Lets assume the MOA and MOE (medium of exchange) are the same to keep things simple for now. Ill take the rest of them later. TallDave, actually, my hypothetical Fed will accept standard Fed deposits as payment, or standard reserve notes. Look at my Example #3 and Example #7 (I added a search feature in the top right), but again, Ill post direct links in a separate post. They get rid of it by selling it. Changing a prohibitive tax rate from one rate to another doesnt matter at all. When the data confirmed Hume, that solidified the QTM, as economists were already inclined to accept it on logical grounds.. oh yeah by that thing called govt they dont want to have to answer to. (2013) Overall, I dont deny that changes in M can affect PQ but I doubt that increases in the money base will necessarily show up in M. In fact, while base money rose sharply in the last 5 years M2 kept its normal growth trajectory. Say in 1500s Spain you have gold, goods, and a gold-linked zero coupon perpetual bond. Youll be amazed by the clarity. The implications for behavior are exactly the same. Its explains why NGDP rises in proportion to prices in the long run, once the interest rates return to normal. QE. Glasner (and I suspect Scott too) are what Ill call partial refluxers. They think, al la Tobin, that the LoR DOES apply to MOE but not MOA. JKH over at Monetary Realism is an excellent source as is Scott Fullwiler (you can google him and find many many banking discussions). Just try it. So far Im convinced its not. The Fed electronically credits the balance of the Treasury General Account (TGA) to pay for it (the BEP is part of Tsy). In a hypothetical economy of this kind, no central-bank liabilities have any special role to play in the payments system that results in a willingness to hold them despite yielding a lower return than other, equally riskless short-term claims., You wrote: If not, then what is the IOR applied to?. And as I said, IOR changes nothing fundamental. Discover our premier periodical database Gale Academic OneFile . Now a permanent increase in the base has an inflationary effect, for the same reason we discussed in the case of the gold reserve that would take two years to dig down to. Households includes things like hedge funds (!). Indeed 100 years ago all reserves were cash. Obviously I shouldnt have said transactions have to settle in terms of reserves or cash, you can do barter. That was for demand deposits. Bitcoins? It either exists, or IOR doesnt matter. The Fed never, ever has any problem finding assets to buy at market prices. This will have the same effect. ssumner, do you agree with this part, only depository institutions can hold reserves at the CB (that part is already the case)? Fed buys these coins at a rate of $85B a month or more. Where you (and everyone else) runs into problems is when you make the jump and assume the increase in NGDP is solely due to HPE. This seems to be an historical a priori assumption which has crept in as a underpinning to most monetary thinking. I have no objections at first glance. Liabilities of the fed = $800 reserve notes. I corrected you. Philippe, fine call it money if you want. Gold flows in to Spain from the Andes. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis. Staff & Board of Directors; Committees; Bylaws & Policies; Membership. Does that change anything about the desire of those people to hold onto those deposits instead of spending it? If you think it does provide a specific quote that you think is wrong. First heres two cases for QE to consider: http://brown-blog-5.blogspot.com/2013/08/banking-example-41-quantitative-easing.html, Also, a simple 0th order approximation of the publics stock of money = L + B + F, See this post (especially the bottom) for an explanation: But I thought you were claiming that the IOR rate could be used as a sort of monetary policy? Other than that, I stand by what I said, and I think many neo-Keynesians, Monetarists and even MMT-ers agree with this. Its because individual sellers of money AND buyers of money, attach a lower marginal utility to a dollar because there are more of them. Im going to need some expansion on the . The fact that the increased gold supply is owned by someone proves the owners WANT that gold. During the 6 week period where the fed funds rate is pegged the base is endogenous. On your last question, cases 2 and 3 are expectations of a future HPE that make current gold prices move. I half agree. Notice the central bank reserves are not in my account at bank A or the retailers account at bank B. I am very interested in macroeconomics, but my only formal training in the field was a survey macroeconomics course thirty years ago. That will come to an end some time and financing the deficit will become more expensive; then holders of fixed-income securities will experience market losses if they sell them before maturity. A temporary increase in the base? Scott clarified when I asked (above) that its the deficit the gov is running thats important here: Fiscal policy can move NGDP, but the current stance is too contractionary-the government is leaving $100 bills on the sidewalk, and should run bigger deficits.. Again, Ive always conceded the net balances of base money can be zero, as long as you allow for individual players to have positive and negative balances. You are ignoring them when you refer to the hot potato effect. (It also sort of works as a response to Quiggin, if he bothers to read it.). IOR Indian Ocean Region IOR Importer of Record (customs) IOR Increased Oil Recovery IOR Istituto Per Le Opere Di Religione (Vatican Bank) IOR International Offshore Rule (sailing) IOR Inspector of Record (construction term) IOR Independent Order of Rechabites (est. Rates being zero forever is only a hypothetical, used as a thought experiment to consider possible consequences and better understand the theory. Thats why people hold it at positive interest rates. You said, During normal times almost 95% of the new money goes right out into circulation, almost immediately. Order: #117801. But Scotts Case 7 was explicitly cashless, and thats the case Im interested in here which kind of leaves bank deposits as the only option. If I am trying to explain real world inflation or deflation (i.e. And regardless of the use, why couldnt they borrow it from the central bank at t-epsilon if its needed at time t, and repay it at t+epsilon, and let epsilon go to 0 since were assuming no monetary frictions? A medium of account is the commodity defining the unit of account. Seriously, it clears up quite a bit. in the previous, in my last paragraph, i was loose with the term cash. I see $2.0 trillion in excess central bank reserves. The degree of price increases varies widely across those various kinds of goods and assets depending on the situation, and is never the only factor changing them. You probably want to pay your workers, suppliers, creditors, etc., so you exchange the mined gold for something that isnt gold. My bad. Edwards died at the scene. Ive tried to explain the hot potato effect using analogies with the apple market, but I think Ive found a better way: gold. So in those situations (which virtually no one does anymore BTW since they are not flexible enough) when someone says they have a dollar they could also be saying I have 1/35th of an ounce of gold. These primary dealers probably hold a large portion of treasuries since they are primary dealers in treasuries. But that isnt an economics thing, its a subjective preference thing. Liabilities bank B: $100 in demand deposits (store asset in a checking account). But in that case changing the IOR would have no effect on the economy. b. Nominal rates are zero and expected to stay zero forever. Second, you are assuming that people will try to get rid of the extra money by buying goods, rather than financial assets. Systems Engineer. I am saying that prohibitive tariffs dont matter in a world without trade, and IOR and COF doesnt matter in a world without base money to apply them to. If its lower, prices will rise. Reserve notes are different: the Fed buys those from the BEP (part of Tsy) for production cost. I said if they wanted the market to think that they should announce a 5% NGDP target. I think your NGDP futures peg is basically a fiscal operation artificially attached to an OMO: If the Fed (it should really be the Treasury) locks the NGDP futures market on a 5% growth path, firms/investors can effectively sell future output to the government at that price. (2) Lack of convertibility is not a defining characteristic of fiat money. Now you want to tell me you are not talkng about inflation! Assume gold sells for $1200. wage rigidity causes unemployment without the rigidity part, there is no recession, [If nobody pays IOR to anyone], why is the IOR an important policy tool in Woodfords framework?. That is what we are seeing now, with savings increasing. Imagine you are trying to raise the floor of a building, and you inflate a giant balloon under it. Scott was using this, I beleieve, in a post about how CBs can generate inflation. 2. The Fed controls the amount of reserves held by banks. Again, in aggregate (forget about reserve & capital requirements). Perhaps we are talking past each other.. If our CB/govt just started using pennies as our UOA and changed nothing else would you call that higher prices (which is what inflation is, is it not?). Otherwise I give up. Sure, but then DDs are the medium of account. The Fed directly controls the supply of base money. Ok, lets say the Fed wants to buy assets (bonds etc.). A reasonable question would then be 6,000 what? If both agree the loan is made. The fed doesnt disclose the holders of SOMA accounts i dont think. Obviously the price of gold can no longer plunge, as the price of the MOA is fixed by definition. In microeconomics, the existence of a price vector that supports an equilibrium doesnt necessarily mean that goods have to change hands. The long run increase in NGDP is only due to the HPEI think almost everyone agrees on that point. It confirms everything Ive been telling you: 1. But Id add that *perhaps* prior to the FDID/Fed/regulators getting involved the banks shareholders might get upset unless you get a Romer-Akerlof bankruptcy for profit situation going: 4. If they have no use for deposits because they dont want to buy anything else but rather keep their interest-bearing bond, the interest rate of those assets would plummet to zero. They were mostly temporary but a tiny bit permanent, which is why QE increased inflation expectations by a very small amount. That said, if youre not used to switching between prices and rates, it can be slightly confusing. But it doesnt really address Scotts arguments in any way. David Glasner has some interesting articles about this with debates in the comments section. Ok, It is clear that what you said earlier is true, you did not understand my post. You need to read what I say more carefully. But first about the medium of account (MOA) vs. unit of account (UOA). It is flawed because it ignores all those individuals who want to ACCEPT more money from those you are referring to with the HPE. I cant even blame you for jumping from CoF to FF since (a) those are often synonymous and (b) I used funds as an abbreviation in the comment you cited and thats generally FF. Abbreviations cloud the meaning of your explanation for the lay reader (like me), who otherwise might learn something. re: I hate to tell you this, but you are far behind the rest of the discussion here. 1998 - 2022 Nexstar Media Inc. | All Rights Reserved. Money is created by someone taking on debt (loans, bonds, treasuries) and expansion of banks balance sheets. You can spend that 1000 I cant, until Im repaid. Each monetary asset has an equal monetary liability on someone elses balance sheet. It seems as if the demand for treasuries outside the banks is just because of risk adversity not QE. Now add $2.0 trillion in central bank reserves that are excess. Treasury mints $1M coins. Im not confusing anything you can call it unit of account or medium of account, same thing. Thanks! Fair enough. (I seem to remember that the California 1849 gold rush saved the USA from a depression after Andrew Jackson destroyed the US bank.) But since Im accusing you of not answering my comments let me make sure I answer yours: I strongly disagree. The gov. The convenience yield is what people are willing to forgo to hold money and the only reason they wish to hold money (at a lower interest rates than interest bearing nominal assets) is due to monetary frictions. Today we have floating exchange rates and there is no promise to convert to anything so your silly point is pointless. Or, put more simply, money supply is not spending. scenario #1 (After bank selling currency to Fed): Assets of the fed = $X What about other MMists that think that MOE is special? Bill Woolsey? Did I get that right Scott? but hed also say you can use any M you want it just has the effect of changing what V is: Gasman, No, they dont price things in dollars in Japan. Gold would not be the medium of account but ounces or grams OF gold would be. Youre confusing the spread between CoF and IOR, with the absolute level of such rates. Its a REAL market for actual output (its just aggregated and cash settled..). B. The part your forgetting in your example is this: scenario #1 (PRIOR to bank selling currency to Fed): Assets of the fed = $X If they buy a bond that is nothing else than lending out the money which implies there must be a willing borrower.. Or if the public wants to buy the new notes, Ill let them trade their bank deposits (with banks acting as an intermediary: i.e. I just provided the above to help you out if you insist on considering banks. . Stocks are never at the zero bound. Money is still neutral. In this paper, we exploit Flow of Funds data By balances do you mean balances at the central bank? The SS trust fund doesnt sell bonds to the public. 1) Only an permanent MOA injection can be used to hit a target. So I dont see what the issue is there. Do you disagree? If I put a 100% tax on sellers of french fries (that is any sales proceeds is taxed away), there would be 0 sales of french fries. http://www.jstor.org/discover/10.2307/2534564?uid=3739560&uid=2129&uid=2&uid=70&uid=4&uid=3739256&sid=21102633875603, This isnt true! Could be $1 googolplex. Reserves and cash are liabilities of the U.S. government, at least in an accounting sense. When Robinson cuts 10 coconuts, eats 9, and puts one away for tomorrow, thats saving and nobody else needs to be borrowing for him to be able to save. In every case, monetary policy can change the return on nominal assets to match the new natural rate. There have been studies showing that asset prices responded positively to information relating to QE. If so, thats not how I interpret Woodford: Woodford writes: Another case in which a monetary policy prescription would have to be specified in terms of an interest-rate rule would be if our advice were to be applicable to a cashless economy, by which we mean an economy in which there are no monetary frictions whatsoever. In 1930 the US MOA was 1/20.67 ounces of gold, but it was rarely used as a MOE. The demand deposits/check move (mark down then mark up) to settle the transaction and circulate in the real economy. What assets do you actually mean, financial assets or real goods and services?. I cant speak for other economists and I dont think monetary policy is ineffective at the zero bound. It was the check that moved in the real economy (it has velocity), not the central bank reserves. Nobody could do it! Discipline: Psychology. I went through a phase where I (briefly) believed in MMT and thought like you. The balloon is kind of like the HPE, and the car jack is like the asset market channel and expected HPE. Principal part: My checking account gets marked down, and JPMs liabilities get marked down. QE at the zero bound is useful, as we see from the financial market reaction. Sorry if my examples were not clear! TB said: I dont think Scott would agree with your fixed V. Hed probably say that with NGDP > that as M = quantity of base money goes to 0, that V goes to infinity.. We dont currently have the technology to get the gold back to earth, but it seems reasonable to expect that at some point in the future the gold will be accessible. Chuck Norris is especially important. BTW, if QE has no inflationary effect, then why did QE cause TIPS spreads to widen? 3. For some reason they just cant grasp the fact that individual activity is the sine qua non of economics, and certainly monetary economics. ), If you dont have one, its not clear what the liability of bond issuers really is. This is very abstract. Some banks have positive balances and some have negative balances. Thats his Case 7. Alternatively the Fed need not limit itself to fixed income assets. What Im trying to do though is break it up into a two step process. Im starting to think were in agreement there. You say:The Fed never, ever has any problem finding assets to buy at market prices. Bank A owes bank B $1000 and bank B owes bank A $1020), then instead of B having to overdraft $20 and then pay it back, why couldnt they just directly arrange with A to borrow the $20 of reserves (i.e. Of course this is how they pay dividends to their shareholders as well. WebAbout Our Coalition. Whos a net seller to the Fed? Liabilities bank B: $100 in demand deposits (store asset in a checking account), The problem with saying the $800 in billion in currency is not liabilities is that it gives the impression the currency was destroyed. If there is no HPE to start with there is no growth in NGDP (except through interest rates). Yet another corner case that interest rate-oriented thinking avoids , Maybe the quantity theorists can create a new monetary aggregate called MBB4M (monetary base before mint), http://www.fms.treas.gov/bulletin/index.html. When T-bonds come due and people are repaid the principle, what do the bondholders get? The commercial bank will probably send the $100 in currency back to the fed where it will be an asset on the feds balance sheet with zero velocity in the real economy.. Only in in the limiting cases does an entire economy manage to get by without holding any of the MOE, but those are just examples that illustrate that the volume of MOE in circulation isnt all that relevant. Then the HPE takes over.. . Sproul argues that if all channels of reflux are permanently cut off, money loses its value (link above). Ill read the rest of your post later. Anders, Balance sheets play no important role in this process. To me, this is the limiting case in which a central bank can literally buy up every asset in an economy and not have an effect on the price level. You keep going back to the HPE as the explanation because it is your a priori theory of choice that you are using to understand history, and yet you want to make it seem like that theory pops out of the data.. The initial statement of yours that I had issue with was that Japans price level is 100x ours. Once the floor is fully raised the balloon is just barely powerful enough to keep it there, and then you remove the more powerful items like car jacks. For example, take the definition of savings as real investment plus net lending. The Treasury derivatives you cite are not Treasury bonds, they are Treasury bond derivatives., I made no mention of derivatives there. Alright heres the best analogy I can cook up: its as if I stood there offering to sell a work of art (made-for-order, so it doesnt exist yet) at $100/piece (Im not a very good artist) and quantity demanded at that price happened to be 0. Base would be zero. Which is it? You can think of credit cards as another device to help carry out transactions without affecting base. DOB, It seems to me that crawling peg case (MOA=CPI basket) is interesting. In case #4 I said: Obviously the price of gold can no longer plunge, as the price of the MOA is fixed by definition., In your point 4, the price of gold drops. Tom, how is my comment like that? . Interviews, reviews, and much more. Scott, I could also say that your HPE post is giving me a headache. So it certainly does exist. JAS, I agree that for gold the HPE drives changes in gold prices very quickly, almost immediately. With its value set by the supply of and demand for it, like a bar of gold, steel or lead. They are not assets to the Fed. Mark down bank As liabilities by $100, mark down my checking account by $100, and mark down bank As account at the fed by $100 in central bank reserves. http://www.themoneyillusion.com/?p=23314#comment-272734. Im pretty sure primary dealers have reserve accounts at the new york fed.. I dont think youll agree with this but hopefully youll find it interesting. The left hand plot shows one curve WAY above the rest is that foreign? Interest part: My checking account gets marked down, and JPMs liabilities get marked down. In essence, the public took the hot potato and threw it to the Fed and they cannot get rid off it anymore. Sorry I am late to the discussion but I would really like to understand your post and where the divergence between Monetarists and MMT arises. I know the base includes coins, I didnt say otherwise. Japans Yen is the equivalent of a penny, not a dollar, so to compare prices and to know whether theirs is truly 100x higher they must be converted to the same unit. Cash is a real good. That is a yes/no answer. If I told you our prices would be 100x higher at Christmas, would that not be I believe ssumner would say that cant happen because his definition of M would equal zero here. Why are the markets horrified by the taper? Are you not aware of the fallacy of composition? So IOR creates no problems for MMs. Regardless of whether gold is the MOA or not people will try to sell it for other goods. There is als o a Wicksellian equilibrium nominal price of zinc. I dont agree with the way NKs link asset prices to short term rates. But why? The specification of the UOA in terms of the MOA is what anchors it: i.e. So tell me what is price level vs inflation? So despite the fact that the base is zero, the policy rates dictate yield on nominal assets and therefore control the price level. Banks as well as consumers/businesses decide based on their current and assumed future earnings if they can carry more debt. You and I have been through this and you asked an accountant, remember? Cash (I assume this means central bank money) is the MOA for privately produced money. Also, look here for an example of how payment could ultimately be settled w/o central bank involvement: http://brown-blog-5.blogspot.com/2013/02/banking-example-1.html. Scott, I had read your post several times but when I asked you (twice!) I dont see them being destroyed. The basic point here is that you need a MOA because you need an asset with a fixed nominal price. http://neweconomicperspectives.org/2011/07/scott-sumner-agrees-that-mmt-policy.html. Regardless of whether gold is the MOA or not people will try to sell it for other goods. Medium of account is another way of saying price. Depends what you mean by matter, but loosely speaking, no, they do not matter any more than car manufacturers as long as the central bank retains its control over the rate of return on the unit of account. However people like Nick Rowe would argue they probably do reduce the demand for base money (checking deposits instead of cash) and hence they probably do contribute to the HPE.. (oops. So why does spending rise with more money then? Thats good to hear, as its a tautology. They also say MOE (which are bank deposits in Case 7) can have HPE. Essence, the existence of a price vector that supports an equilibrium doesnt necessarily that. 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