal policy because a helicopter drop is not accompanied by bond sales. Really? Apparently these people haven’t noticed that the Fed is carrying out reverse repurchase operations, and plans to expand their use multiple fold when it raises its interest rate target in order to put a floor on how far the fed funds rate can fall. In other words, the Fed is going to be selling securities in order to keep the federal funds rate from falling once it raises rates above 0. So, if the Fed were to carry out helicopter drops as Crook and others suggest to create “QE for everyone,” it would have to sell securities or the interest rate would fall back to zero. Also, it’s quite clear that these security sales would not be “financing” operations, as the Fed just “prints” the “money.”
And what does it look like if instead we have Congress/President doing the spending? Well, they spend money and sell securities, too. But in that case, people say the security sales are financing the spending. And in their minds this is fiscal policy, while the Fed’s helicopter money is monetary policy.
Why do they make this distinction? Perhaps it’s because of the law that requires the Fed to not “lend” directly to the US Treasury, so that the Treasury can’t spend unless it has a positive balance in its account at the Fed. I find that weird—the government writes a law forbidding itself from requiring one of its own agencies to provide it with an intergovernmental loan (which is itself very weird), and apparently that makes fiscal policy about “borrowing” money while monetary policy is about “printing” money, even as both of them are spending and selling securities.
And note what would happen if the Fed was instead required to provide that loan to the Treasury—as it has been required to do at times in the past—if the Fed wanted to raise rates, in the absence of the Treasury selling securities, the Fed would have to. But, again, economists want us to believe the Fed selling securities in this case is monetary policy to support an interest rate target while the Treasury selling securities is fiscal policy to finance its spending.
In fairness, Crook, like many, calls helicopter money a “hybrid” of monetary and fiscal policies. But I think this again confuses things.
It seems much clearer to simply say that (a) the act of creating a deficit—raising the net financial wealth of the non-government sector—is fiscal policy, and (b) the act of announcing and then supporting an interest rate target with security sales (or purchases, or interest on reserves)—which has no effect on the net financial wealth of the non-government sector—is monetary policy. In the case of (a), whether the Treasury or the Fed cuts the checks, it’s fiscal policy, and with (b), whether the Treasury or the Fed sells securities, it’s monetary policy.
In other words, fiscal policy is about managing the net financial assets of the non-government sector relative to the state of the economy, and monetary policy is about managing interest rates (and through it, to the best of its abilities, bank lending and deposit creation) relative to the state of the economy. This is in fact how Randy Wray explained both in his 1998 book; it’s also how Warren Mosler explained them in his 1996 paper. That is, from the beginning, MMT has labeled monetary and fiscal policies by their functions, not by who was doing what.
I think this is a much more useful taxonomy because it makes clear from the start that (1) the currency-issuing government isn’t constrained while (2) the interest rate on the national debt is a policy variable. All kinds of human suffering the past 6+ years may have been avoided if those two basic points were widely understood.
I want to bring the above to bear on the following quote from Crook’s piece, which is also representative of the views of many economists:
One concern is that if a central bank starts giving out money, it will create liabilities with no corresponding assets — thus depleting its equity. Compare with QE: This also creates liabilities in the form of money, but the central bank gets assets (the securities it buys) in return.
Does it matter that the central bank’s equity is reduced? No. Standard accounting terms lose their usual meanings when applied to central banks. Money isn’t a liability in the ordinary sense. Nobody is owed and nothing ever has to be paid back.
First, I want to congratulate Crook on recognizing the accounting difference between QE and actual spending—this in fact is not well understood, and he nails it. However, consider the following adjustment to his passage (I’ve deleted the QE reference, which is a separate point):
One concern is that if a GOVERNMENT starts giving out money, it will create liabilities with no corresponding assets — thus depleting its equity.
Does it matter that the GOVERNMENT’s equity is reduced? No. Standard accounting terms lose their usual meanings when applied to GOVERNMENTS. Money isn’t a liability in the ordinary sense. Nobody is owed and nothing ever has to be paid back.
In fact, all the accounting points he makes about the central bank’s helicopter money are also true for government deficits resulting from the same size transfer payments to the private sector. Again, though, for the economics profession, when the Fed does it, it’s monetary policy and they recognize quickly that “money isn’t a liability in the ordinary sense”; but were the government to do it, it would be fiscal policy and “Oh, no! We’re living beyond our means! The government will go bankrupt! The bond vigilantes are coming to destroy our economy!”
This is all not to mention that for the US and many other countries—not the nations of the EMU, though—the central bank is an agency of the federal government, and its debt should technically be considered the government’s debt.
It’s also not to mention the little technical detail about the laws that governments write to establish central banks, which spell out what the central banks can and cannot do. As it turns out, for the Fed, helicopter money as Crook and others describe is not legal. Unlike the US government’s law forbidding it from receiving direct loans from the Fed, this is not a self-imposed constraint—it’s not the Fed’s choice whether or not it has the legal authority to carry out helicopter money spending. And it currently does not.
So, again, note how odd economists are: The government’s deficit spending is called fiscal policy, and it is seen as bringing with it the potential for bankruptcy, rising interest rates if markets lose “confidence” in the government’s ability to pay back its debt, and so on. But the central bank’s helicopter money spending is (mostly) called monetary policy, and it’s quite clear that this brings no risk of bankruptcy—since money is “no ordinary liability”—and interest rates on its liabilities are not subject to the market’s “confidence.”
And this is all believed to be true even given that the accounting entries for the two types of spending are identical, the central bank is (in most cases) an agency of the government established by laws written by the government, and the government has the express authority to tell the central bank if it can even carry out helicopter money spending in the first place.
Instead of helicopter drop or welfare call it the “National Inheritance”
The National Inheritance is the earnings of being shareholders (i.e. citizens) in a strong and wealthy nation.
Its not hard to convince people to believe that they deserve that inheritance earned by the hard work of their father and mothers.
“Many will object to my labeling of helicopter drops as fiscal policy because a helicopter drop is not accompanied by bond sales. Really? Apparently these people haven’t noticed that the Fed is carrying out reverse repurchase operations, and plans to expand their use multiple fold when it raises its interest rate target in order to put a floor on how far the fed funds rate can fall. In other words, the Fed is going to be selling securities in order to keep the federal funds rate from falling once it raises rates above 0. So, if the Fed were to carry out helicopter drops as Crook and others suggest to create “QE for everyone,” it would have to sell securities or the interest rate would fall back to zero. Also, it’s quite clear that these security sales would not be “financing” operations, as the Fed just “prints” the “money.””
The heli drop is accompanied by bond sales by treasury thats why crook termed it monetary/fiscal.
In the case of independent heli’s performed by fed without fiscal assistance they should be termed monetary policy IMO. Its just a change of counterparties essentially.
When the fed issues bonds it isnt for the purpose of funding unlike the treasury. This is why its not really fiscal for the fed to issue bonds.
You dont seem to understand how rates work. If the heli’s generate spending it will send inflation up and interest rates will follow. Under rate targeting historically the MB is increasing even when the fed funds rate is also increasing.
“The heli drop is accompanied by bond sales by treasury thats why crook termed it monetary/fiscal.”
That’s not what Crook said at all. He never says anything about bond sales w/ helicopter money. There are different versions out there, but what Crook talks about here has no bond sales. BUT, there will be bond sales because operationally there must be–he doesn’t understand that; that was my point.
“In the case of independent heli’s performed by fed without fiscal assistance they should be termed monetary policy IMO. Its just a change of counterparties essentially.”
First, the Fed’s not legally allowed to do it. But regardless, you’re just saying here you disagree because, well, you do. OK. You think monetary/fiscal should be defined by who’s doing it. I think they should be defined by WHAT is being done.
“When the fed issues bonds it isnt for the purpose of funding unlike the treasury. This is why its not really fiscal for the fed to issue bonds.”
This blog post is 2000 words explainng why I think this is wrong. YOu’ve done nothing more here but say “I disagree.” Again, that’s fine, but you haven’t refuted anything, just stated your opinion.
“You dont seem to understand how rates work. If the heli’s generate spending it will send inflation up and interest rates will follow. Under rate targeting historically the MB is increasing even when the fed funds rate is also increasing.”
Thank you for the Econ 101 explanation of interest rates. I do understand that, but I think it’s wrong, and again, I just explained why, and you’ve merely said “I disagree.” The Fed is the monopoly supplier of reserve balances. It can’t not set the interest rate on them–Bernanke recently said the exact same thing in his initial blog series. The Fed might (and probably will) choose via it’s strategy to adjust the target rate when inflation changes, but that’s not the same thing.
Well, OK, if you put it that way, but …
“There are different versions out there, but what Crook talks about here has no bond sales. BUT, there will be bond sales because operationally there must be–he doesn’t understand that; that was my point.”
It seems as if Clive is talking about a version with bond sales as is proposed in the vox article he links to in his bloomberg post. There wouldn’t need to be bond sales if the central bank issued emoney accounts to people
“First, the Fed’s not legally allowed to do it. But regardless, you’re just saying here you disagree because, well, you do. OK. You think monetary/fiscal should be defined by who’s doing it. I think they should be defined by WHAT is being done.”
Well the reason I think it should be monetary is becuase it involves printing and passing money on to people instead of banks. I dont think that becuase the central bank changes counterparties printing money sudenly becomes fiscal. Printing is what’s done. It s also important to take into account who’s doing it IMO. If the treasury purchases assets its fiscal but if the central bank does its monetary. The purpose of the act is also important.
“I do understand that, but I think it’s wrong, and again, I just explained why, and you’ve merely said “I disagree.” The Fed is the monopoly supplier of reserve balances. It can’t not set the interest rate on them–Bernanke recently said the exact same thing in his initial blog series. The Fed might (and probably will) choose via it’s strategy to adjust the target rate when inflation changes, but that’s not the same thing.”
The fed wont need to sell securities if the heli generate inflation. You said it would have to in order to keep the rate from going to zero. You assumed it will because you dont take into account the effect of spending on fed targets and rates. You only look at demand and supply of reserves to establish what would happen to rates.
“Well the reason I think it should be monetary is becuase it involves printing and passing money on to people instead of banks.”
That you could say this only shows that you dont quite understand the operations. The Govt does not send physical cash to people, and so all Govt spending, regardless of which Govt agency is doing the spending (Fed or Tsy) goes through banks.
Example 1: QE, Fed buys $10K in T-bonds from NON-bank private sector:
From Private sector POV:
private bank customer deposits +$10K (which is both an Asset and Liability of the private sector)
Example 2: Heli drop where Fed gives $10K to NON-bank private sector:
From Private sector POV:
private bank customer deposits +$10K (which is both an Asset and Liability of the private sector)
In either example, the private banking system gets an increase of $10K in reserves and commercial bank deposits because thats how the Govt pays for things, it credits the private banking system with reserves and the commercial banks in return credit their customer deposits. The only difference between the two examples, is that in the QE example, the private sector loses an equal amount of TSY securities wealth and in the Heli-drop example, the private sector loses nothing. So there is no scenario where the Govt can “pass money on to people instead of banks.”
” You assumed it will because you dont take into account the effect of spending on fed targets and rates. You only look at demand and supply of reserves to establish what would happen to rates.”
The reason that Scott, correctly, looks only at the supply and demand for reserves in orderr to understand how the “rates” work, is because thats how the “rate” is determined. The price for reserves is not determined in the broader economy, it is only determined within the market for reserves. If the banks only need $1 trillion in reserves to meet their legal requirements and settlement requirements, and the Fed supplies $4trillion in reserves to the banking system, there is no way that the interbank lending rate would ever go above zero. What is the interest rate you can charge someone to lend them something they dont need and dont want? The answer is of course zero.
Example 2 which is a heli drop. Where is the fiscal policy in this? I dont understand your point. Are you trying to say that heli drops are fiscal? The treasury wast involved in this example.
Or maybe your point was that the central bank cant do indi heli drops indepedantly of the banks. It can if it provides electronic deposits.
OK. If the helis generate demand and inflation that means lending will go up and the demand for reserves also goes up. Therefore the idea put forward in this post that the fed has to reduce reserves to stop the rate from going to zero is incorrect.
Its almost as if you didnt read the post at all, or if you did read it the material passed right over your head.
“Example 2 which is a heli drop. Where is the fiscal policy in this? I dont understand your point. Are you trying to say that heli drops are fiscal? The treasury wast involved in this example.”
The entire post was about how the correct definition of fiscal policy is whether or not the action increases the NET WORTH of the private sector, not whether or not the actions were taken by one Govt agency (the Fed) or another (the Tsy).
“Or maybe your point was that the central bank cant do indi heli drops indepedantly of the banks. It can if it provides electronic deposits.”
Yes, all Govt spending necessarily goes through commercial banks because thats where people have their deposit accounts. The Fed does not provide access to reserve accounts by the general public.
“OK. If the helis generate demand and inflation that means lending will go up and the demand for reserves also goes up.Therefore the idea put forward in this post that the fed has to reduce reserves to stop the rate from going to zero is incorrect. ”
This comment is very confused, I cant respond because its too nonsensical.
I agree w/ Auburn that CMA is completely confused or otherwise not understanding the arguments in the post, largely because CMA is operating on an ECON 101 view of central bank operations that doesn’t apply.
I thought I’d give this part a response, though . .
“OK. If the helis generate demand and inflation that means lending will go up and the demand for reserves also goes up. Therefore the idea put forward in this post that the fed has to reduce reserves to stop the rate from going to zero is incorrect.”
This is not correct. Yes, there may be some increase in demand for reserve balances with a rise in deposit creation by the helicopter drops and a rise in lending, but . . .
1. The point about the Fed selling securities is about the IMMEDIATE effect of the spending, which is to raise reserve balances way above what banks want to hold at the very moment the helicopter drop occurs, and for which the Fed would then have to sell securities to drain (or some combo of IOR and security sales). If demand for reserve balances rises enough after that, then the Fed could buy back the securities or let them mature, but the essential point of needing to sell securities remains when there are helicopter drops.
2. Furthermore, there’s virtually no chance that the demand for reserve balances would ever rise as high as the quantity created by helicopter money, or anywhere even close. For basically the entire mid-1990s to mid-2000s, there was virtually no increase in the demand for reserve balances even as bank lending grew with the economy. There are many reasons for this that I won’t get into here, but the basic point is that banks haven’t desired more than about $30B in reserve balances since the mid-1990s, and even before then the qty never got even close to $100B. By contrast, we’re talking about a helicopter drop of several hundreds of $B, if not a few $trillion. Regardless how much economic activity the helicopter drop creates, the vast majority of reserve balances it creates would be easily multiple times more than the quantity banks would desire. The supply of reserve balances would still far outpace the demand, in other words, and so CMA is again incorrect.
‘QE for the people’ is of course Citizen’s Income/Basic Income by the back door. The people supporting such a scheme know they can’t get it in place (and importantly keep it in place) via democratic means, so they have to resort to autocratic means via their beloved central bank which will always be staffed by lovely fluffy progressives like them. A central bank will never deliberately starve an area of money for political reasons. Greece, Cyprus: never heard of them…
Here in the UK the central bank is part of government as shown on the ‘Whole of Government Accounts’ (https://www.gov.uk/government/collections/whole-of-government-accounts). Unsurprisingly when the central bank is correctly incorporated into the accounts of the government as a whole half the so called public debt disappears in a puff of accounting logic.
The idea of a helicopter drop is bonkers.
It’s as mad as QE.
Something for nothing undervalues the something.
Money for nothing would undervalue money.
Better an alternative to money that is earned into existence for pro-social/pro-envioronmental contribution.
Why are you economists so bloody technical? We don’t need academic theories that confound everyone. We need simple down-to-earth solutions that everyone can understand and buy into.
In other words – do this // get that.
Totally with you on finding moneys (or alternatives) that are “earned into existence for . . ” MMTers have worked on that a lot at the community level.
However, the rest of your comment shows a complete lack of understanding of QE (note Crook correctly explained that QE is NOT something for nothing–accounting 101) and helicopter drops (intended ONLY for when there is idle capacity–so, pay people for pro-social/environmental behavior, for instance). If you create “alternatives to money” earned into existence to encourage pro-social behaviors and that doesn’t devalue the money alternative, then doing the same with money itself doesn’t either with idle capacity. Not that I’m against the former whatsoever–quite the contrary.
And not everything is simple in an economy of hundreds of millions of people and billions of trades occurring daily. Yes, at some levels simplicity is a virtue, particularly with messaging intended “for the people.” But it’s well understood that socio-ecological-technological systems are complex, adaptive, and non-linear, and experience problems whose solutions necessarily have multiple nonlinear and complex feedback loops. And these systems and problems are what economists ought to be investigating. All that being said, what my post does is actually quite simple, though the explanation is by necessity detailed since it’s not well understood (not due to complexity but because it’s not the orthodoxy–as I noted, your own comment demonstrated a lack of much background, as well)–basically it’s a simple application of accounting 101.
Thanks for an interesting article! You raise many relevant points. I especially like your view where Treasury’s bond sales are separated from fiscal policy (decisions regarding spending and taxation, the budget stance).
I agree that money is no ordinary liability. But I don’t agree with Crook when he says “Nobody is owed and nothing ever has to be paid back.”. Do you agree with him?
This is in no way a simple issue, not for me either. But this is a critical issue. I believe this is where I unfortunately part ways with MMT. It’s about “net financial wealth of the non-government sector”, which I don’t think exists. I feel that MMT has “defined it into existence”, and I can follow the logic, so there’s no need to explain it to me. It all boils down to the question if government and non-goverment (private) sectors are truly separate entities, overall or at least in these fiscal matters. Can there be a government liability, which is not even indirectly a non-government liability, and still has positive value for the non-government sector as an asset? I don’t think so, and I’d be happy to learn why MMT thinks so.
To put this in simple terms: I see government acting only on behalf of its citizens, and, in fiscal matters, more accurately on behalf of the taxpayers. (If I was an Italian, I might think differently — but I’m a Nordic citizen…) But this is not really about my worldview; this is about chartalism. For a financial asset to have a positive real (as opposed to nominal) value, the corresponding liability, or obligation, has to constitute a real burden on someone else. And we agree that “money” as a government IOU (in circulation; an IOU in the hands of the issuer is not really an IOU) doesn’t constitute a real burden for the government or the central bank. We need to look for that “real burden” elsewhere.
In my world, what gives value to these government IOUs is the fact that there are non-government debtors out there who need to get their hands on these “government IOUs” to repay a debt. A tax obligation is one example of the debts I’m referring to. In other words, these “government IOUs” are really, albeit indirectly, non-government IOUs which are redeemed — and can only be redeemed — by non-government debtors providing (selling) something to the holders of these IOUs. Mitchell-Innes explains this in this way: “«…with every coin issued a burden or charge or obligation or debt is laid on the community in favour of certain individuals, and it can only be wiped out by taxation». If there is no prospect of this kind of redemption, the IOU is more or less worthless. Or, more accurately, if there are IOUs with nominal value of 2000 in circulation but there exists corresponding debts of only 1000, *each IOU* is worth only half in real terms compared to what it would be worth if the corresponding debt (liability; e.g. tax obligation) would be 2000.
Government bonds, too, are ultimately taxpayer liabilities — even if we assume that they are rolled over, decade after decade (a debt is a debt even if it’s rolled over). Interest due on government bonds can only be really *paid* by taxpayers, although it can be taken care of by government issuance of new IOUs; IOUs which ultimately represent non-government liabilities.
All this is not to deny the existence of a “residual component” (although it’s hard to detect it, not to speak of quantifying it) which you call “net financial wealth of the non-government sector” and which others refer to when they talk about government “printing money” (for real, not QE) and causing inflation by eroding people’s trust in the currency.
Overall, I think MMT gets many, many things right about our monetary system. I have learned a lot by reading Wray, you and some others. I’m more or less apolitical (I consider myself a humanist), and I would have nothing against guaranteeing jobs if there really was an easy way to do it. So my critique lies in no way on the normative side. I haven’t found any school of economic thought that gets “money” more right than MMT, or Post-Keynesians in general, so what I say should not be taken as an attack from another camp. I’m all alone out here.
“Interest due on government bonds can only be really *paid* by taxpayers,”
That’s the mistake there.
– Interest is paid by people who receive interest.
– Profit is paid by people who receive profit.
– Wages are paid by people who receive wages.
It’s just a circulation of oil, which you only need to top up from the source when people decide to save.
The financial circuit operates independently of the real circuit with only an induction relationship between the two.
I’m not sure if I follow you. Are you saying that the interest is paid (and by this I don’t mean “paid with money”) by the bondholder, or overall by a group which the bondholder is a member of (assuming closed economy)?
For me, as for Mitchell-Innes, money is credit. A $10 note, or a deposit, is “a credit”, an IOU. I assume you agree so far. But here comes the crucial point: The government, or a commercial bank, is not the real debtor behind this IOU. It is not from these we can expect any real redemption of the IOU (cash or deposit). All we can expect from them in return for these IOUs is just some other IOUs. There is no substance here. But instead of stopping here, we should look elsewhere for the value behind these IOUs.
The real value behind these IOUs lies in the fact that there are debtors to the government (taxpayers) and to banks (e.g, mortgagors) who need to *sell something* to get their hands on these IOUs, which makes these IOUs, in essence, (indirect) IOUs of these debtors — not the government or banks. So, this kind of debtor in fact redeems his (indirect) IOU by selling something to a holder of this IOU. Later, the debtor proceeds by taking this IOU/token to a bank (bank loan) or to the government (tax obligation) and makes it explicit, “on the record”, that he has redeemed it — his own, indirect IOU — by a sale. At this point, the IOU is “destroyed”.
This is the substance I see behind “money”. In fact, it’s better to forget the whole notion “money”. It’s all about who owes whom, and of what nominal value. What is owed is actually decided on the market, both by debtors and by creditors. There’s a lot of flexibility in it, of course. So, strictly speaking, “money” doesn’t exist. All there is is credit-debt relations. These are the terms I think in.
I’d appreciate if you could let me know where you might agree and where disagree with me.
The pressure that causes the circulation is incurring a liability to somebody – the moral requirement to fulfil a promise.
That’s how humans work. We do each other favours and can generally call on that ‘investment’ over time as people feel the need to reciprocate. What we call the economy is a sophisticated version of gift giving and receiving.
In a monetary economy we trade with each other by creating IOUs and then swapping them around so we can create more.
Over time though as the monetary economy gets more sophisticated the redemption process becomes systemically irrelevant almost and the swapping around bit dominates. Then you end up with fiat money where at the root there is no redemption process (or at least not one that changes anything).
But in a monetary economy we trade for the IOUs because that is how we keep score. The real things are almost a byproduct – to the point where if you don’t regulate the financial economy properly nothing real actually gets created and it becomes more ‘valuable’ not to bother.
Neil, I have read about this gift-giving aspect in Graeber’s “Debt”. What I’m saying should be in line with all that.
You write: “In a monetary economy we trade with each other by creating IOUs and then swapping them around so we can create more.”, and, “Then you end up with fiat money where at the root there is no redemption process (or at least not one that changes anything).”
Above, I have tried to present a different interpretation of our economy, where there indeed is a real “redemption process”. Yes, we swap these IOUs around — until they are redeemed by the ultimate debtors. The fact that they are eventually redeemed by debtors gives these IOUs their value, no matter if people are aware of it or not. I understand that my view might be somewhat novel, and that’s why it would take time from you to get into it. I can’t ask for that, but now I feel that you’re not really addressing the points I have made.
The point is that they are never redeemed in aggregate. In aggregate we hold them against the fabled ‘rainy day’ and just change the name tags on the things over time.
So the ‘real stuff’ that it allegedly represents isn’t ever real at all. It’s a dream (or a nightmare depending upon your viewpoint).
So you can treat the stock of ‘rainy day’ IOUs as not being there in your calculations – essentially voluntary taxation. It continues to grow as the population grows and our wealth grows and the ‘rainy day’ need appears larger.
So you will always have to have a financial stock well in excess of the real stock to allow these self-funded insurance policies to exist. There isn’t a one-to-one correlation between financial and real and never will be – because of human behaviour.
Equating financial and real directly is a mistake. At best there is a sort of inductive link.
This is the trouble with economic theory – it’s all just theory and hot air.
Come join us in Manchester where we’re printing our own money and distributing it in exchange for contribution to community.
By using the mechanism of the market to clear stock and capacity using one single metric that signals ‘good’, we have given business a cause to invest in.
Come see it in action and lay all theories to rest.
Economics might do a better job if it invented a new way of measuring success that we could all understand and buy into but we can’t because it’s all too damn complicated.
Reward points. Now everyone gets that!
I’m still not convinced, Neil. I’m not saying that they are redeemed in aggregate, although I don’t see any reason why the total amount of debt, and the total amount of, say, M2 couldn’t decrease in the economy. As far as I know, this does happen from time to time.
So, yes, there is a big “float” of IOUs in the economy. The “real stuff” is, for instance, the labor services I provide in order to redeem my indirect IOUs (deposits created when I took my mortgage). I don’t see how you taking a new mortgage after I’ve repaid mine, and thus keeping the total amount of IOUs from falling, would make this in any way less real. Note that I’m not saying that “money” represents some *existing* “real stuff”. It represents a real burden for the debtor behind it, and this debtor can relieve himself from the burden by selling goods or services later — in exhange for these IOUs.
I’m not saying we should have a smaller or a larger stock of these IOUs. I’m only suggesting that we should recognize those IOUs as very real IOUs. And what is owed is not “money”, because those IOUs themselves are “money”.
I still find it hard to answer your critique. Where do you concretely aim it at? Could you give, for example, a sentence of mine, let me know how you interpret it and why you don’t agree with it?
“A” treasury bond holder “pays” the interest if you consider the one who bought the bond replacing the retired bond plus interest on that bond but I would not consider saving at interest “paying” for anything!
Can there be a government liability, which is not even indirectly a non-government liability, and still has positive value for the non-government sector as an asset?
Yes, of course. Any government liability – e.g. bonds, cash, reserves, whatever are in ordinary parlance government liabilities which are not non-government liabilities etc. Government liabilities are just like any other liability, formally, the only difference is that the government is bigger than anyone else, so we use government liabilities as a measure of others’. But considering, speaking of government liabilities as therefore taxpayers liabilities is not legitimate if one doesn’t do the same thing for everyone else, making every liability everyone else’s liability. (See Neil’s comment also) Everything is related to everything else and every relation is both direct and indirect. (want the ref to Hegel?)
And we agree that “money” as a government IOU (in circulation; an IOU in the hands of the issuer is not really an IOU) doesn’t constitute a real burden for the government or the central bank. That is NOT the MMT / FF position. We don’t agree. Money, government debt is a burden on the government. That is what debts are – obligations, burdens, liabilities – they’re all synonyms. Government debt just ain’t much of a burden, especially a domestically held debt. All this was very clearly understood in 65 years ago by people like Abba Lerner & Seymour Harris, let alone Keynes & Mitchell-Innes. See the chapter on the National Debt in Lerner’s Economics of Employment & Harris’s 1947? book on The National Debt. In Lerner’s words, “the return to sound finance is illusory” – [when one argues as you do].
The government, or a commercial bank, is not the real debtor behind this IOU. It is not from these we can expect any real redemption of the IOU (cash or deposit). All we can expect from them in return for these IOUs is just some other IOUs. The first two sentences are treated above. The last sentence is very, very wrong. Taxation is a purchase from the government. Simplest cases are head taxes you are buying your own head, or property taxes – you are paying rent on a property to the ultimate owner, the government. That is what we get for our IOU’s. Government money/debt is valuable because what it sells is so valuable. You are absolutely right that all there is is the credit-debt relations, but you have to proceed carefully and slooooowwwly to get it right. Money of course does exist – but it is a type of credit/debt relation, not a thing.
Calcagus, you’re saying that with income taxes we buy the right to exist, or at least our freedom? I have nothing against adopting different perspectives. At the same time, I don’t think that you presenting a different perspective in any way proves wrong what I said earlier.
Now that you mentioned Mitchell-Innes, I quote him again (from my first comment): «…with every coin issued a burden or charge or obligation or debt is laid on the community in favour of certain individuals, and it can only be wiped out by taxation». My interpretation: When he talks about a burden “laid on the community”, he doesn’t mean the government but taxpayers. His “in favour of certain individuals” must mean the recipients of this government spending (“coin issuance”). And this burden that can only be wiped out by taxation, meaning that taxpayers need to sell something to these “certain individuals” in exchange for these IOUs which the taxpayers need in order to pay taxes. I have taken this to be the essence of chartalism, but I would be glad to hear other interpretations.
I have understood that MMT acknowledges the part of government spending (= issuing government IOUs) which is covered by taxation as a non-government liability. Let’s look at an unrealistic economy where all government spending takes place during Q1 and all taxation takes place during Q4. During Q2 and Q3, there are government IOUs in circulation, but these will be redeemed later by taxation. The burden of redemption lies with the taxpayer, not with the government. These IOUs can be seen as a taxpayer liability, not a government liability. Do you agree?
“and it can only be wiped out by taxation”
The difference is that taxation can actually be voluntary (aggregate net saving).
Yes, both take money out of circulation and are anti-inflationary but the similarity ends there. FICA and other income taxes are just a direct reduction in the wages of employed persons and thereby take money out of the economy and reduce demand. Aggregate savings/treasure purchases on the other hand are safe parking places for surplus, unneeded money with promised return at interest at a later date at interest when it may be used. Removing those unneeded funds from the economy has little effect on demand in the market.
Peter Golovatscheff :At the same time, I don’t think that you presenting a different perspective in any way proves wrong what I said earlier.
“Taxes are individuals purchasing from the state” is just restating the MMT / Mitchell-Innes “perspective” – which is just what everyone knows, but hardly ever thinks about. And when it is considered, due to the influence of bad and confused theories, people almost always get it wrong.
My interpretation: When he talks about a burden “laid on the community”, he doesn’t mean the government but taxpayers.
Very wrong. Not in Mitchell-Innes at all. When he says “community” he means “community”, not a part of the community, the taxpayers. The government is of course the representative of the whole community, so government debt is used as the base money of the system, is a burden laid on the whole community in favor of the holders of government debt.
I have understood that MMT acknowledges the part of government spending (= issuing government IOUs) which is covered by taxation as a non-government liability.
It most certainly does not. Muddled, mangled accounting is anti-MMT. Arguing as you do leads to identifying everyone’s liability with everyone else’s. True but not too helpful if you do it consistently (as such arguments never bother to be). Done inconsistently as usual it is a path to absurd conclusions. For instance, why stop at taxpayers? Why stop with taxpayers / the debtors to the gov are the ones really paying government debt? Why not continue to debtors to these debtors etc? No reason not to, every reason to, and then we’re back where we started. In history & right now – it is child’s play for elites to set it up so that they “pay” all the taxes, while their sharecropping peons in their company towns seemingly get all the government largesse. In reality, of course the elites are welfare kings and queens supported by the peons work and the government they corrupt. But such a system cannot withstand a Job Guarantee, which is why them elites hates it soooo much.
It is sooooooooooooooo much simpler to proceed as people do in real life: When a government issues a note or bond that says this is a government liability – that means it is a government liability, burden debt etc. It doesn’t mean that it is Bill Gates’s liability. Government liabilities are government liabilities. Nongovernment liabilities are nongovernment liabilities. Get the basic basics straight first, walk before running.
Then notice that if you do this boring but correct procedure, you get very different conclusions from those from sloppily identifying government liabilities with taxpayer liabilities or any of the other innumerable “obvious” but absurdly wrong shortcuts that ultimately stem from thinking of money as a rigid thing, not a relationship. Which shows the shortcuts are not shortcuts but dead ends.
Government liabilities, HPM are the most prized and distinguishable liabilities. That is a real world fact. That’s how human beings behave, rationally. If you see a $100 bill on the sidewalk and what looks like a cashier’s check, drawn on a presumably tax-paying, but unknown bank, for $100, which do you pick up first? Government IOUs are just like any other ones. But they are better than others, the most distinguished, the ones most widely used, which means they are the ones it is craziest to aggregate or consolidate with taxpayers’ alone, or any group short of the whole community, which is where we started with.
Even Neil nodded, made a mistake or was very misleading above, when he said – “Then you end up with fiat money where at the root there is no redemption process (or at least not one that changes anything).” You don’t end up with fiat money. You start with and always have fiat money. There isn’t any other kind of money. The redemption process always going on, always changing everything, is what makes fiat money genuine money, genuine debt, rather than monopoly money in a game box. What a “fiat money” issuing government is constantly selling to its people is as important to them as water is to a fish – and as invisible. It drives economic activity of the whole society.
“But but but, the Fed is not part of the Govt its a private banking cartel because the banks own meaningless shares in the Fed system and receive a dividend subsidy so thats why the Fed and Tsy are different!!!!”\
So says millions of nutters including at least one economist (I’m looking at you Richard Werner).
Auburn, here’s what the “nutters” at the St. Louis Fed have to say. Emphases mine.
Shall we believe one commenter’s slur, or the St. Louis Fed’s own depiction? You’ll notice it describes not only the member banks’ dividend earnings but also their governance rights. Ah, but these do not precisely match the “control and financial interest given to holders of common stock in for-profit organizations.” Six of the nine board seats. “Meaningless shares,” quoth our friend.
Also among the “nutters” : NEP’s own Joe Firestone.
That commercial banks are required to buy shares in the Fed system is completely irrelevant to who “owns” the Fed. Owning shares that you are legally required to and that you cant sell or transfer, and give you no authority over the policies of the Fed, does not mean the Fed is a private bank. The NY Fed cant do anything that the Board of Gov dont allow it to, and the BOG cant do anything that Congress doesnt allow it to. You see the problem here? Right there in your quote it says
“While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends. Holding this stock does not carry with it the control and financial interest given to holders of common stock in for-profit organizations. The stock may not be sold or pledged as collateral for loans.”
BOG is a Govt agency, and owning “shares” of the Fed is irrelevant to anything except for a stupid, unnecessary 6% dividend subsidy. And Congress can change the way the boards are appointed anytime we like, because the Fed is a Govt agency.
Let me provide a quote:
“The Federal Reserve System fulfills its public mission as an independent entity within government. It is not “owned” by anyone and is not a private, profit-making institution…..the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”
SO who should we believe, basic common sense and the Fed itself, or some internet nutters who like to believe the Fed is some private banking cartel so they can use it as a punching bag?
The puzzles of fiscal/monetary/Fed/Government are difficult to untangle for a simple reason. It is a contrived system, not a logically designed system. You need to get back to the roots to see the issues and face the realities of why it was contrived in this way. Because of some unwritten rule and definitely not demanded by the constitution, the federal government is constrained to make spending equal to taxes removed from the economy plus money removed by treasuries sales. I call it the “bean counter rule.” That rule had some bases in reality when gold really was money but that era was very far in the past and the fairy tale era of pretending gold was money was ended for us as a nation in 1933 by FDR. So what does the bean counter rule do for us now? First and foremost, it prevents the government from altering the quantity of money in the economy, that power being reserved for the central bank. The rule requires the government to remove money via taxes/fees and if that is not enough to equal spending , to remove more by selling treasuries with the promise to pay it back plus interest. Taxes fall heavily on the working population; treasuries function as a savings account for those who can find no other safe place for their accumulated money. This method of constraining the government from controlling the money supply is neither logical nor moral. The federal government removes money from A and B and spends it to C and D with significant logical overlap between them. This is fiscal policy. It moves money around in the economy, adding none and subtracting none. It is a significant power but very limited compared with the power of controlling the quantity of money in the economy, the power retained by the central bank under the bean counter rule. And here the absurdity of the whole system becomes apparent in this era of fiat money. The central bank has the responsibility of controlling the money supply with power puff tools to do it whereas the government has the sledge hammers and chain saws for control of the supply of money, taxing and spending. It is an upside down system, the tools in one place and the responsibility in another. To make it a rational system either the Fed should be given the power to tax and spend or the federal government should take back the power to control the money supply. That power is definitely available to the government under both law and the constitution. The heli drop by banks proposed in the article is a neat idea but a guaranteed job for those who are able and a guaranteed income for the old and disabled would be much better.
Unless spending exceeds the economic output of the economy,inflation is not a risk.
“Money for nothing” is not inflationary,it would act as a stimulus and increase the insufficient demand in the economy,increasing output.
Not that I don’t think that Government should pay people to do useful jobs/work and much needed projects.
@jake I agree in essence. I wasn’t suggesting that money was inflationary i was simply suggesting that it doesn’t produce things of real value any more.
We have a problem with productivity do we not? That’s why a helicopter drop is the wrong idea – it misses the opportunity to produce something of value in exchange for the drop.
But the point about money is quite separate. Money does produce stuff. Stuff we don’t need. Greed, envy, covetousness, pollution, war, hate.
Money as a construct needs to be challenged. MMT doesn’t solve the big problem it simply rearranges the deckchairs on the ship that is sinking.
You’re taking “helicopter drop” too literally. IT doesn’t have to be “money for not doing anything.” It certainly could be. But doesn’t have to be. Even so, though, with idle capacity, “money for not doing anything” puts people back to work, so now they are doing something–involuntary unemployment has a statistically significant relation to virtually every social problem.
I’m with you on creating local currencies, though, and creating them in exchange for productive behavior/contributions to society (in fact, that’s where many local currencies fail or at least don’t do as well as they could–they neglect to have that all important pro-social component for the creation of the money in the first place). MMT’s been writing about that since the mid 1990s–and we’ve been advising community governments on this, as well as creating these alternatives in our own classrooms (which have led to sevearl thousand hours of community service, by the way, so we understand well how this works). That was one of the key applications we recognized of our approach to money very early on, in fact.
And, no, we don’t necessarily have a problem with productivity. The US economy didn’t all of a sudden become less productive in 2009 compared to 2007 or 2008. It had a significant % of its productive capacity go idle. Yes, once you do that you lose productivity as your skills depreciate, you don’t make investments in new technologies, etc. But if at least some of the problem is from idleness, then as I noted above, simply giving out income to spend will reduce the idleness; but I agree it can definitely be suboptimal, and is in no way the entire solution.
“Many will object to my labeling of helicopter drops as fiscal policy because a helicopter drop is not accompanied by bond sales. Really? Apparently these people haven’t noticed that the Fed is carrying out reverse repurchase operations, and plans to expand their use multiple fold when it raises its interest rate target in order to put a floor on how far the fed funds rate can fall. In other words, the Fed is going to be selling securities in order to keep the federal funds rate from falling once it raises rates above 0.”
I’m confused by that last sentence. As I understand it, the floor system means the Fed doesn’t need to sell securities to keep the rate from falling once it raises rates above 0. They move the floor up, excess reserves keep the rate pinned to the floor, the desired rate increased is achieved independently of the decision whether to hold or sell securities.
Specifically wrt that last quoted sentence, I don’t understand why raising rates implies selling securities as opposed to changing the basis points offered on reverse repo (and/or IOR & term deposits).
See my response to Jose below. thanks!
Thought you might enjoy this below. Seems Sir Thomas had his doubts about the ‘theoretical independence’ of central bankers too. Helps to explain why lending to government at interest is what central banks do to favour their private banker friends.
Royal Commission on Banking and Currency in Canada, 1933. Chair: Hugh Pattison Macmillan.
*“ I recall that the Union Government, of which, I was a member in the reconstruction period, following the Armistice – a period very similar to this – declined to consider favourably the establishment of a Central bank for the reason I have expressed. Some of the financial problems to which I have alluded are the refunding of our outstanding loans, the flotation of new issues, whether in Canada or elsewhere, the sale of Treasury Bills, the management of an Exchange Stabilization Fund (should that hazardous experiment be tried) and such questions as reducing unemployment and raising the domestic price level through monetary action. In the solution of these problems it is my belief that the existing banking system of Canada, supplemented by the provisions of the Finance Act, affords the Government a much more efficient instrument than that system, controlled and regulated by a newly-created Central Bank independent, in theory, at least, even of the Government of the day.”
*Memorandum of Dissent, Sir Thomas White: Ottawa, October 3, 1933 p.89.
Excellent as always! Thanks for blogging!
I have a dumb question. If the Fed does not have the legal authority to carry out helicopter money spending, why does it appear to have the authority to “spend” $4T on QE “assets?”
The Fed has the authority to trade certain types of financial assets (QE, monetary policy), it does not have the authority to give free money to people (fiscal policy). QE is nothing but an open market operation, which the Fed has been performing since the 1930’s.
If you are interested in the specific statutory authority it comes from 12 USC s355 https://www.law.cornell.edu/uscode/text/12/355
Every Federal Reserve bank shall have power:
“1. To buy and sell, at home or abroad, bonds and notes of the United States…
2. To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.”
And, under the MMT/Scott Fulwiler view – this does not allow for the FED to exercise “fiscal operations” because there is not an increase in net financial assets for the general private sector. The liquidity/quality of the assets have just changed.
But now, consider that 12 USC 353 allows for the FED to purchase other assets like Banker’s Acceptances and other assets besides U.S. Treasuries:
“Any Federal reserve bank may, under rules and regulations prescribed by the Board of Governors of the Federal Reserve System, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers’ acceptances and bills of exchange of the kinds and maturities by this chapter made eligible for rediscount, with or without the indorsement of a member bank.”
Maybe, if the FED were to decide it was going to no longer purchase Treasuries but said it would purchase Banker’s Acceptances from any and all banks, individuals and corporations pursuant to s353 and maybe, if the FED’s regulations started letting any ordinary person obtain routing numbers and therefore accounts at their local Federal Reserve Bank instead of just heavily regulated depository institutions…and the FED just started buying facially worthless “Banker’s Acceptances” from anybody who had accounts at the FED…well then maybe in that alternative world the FED’s purchases would, in substance, be fiscal operations that increased net financial assets, if not in form.
Comment on ‘What Is Helicopter Money, Anyway?’
The function that money, and helicopter money in particular, performs has to be clarified within a comprehensive framework. The concrete details of the central bank’s technical operations are secondary and distracting surface phenomena.
The challenge for theoretical economics is, first of all, to explain how the (undifferentiated) product market, the labor market, the secondary market, and the financial market (including money) fits together.
No such framework exists. From their previous dismal analytical performance it can safely be extrapolated that neither Walrasians nor Keynesians can answer the question how helicopter money works.
The key point is that it does not matter much whether helicopter money is handed over to the household sector or to the public sector, it ends invariably up as profit of the business sector. By consequence, proponents of helicopter money produce massive distributional effects as collateral damage. This, not inflation, is the real crux.
The consistent and comprehensive theory of how the various financial markets emerge as integral parts of the monetary circuit which links all markets has been put forward by Constructive Heterodoxy (2015).
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607032.
I can understand the confusion of one commenter above.
Scott Fullwiler has stated many times in previous articles that by paying interest in reserves the Fed doesn’t have to sell bonds in order to keep rates above zero.
As for Fed economists, they talk about “divorcing money from monetary policy” – they point out that by “paying interest on reserve balances at its target interest rate, a central bank can increase the supply of reserves without driving market interest rates below the target”.
It can be read here: http://www.newyorkfed.org/research/epr/08v14n2/exesummary/exesum_keis.html
The point here is a technical one for the US–IOR is not paid on all reserve accounts, particularly those of the GSEs, so even with IOR if there are large ER the fed funds rate falls below IOR as it has done since 2008. That’s why the Fed is using RRPs–which would allow a much broader set of FIs to have “lend” to the Fed–and plans to expand them a lot when it raises rates, as they will set a floor below IOR. RRPs are already up to $200B as of April 2015. So, even with IOR, the Fed will have to sell securities (RRPs).
Is QE fiscal or monetary policy?
It is not necessary for the Fed to use QE to control interest rates. It also does not add financial assets to the economy, hence not fiscal. I would still call it fiscal policy because it drains interest income from the private sector.
Personally I think we need to come up with completely new terminology beyond “monetary policy” and “fiscal policy.” Indeed, as I have thought about over and over…I don’t even think it makes sense to use the term “fiscal policy” with regard to a currency-sovereign. There is no public fisc. There is a computer and a spreadsheet.
Seems like “Expectations Policy” “Asset Policy” “Supply-Side Policy” “Demand-Side Policy” “Liquidity Policy” “Credit Policy” “Interest-Rate Policy” “Taxation Policy” “Industrial Policy” – any of these and whatever else more accurately describe things than “monetary policy” and “fiscal policy”
I mean consider the neo-monetarist position: “Money” is tight if the markets do not expect X% NGDP growth sufficient for full employment and output even if you are increasing the monetary base by trillions and trillions?
My humble opinion is that we have this incomprehensible language game going on and the phrases “monetary policy” and “fiscal policy” have outlived their usefulness.
Amen, exactly correct!
Bottom Line: “Helicopter Money” is precisely the same as Greenbacks, US Notes, Silver Certificates and coins; money in the economy which does not have to be repaid at interest to commercial banks. The only difference is it comes floating down instead of being used by the govt. to buy something.
Why is it that the national debts of Canada and the UK have grown exponentially since the end of the post war consensus and the neoliberal era?
Is this related to their no longer borrowing from the central bank directly? Please explain.