Treasury and Central Bank Interactions
This post concludes our study of central banking matters (there would be a lot more to cover…maybe another time). The post studies how the Fed is involved in fiscal operations and how the U.S. Treasury is involved in monetary-policy operations. The extensive interaction between these two branches of the U.S. government is necessary for fiscal and monetary policies to work properly.
Once again the balance sheet of the Federal Reserve provides a simple starting point. The Treasury holds an account (called Treasury’ General Account, TGA) at the Fed, which is part of L3. To simplify, this post assumes that the Fed still follows the monetary-policy procedures that it followed prior to the 2008 crisis.
By Eric Tymoigne
Previous posts studied the balance sheet of the Fed, definitions and their relation to the balance sheet of the fed, and monetary-policy implementation. This post answers some FAQs about monetary policy and central banking. Each of them can be read independently.
Q1: Does the Fed target/control/set the quantity of reserves and the quantity of money?
The Fed does not set the quantity of reserves and does not control the money supply (M1). It sets the cost of reserves; that is it.
In terms of reserves, the Fed was created to provide an “elastic currency,” i.e. to provide monetary base according to the needs of the economic system in normal and panic times. It would be against this purpose to implement monetary policy by unilaterally setting the monetary base without any regards for the daily needs of the economy system.
By Geoffrey Gardiner
Jurists have demonstrated that every right must have a corresponding duty, or it is worthless.
The same is true of financial assets: for every creditor there has to be a debtor.
Money is assignable debt. The debt should be negotiable, that is it can be transferred to another owner without reference to the knowledge of the debtor.
There are primary debt and secondary debt. An example of primary debt is when a borrower draws down a bank loan by making a payment to someone. That someone pays the money received into a bank account, thus creating the credit which finances the loan. New money has been created.
Posted in Guest Blogger
Most of the world, and most notably the United States, is in the grip of fiscal myths fostered by the ideology of neoliberalism. There is virtual unanimity across the major political parties in the United States in accepting the viewpoint of neoliberalism, and the fiscal myths associated with it.
This book is about these myths, the arguments showing that they are, indeed, myths, and the truths that can counter them. It is about Campaign 2016, and some of its issues, because the fiscal myths will certainly be used in the Campaign; since, for the first time in a very long time, there is a major party candidate running, who, because he advocates for a very broad agenda and for fighting inequality, will, sooner or later, find that some, and perhaps a large number, of fiscal myths are being directed at him by his opponents and their supporters, who want to persuade voters that his agenda is “fiscally irresponsible.”
Posted in Joe Firestone
Tagged bernie sanders, Burden of Government Debt, consols, fiat currency, fiat money sovereigns, Fiscal Myths of Campaign 2016, Fiscal Responsibility, Fiscal Sustainability, fiscal truths, Government Austerity, Government Debt, Government Family or Household, government solvency, Hyper-inflation, inflation, money, Our Economic Future, platinum coins, Running Out of Money, Shared Sacrifice, Wall Street Journal
By J.D. ALT
I’ve been continuing to work on the book I first proposed here at NEP last spring—The Millennials’ Money—and am getting close now to having it ready for publication. The aspect of it that was least successful (and there were several NEP comments to that effect) was the framing of the “ideology of money scarcity” as having evolved from the particularities of the baby-boomer’s generational experience. That was always a shaky and not-very-insightful argument—and I recently came to realize it had to be replaced with a “framing” that focused the “target” of the book in a more useful way. This “target” became clear to me while reading a series of collected essays by Wendell Berry (The Art of the Commonplace) in which he very forcefully explains how and why local, self-sufficient economies are being exploited and destroyed by the multi-national corporate economy—and why it is essential for those local economies to somehow be re-established and regain some useful portion of their self-sufficiency. I realized this was, in fact, precisely what my book was suggesting ought to be the ultimate purpose of the “millennials’ money”—and that modern fiat currency, itself, makes achieving that goal uniquely possible. What follows here is part of my revised introduction, which is titled: “The Ideology of Money Scarcity—A Brief History”.
By William K. Black
Bloomington, MN: January 13, 2015
Economists as the Secular Priestly Caste Guarding Knowledge of the Holy of Holies
There’s something invigorating about people freaking out about modern monetary theory (MMT). They treat MMT as akin to the Ark of the Covenant in the first Indiana Jones movie. They are petrified that knowledge of the financial equivalent of the “holy of holies” will be released to normal people because they project their greatest terrors onto the possibility that the public will be transformed and empowered by their knowledge of matters that much of the financial world has understood for at least a century.
By J.D. Alt
Money causes labor to do useful things, and goods and services to be exchanged between people, thereby enabling people in general—both individually and collectively—to obtain what they need. In order for this process to occur in an optimal way—that is, in order for the maximum number of people to obtain what they need, individually and collectively, it seems clear that two basic conditions must be met: (1) there needs to be enough money to pay people to create all the goods and services they need, and (2) this adequate supply of money needs to be in the hands of people who are actually able and motivated to spend it for that purpose.
By “enough money” I mean this: Is there enough money to pay people to build all the things and provide all the services they need both individually and collectively—without there being too MUCH money (which could cause prices to escalate)? If there isn’t enough money, it is likely there will be things we need but which we cannot have—not for the lack of available and willing labor to provide those things, but for lack of money with which to pay that labor. In this case that labor not only remains wastefully unemployed, but we, collectively and individually, go without something which we otherwise could have, and might possibly—even desperately—need. (It is also possible, of course, that we cannot have the things we need because the required natural resources—energy, materials, chemicals and minerals etc.—are not available. This, however, is not a “money problem” but a resource problem.)
By J.D. Alt
Why do so many people—including the authors of most economics textbooks—believe the U.S. banking system creates the U.S. dollars we earn and spend and pay our taxes with? It’s because the U.S. banking system does, in fact, “issue” the great majority of the dollars we use—by making loans to businesses and citizens which are not backed by “real” dollars the banks have on deposit. What everyone overlooks, however (for reasons not entirely clear) is the fact that these new loan dollars are “made real” by the U.S. government’s solemn promise to convert them at any time, on demand, into actual, “real”, sovereign U.S. dollars. The U.S. government is able to make this promise because, by law, it can issue the necessary actual dollars by fiat (by simply “declaring” the dollars into existence.) A lot of people (again for reasons not entirely clear) don’t like to hear that last part. But it’s simply a fact of life: the cash dollar bills you get from an ATM machine are not printed up (created) by the banks—they are printed (or created electronically as needed) ONLY by the U.S. sovereign government.
By J.D. Alt
How would Thomas Piketty propose to save the city of Norfolk, Virginia? He teaches us, ad-nauseum, that what the U.S. collective state has to spend on such things as sea walls, flood gates, elevating infrastructure and roadways, buying-out property owners so they can relocate to higher ground, etc., etc., is limited to the number of tax dollars that can be collected from U.S. citizens—as if the collective state itself were like a club, and if the clubhouse needs repairing, the club members must first pay a special assessment of dues—or, alternatively, the club can borrow dollars from the supply of Capital owned by the wealthiest 1% of its membership, or (as a creative alternative) the rebuilding effort could be structured in such a way that the newly elevated Norfolk would pay rent to the one percent in perpetuity for the privilege of living above sea-level.
By Glenn Stehle
Money and art, in the minds of some, are now one and the same.
Izabella Kaminska, for example, recently asserted that art is “the sophisticated man’s Bitcoin.” It is the “safe store-of-value” which “art aspires to that is our intended meaning,” she avers. “Think sophisticated man’s Bitcoin rather than asset class outright.”
Kaminska goes on to elaborate that much art
is being ‘mined’ purely to satisfy the demand for ‘safe-ish’ assets in a liquidity saturated world. Safe assets, which we should add, are often held in bonded warehouses in places like Geneva, outside of the reach of tax authorities, and which later become a type of bearer security in their own right as the depository receipts which allow redemption of the assets begin to circle amongst the wealthy as their own type of non-taxable currency.
Much of the value of art, according to Kaminska, is just like that of Bitcoins. It depends on the “the Emperor’s New Clothes effect. “If we — art dealers, collectors, writers and experts – all agree a particular work has value,” she asserts, “it surely does, irrespective of its costs of production, utility and purpose.”