Comments are thankfully few and I already dealt with some ofthem. I doubt there will be many readers this week, but here we go:
Q1: Is it possible to show these transactions simply from anominal perspective?
A: Look if you buy a stick ofgum we need to show the “real”–you exchange a demand deposit forgum, your store gets the demand deposit and you get the gum. We can stick topurely “nominal” only if it is a financial transaction only. But youdo pay “money” (the gum you buy was denominated in dollars) so it is valuedin nominal terms: $1.45. If you did not think it was worth that you would notbuy it. So that is the nominal value we put on it. Kenneth Boulding had a verynice way of looking at it. You exchange your liquid savings (deposit) forilliquid assets (gum); then you dissave over time as you consume them. AsBoulding said, consumption is destruction of your assets–you chew your assetsaway. He said you get no satisfaction from consumption=destruction of assets.Tires on your car are a clearer example. You “consume” them over 5years as you wear them out. You’d rather that they do not wear out, but theywill. That is destruction of assets. It is a stock-flow consistent model.Boulding was among the most clever and greatest of economists.
Q2 by WH: You wrote in Blog #24, referring to foreigner’saccumulation of reserves, such as China’s:
“Neither of these activities will force the hand of the issuinggovernment—there is no pressure on it to offer higher interest rates to try tofind buyers of its bonds… Government can always “afford” larger keystrokes, but markets cannot force thegovernment’s hand because it can simply stop selling bonds and thereby letmarkets accumulate reservesinstead.” In world with self-imposed constraints like the US’s, it doesn’thave the option to stop selling bonds if it wants to deficit spend. However, like you mention, bonds are an interest-earning alternative toreserves. So: 1) If bonds are an interest-earning alternative toreserves, is there an economic reason why the ultimate holder of reserves(whether it’s China or whoever China sells dollars to) would not place theirreserves into US debt and at an interest rate consistent with the future pathof FFRs? In other words, it’s generally understood interest rates on USdebt follow the expected future path of FFRs. Why would this change ifforeigners hold the debt (even a majority portion of the debt)? 2) Let’s assumeforeigners arbitrarily abstain from buying the debt. Could the US and itsholding of reserves as well as credit creation abilities still fund the US debtat rates consistent with the path of expected FFRs?
“Neither of these activities will force the hand of the issuinggovernment—there is no pressure on it to offer higher interest rates to try tofind buyers of its bonds… Government can always “afford” larger keystrokes, but markets cannot force thegovernment’s hand because it can simply stop selling bonds and thereby letmarkets accumulate reservesinstead.” In world with self-imposed constraints like the US’s, it doesn’thave the option to stop selling bonds if it wants to deficit spend. However, like you mention, bonds are an interest-earning alternative toreserves. So: 1) If bonds are an interest-earning alternative toreserves, is there an economic reason why the ultimate holder of reserves(whether it’s China or whoever China sells dollars to) would not place theirreserves into US debt and at an interest rate consistent with the future pathof FFRs? In other words, it’s generally understood interest rates on USdebt follow the expected future path of FFRs. Why would this change ifforeigners hold the debt (even a majority portion of the debt)? 2) Let’s assumeforeigners arbitrarily abstain from buying the debt. Could the US and itsholding of reserves as well as credit creation abilities still fund the US debtat rates consistent with the path of expected FFRs?
A: First, sovereign governmentcan target any interest rate it wants—overnight, short-term, long-term. It canrefuse to offer long-term debt and instead stay at short end of market. Thus itcan offer Chinese 0.50% on 30 days, or 0% on overnight. Period. They’ll takethe 30 days, but if they decide not to, so what? And in any case, all themonetary ops undertaken to let the Treasury spend have nothing to do withChinese—it is the special banks in the US.
Q3: wh10 It seems if we take foreigners out of the picture, then there is a smalleramount of reser Q ves/treasury debt with which to buy/rollover into newdebt. However, in sort of a reversal from my alien scenario, why couldn’tthe US just hold smaller but more frequent auctions to overcome any ‘funding’ issues?
A: It is not a funding issueand yes, the US can do whatever it wants. The foreigners are never in the“funding” part—it is special domestic banks.
Q4: Paul Krueger Thanks, this is a nice exposition of the (at least partial) equivalence ofdifferent views of the process. To really prove a complete functionalequivalence it seems to me that you would need to show that the interest ratepaid on government bonds was the same in any of the cases. Is that a correctassumption or does that not matter for some reason?
Q5: wh10 I believe at the end of Fullwiler’s paper, he also comments that bank primarydealers can take on the govt’s tsys in a manner similar to your case 3 (asopposed to non-bank primary dealers having to engage in repos to obtain thedeposits to purchase the tsy). Is there a practical difference betweenthese two types of primary dealers? Can bank primary dealers handle a greater
govt debt load or do it more easily? What is the ratio of these bankprimary dealers to non-bank primary dealers? Secondly, Fullwiler has commentedto me that it is possible that a tsy auction could fail if the govt conducted atsy auction, say, 2-3x the size of what it normally does (or some conceivablesize). This is because investors do have to secure financing toparticipate in the auction, and they might not be able to do it readily enoughwith such a large issuance. Although, he says, the next time around,they’d likely have no problem getting things together. Though thisdoesn’t present an issue to a
govt normally, I think it does underscore a real difference between a govt beingable to simply spend first whatever it pleases (e.g. if it had overdraftsfromthe Fed) and a govt needing to tax/sell debt to the private sector in order tospend. That is, the private does have to secure financing for a govt debtauction to succeed. So just because the final balance sheet position isthe same, the path to get there may be more obstructive in the realworld. Usually, it is not an issue at all, but it seems it couldconceivably be. I just think these types of qualifiers are worthmentioning when teaching MMT to others who may be skeptical about ‘govt spendsfirst,’ since it paints a more accurate picture
and clarifies why the real world doesn’t operate exactly like the general case ofa consolidated Fed/Tsy.
govt debt load or do it more easily? What is the ratio of these bankprimary dealers to non-bank primary dealers? Secondly, Fullwiler has commentedto me that it is possible that a tsy auction could fail if the govt conducted atsy auction, say, 2-3x the size of what it normally does (or some conceivablesize). This is because investors do have to secure financing toparticipate in the auction, and they might not be able to do it readily enoughwith such a large issuance. Although, he says, the next time around,they’d likely have no problem getting things together. Though thisdoesn’t present an issue to a
govt normally, I think it does underscore a real difference between a govt beingable to simply spend first whatever it pleases (e.g. if it had overdraftsfromthe Fed) and a govt needing to tax/sell debt to the private sector in order tospend. That is, the private does have to secure financing for a govt debtauction to succeed. So just because the final balance sheet position isthe same, the path to get there may be more obstructive in the realworld. Usually, it is not an issue at all, but it seems it couldconceivably be. I just think these types of qualifiers are worthmentioning when teaching MMT to others who may be skeptical about ‘govt spendsfirst,’ since it paints a more accurate picture
and clarifies why the real world doesn’t operate exactly like the general case ofa consolidated Fed/Tsy.
Q6: Neil Wilson S is there any benefit from all those extra transactions? Or is this, likeallegedly private pensions that ‘invest’ in Treasuries, simply a Job Guaranteescheme for financial sector workers?
Paul: A treasury that understands what bonds are would only sell bills and sowould have no impact on interest rates; that said, there might be an impact iftreasury tries to sell too many long term bonds into mkts. Solution: don’t selllong term bonds.
WH: Scott is the expert and I won’t disagree. And aliens might explode asupernova at some distant place in the universe precidely when the treasurytries to auction, causing a temporary hiccup. We cannot possibly deal withevery unlikely event. Treas and Fed converse every morning to go over plans.They aren’t going to try to auction of 3x what the mkt can handle. In any case,the primary dealers are “banks” so not sure what you are getting at. While thepath could be more difficult in practice it is not. Except when Congressrefuses to raise debt limit!
And that leads to Neil: NO, obviously all the intermediate transactions justintroduce the possibility that something could possibly go wrong. You can be amuch better boxer if you do not tie your hands behind your back and your shoestogether. These constraints arise because Congress doesn’t understand monetaryoperations.
