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Tom,

my point is there is nothing particularly 'socialist' about the central bank simply crediting people's accounts in a way dannyb2b suggests. This is usually referred to as a "helicopter drop", and Friedman argued it could be a good idea under certain circumstances.

Banning paper money is a crony-capitalist move that would benefit no one but the banks. The idea that you can solve all recessions and depressions by simply implementing a central bank negative interest rate is just facile nonsense based on completely unrealistic assumptions.

dannyb2b, the numbers you specified for the amounts of free money to be given to all don't sound large. And who doesn't like free money? But ironically I still think that's going to be a stumbling point politically unless you can paint it as a tax credit or something.

dannyb2b: "Base expansion in normal times works out to about 500 dollars a year per person. About 10 dollars a week if expansion is performed in weekly increments. Thats hardly socialism. Its capitalim."

It's not socialism in the sense of public ownership of the means of production, but it is socialism as the term is used today, whereby non-capitalists get government support.

dannyb2b: "Its just issuing financial assets to owners of central bank which are the public (or it should be public anyway)."

There you go. Socialism! ;)

Phillipe,

If it were easy to persuade people on the right that policy X is not socialist because Friedman (or even Hayek) proposed it, then I don't think we'd be in the macroeconomic mess we're in throughout almost every Western country.

My objection to helicopter drops is different: contractionary OMOs are mirrors of expansionary OMOs, but what does a helicopter lift look like?

"what does a helicopter lift look like?"

Taxes, or bond sales maybe.

in an imaginary 'helicopter drop' money is just thrown out of the helicopter, there is no exchange of money for bonds, no OMOs. A helicopter lift would probably involve some sort of massive vacuum device, which means taking the money back without selling an asset in exchange, so taxes let's say.

Exactly. And taxes aren't mirrors of helicopter drops, unless they're something like a head-tax.

"taxes aren't mirrors of helicopter drops, unless they're something like a head-tax."

Is that a problem?

I suppose if the Fed were to just credit people's accounts equally, there's no reason why it couldn't debit people's accounts equally too, if that's what was wanted.

Philippe: what's mine is mine. Even though and even more if I got it free for no discernible reasons...

"Other critiques of the money multiplier totally miss the point. Like "loans create deposits!" or "base is endogenous!" or "banks don't lend reserves!" or "other things affect the money supply too!". This critique matters because the textbook exposition is designed to show (among other things) how the central bank's control over its own balance sheet (which is all it really controls) allows it to control the money supply, in the same sense that I control my car. (Yes, the position of the steering wheel is endogenous, given the bends in the road I have chosen to take.) The current state of the balance sheet matters less than the expected future balance sheet, and the expectations about the conditions under which the central bank will change that balance sheet."

For dannyb2b and others, let's assume a 0% reserve requirement, currency and demand deposits are fixed at 1 to 1 convertible both ways thru the commercial banks, 0 demand for currency, and 0 demand for (central bank) reserves. Currency yields 0%, and (central bank) reserves yield 0%. It is an all demand deposit economy.

The central bank keeps the risk-free, overnight rate the same while keeping the monetary base at 0. Demand for currency stays at 0, and it still yields 0%. Demand for (central bank) reserves remains at 0, and they still yield 0%. The central bank will allow demand deposits to double permanently but does not announce this. The banks are capital constrained. The central bank lowers the capital requirement to 10% from 20%.

What happens?

How does the "money multiplier" work if monetary base = 0?

Philippe said: "in an imaginary 'helicopter drop' money is just thrown out of the helicopter, there is no exchange of money for bonds, no OMOs. A helicopter lift would probably involve some sort of massive vacuum device, which means taking the money back without selling an asset in exchange, so taxes let's say."

1) Depends on the actual mechanics of "helicopter drop".

2) Any other way(s) besides taxes?

Philippe,

I don't think that would work politically. Poll taxes do not have an impressive record of popularity. The idea of a cheque in the mail from the government to every citizen gets some people excited. A bill in the mail to every citizen gets considerably less enthusiasm.

Tom: You wanted to know about Niehans' book? Chapter Seven is 'Money as a medium of account'. A couple of obvious points: 'By a medium of account or "numeraire" I shall mean a good in terms of which prices are quoted and accounts are kept.' It has a price of unity by definition. 'Money is here called a medium and not, as customary, a unit of account because, clearly, money itself is not a unit, but the good whose unit is used as the unit of account.' The unit of account can be abstract (as per Patinkin), the example being English prices quoted in guineas which had long since disappeared. But because the unit must be fixed in price to at least one real good, he dismisses the abstract unit as having 'no room in the economic system.'

Helicopter money is money-financed transfer payments (or tax cuts). The opposite is vacuum cleaner money. Tax increases used to reduce the stock of money.

A bond-financed transfer payment + an open market purchase of bonds = helicopter money.

Lump sum transfer payments are easy. Lump sum taxes not so easy. In practice we are probably talking increases or decreases in tax rates. If we did all changes in MB by helicopter and vacuum cleaner, tax rates would vary more over time. We might not want tax rates to vary over time, especially since the deadweight loss of taxes is proportionate to the square of the tax rate. This gives an argument for "tax-smoothing". (Which also gives an argument against trying to balance the budget annually in the face of shocks; instead we should use monetary policy and try to keep tax rates constant over time and run temporary deficits and surpluses as needed.)

HJC: you will be pleased to see that Brad DeLong picked up this post for his "should read" list. He too thought it was a good point.

Niehans on MOA vs UOA makes sense to me.

I read Niehans ages ago. IIRC, he sort of dismisses Patinkin as saying something rather simple that didn't need a whole book, and then proceeds to make the exact mistake that Patinkin warned against! Otherwise, it was a good book.

Squeeky: start in equilibrium. By assumption, each bank has exactly the amount of capital, reserves, loans and deposits it wants. And each individual has exactly the amount of bank shares, currency and deposits he wants. All the marginal conditions are satisfied, including the marginal conditions for riskiness of loans. Now let the central bank increase base=reserves+currency. Unless every bank and individual has perfectly inelastic supply or demand curves, they won't want to hold the extra reserves or currency, and all other quantities are going to change.

For every $1 borrowed there is $1 lent. We can't have everyone borrowing-constrained.

If the central bank buys a bond from the public, that member of the public must have more currency or deposits.

" However if the CB simply prints a lot of currency and locks it in a vault, the base increases, velocity decreases, and nothing happens (until the vault is unlocked)."

Currency in the central bank's vaults is not part of the monetary base. It is not "currency"; it is just bits of paper.

Yes, when the central bank decides to buy something, to increase the monetary base, it may have to offer a higher price for the thing it buys. The mere announcement it will start buying may raise prices. It may even reduce prices, if we are talking nominal bonds, and bond traders understand that central bank buying will increase inflation and nominal interest rates.

"In this case the nominal value of all nominal assets increases and that itself forms the start of inflation (through wealth effect, etc)."

I think you meant: "the nominal value of all *real* assets". And substitution effects matter more than wealth effects.

Nick: Thanks! It's good to see that my new-found market monetarist ideas are getting the attention they deserve!

I agree on Niehans' assessment of Patinkin, a whole book on the real-balance effect and the 'classical dichotomy' is too much. Especially when it all seemed to get refuted later anyway. I haven't read all of Niehans yet, I've been looking at the bank model.

I wonder whether the abstract unit does need to be fixed to a real good? Patinkin says that the price level in the unit of account is arbitrary and indeterminate, but Graeber's 'Debt' mentions all sorts of crazy units used in the past but glosses over the fact that they may have been tied to another good. (In my memory of reading it anyway.) Maybe he didn't appreciate the significance.

HJC: all good ideas look simple and obvious from hindsight. "You needed a whole book to say that?"

"Especially when it all seemed to get refuted later anyway." ? It did?

IIRC JP Koning did a good post about a year back on imaginary units of account. I think they weren't so imaginary. But on the other hand, languages work, without anything tying down the meaning of words, apart from custom. Philosopher Lewis wrote (a whole book!) on Conventions, as games with multiple Nash equilibria. A lot of social things are only tied down by custom. Like law and government. It is only law and government because everyone believes it is.

Squeeky Wheel,

Re the frequency with property, shares, etc actually changed hands in a system where there is no central bank, it strikes me that all commercial banks need to do is sign an agreement to the effect that where one bank get seriously in debt to others, the others have a right to grab the debtor bank’s property or do a hostile takeover or something like that. Having signed that agreement (which amounts to the sort of collateral you’re looking for I think), banks would have considerable freedom to run up debts to each other without going to the expense of actually transferring small chunks of property or shares to each other every time one bank got a little into debt with another.

Ralph: and if the beta banks do that, (and if we also assume that nobody ever uses currency), is the central bank still a central bank? Does the central bank still exist? Or have the beta banks become a pooled alpha bank? Or would one of the beta banks rise above the others, and become the new alpha bank? My (very imperfect) reading of history suggests the latter. The Iron Law of Monetary Monarchy?

HJCa, thank you, but let me see if I understand. Let's say that a dollar's value was defined in terms of electricity just for fun, and that $1 was worth 1-kw-hr of electricity. Then could we say the following in this situation:

MOA = 1-kw-hr of electricity

UOA = the word "dollar" and the symbol "$" and the word "cents" and the fact that $1 = 100 cents

Now do we also have then that part of the MOA is the definition or permanent correspondence:

$1 = the value of 1-kw-hr electricity?

HJC, using my electricity example above, it occurs to me that there are several options. Here are four:

Option 1)
A.) MOA = electricity
B.) UOA = the word "dollar" the symbol "$" and the word "cents" and the fact that $1 = 100 cents AND the definition of a dollar's value as $1 = 1-kw-hr electricity

Option 2)
A.) MOA = 1-kw-hr electricity
B.) UOA = the word "dollar" the symbol "$" and the word "cents" and the fact that $1 = 100 cents AND the definition of a dollar's value as $1 = 1 MOA (1-kw-hr)

Option 3)
A.) MOA = 1-kw-hr electricity AND that $1 = 1-kw-hr
B.) UOA = the word "dollar" the symbol "$" and the word "cents" and the fact that $1 = 100 cents. No value whatsoever is associated with just the UOA in isolation: only words and symbols and numerical relationships between the words and symbols.

Option 4)
A.) MOA = electricity
B.) UOA = the word "dollar" the symbol "$" and the word "cents" and the fact that $1 = 100 cents. No value whatsoever is associated with just the UOA in isolation: only words and symbols and numerical relationships between the words and symbols.
C.) A separate "definition" which ties a quantity of MOA to the UOA: $1 = 1-kw-hr electricity

Which of the above are closest to what Niehans intended? Any of them?
Thanks. (BTW, I stole this electricity example from Bill Woolsey)

Nick: "all good ideas look simple and obvious from hindsight", yes of course you're right, but Patinkin's book has the first half describing the real balance effect in words, then the second half describes it again in mathematical terms. Leaving aside how important it is, it does at times feel a bit overwrought.

From Colin Rogers' book (!) 'Money, Interest and Capital' (p. 99): "From the benefit of hindsight, we can see that Patinkins' concern over the contradictions implied by the 'classical dichotomy' was not well founded. In fact, the contradictions the he derives are of his own making and arise as a result of his failure to interpret his neo-Walrasian model correctly." This is his conclusion after an extensive analysis and review.

Archibald and Lipsey critised his temporary equilibrium and Gale pointed out the introduction of a real balance effect raises means that "the attainment of the long-period equilibrium is in doubt." (ibid, p. 70)

Good point about custom, I think credit might be the same. JP if you are following this, do you have a link to the post that Nick refers to? Thanks.

Tom: I don't think any of the examples quite nails it. The best example is the use of Roman denarius as the unit of account in the middle-ages even though they didn't exist anymore. Apparently credit transactions were in terms of this. Money as we know it wasn't commonly used. (This is from Graeber's 'Debt' via my memory.) I will read the Neihans' chapter and see what else I can glean.

HJC, your interpretation is similar to more recent interpretations from JP Koning, but when I pressed JP on the "definition" part of it, he thought that it was most akin to being incorporated into the MOA. So that would be most like my Option 2 or Option 3 above. The reason I put it in terms of electricity was because I thought that was an interesting thought experiment that Bill Woosley devised to explain this stuff. Unfortunately I haven't had a response from Bill asking for clarification. In Bill's explanation the "definition" *seemed* like it was a separate thing to me (That would be my Option 4). Mark Sadowski likes the definition being attached to the UOA (My Option 1). He claims that's that way Niehans describes it, but he says he doesn't actually have access to a copy of the book. I like Option 1 too (just because it seems most clear to me) but I'm happy to go with whatever. I can point you to an interchange between Marcus Nunes and myself (I'm showing him a quote from Mark) in which he originally wrote his article using MOA in JP's sense, but once I pointed out Mark's comment, he said in a comment that maybe UOA would be better. He didn't seem 100% sure. His most recent take (favoring Mark):
https://thefaintofheart.wordpress.com/2014/03/08/macroeconomic-theory-is-not-the-best-analytical-framework-for-making-monetary-policy-decisions/#comment-13225

His original (favoring JP):
https://thefaintofheart.wordpress.com/2012/10/31/two-kinds-of-money/

HJC, here's one of Bill Woolsey's old comments:
https://www.themoneyillusion.com/?p=17412#comment-201444
Here's the one where he brings up using electricity as MOA (this was a very clever way to make sure it's not also an MOE, and the reason I like it so much):
https://www.themoneyillusion.com/?p=17368#comment-200929
"Just use an example of something that is cannot reasonably be used as a medium of exchange. Use electricity.
The dollar is 5 kw of electricity. Then you make it 6." -- Bill Woolsey

My only complain is that he should have used kw-hrs instead of kw. Any amount of kw for 0 seconds should have no value.

"JP if you are following this, do you have a link to the post that Nick refers to? Thanks."

Lurking in the background here...

https://jpkoning.blogspot.ca/2014/01/macutes-imaginary-money.html

If someone asked me what I expected the future level of the monetary base to be, I'd probably say something like: "Er, dunno. Whatever level is needed for the deposit volume at the time". With the exception of a few market monetarists perhaps, I think most people would say something similar. So, if this has any meaning at all, it must be that the central bank influences people's expectation of the future level of the monetary base by influencing their expectation of the future level of deposits. This seems to have the same ambiguity over causal direction that the original version does.

Nick E: "...I think most people would say something similar."

I don't. Most people won't have a clue what you mean by "deposits". But if the central bank said it was going to do what it takes by printing money to double the price level or double dollar income, I think they would get the drift.

"This seems to have the same ambiguity over causal direction that the original version does."

That is why central bank communication strategy is so important, and why people thinking of monetary policy in terms of interest rates has been such a real-world disaster, and why the people of the concrete steppes, with their focus on a linear causal chain that ignores communication, are so missing the point.

Tom: My impression is that a unit of account is something that could measure bilateral debts in a pure credit moneyless economy. It does not need to exist as an actual good (phlogiston!). It is my understanding that these conditions have existed in the past (tally sticks etc), so it is worth considering. A medium of account is a good that is nominated or created by a state authority to have a fixed price (generally unity, but not always) with respect to a unit of account. It usually comes into existence with its own unit of account and a state funding war. Finally, a medium of exchange is any good that can be used to settle transactions, so it includes the case of bilateral debt in the pure credit economy and is denominated in a unit of account.

HJC, that sounds to me like it's closest to my Option 3 above. Do you think it's possible to use those definitions with respect to Bill Woolsey's electricity example? How would you do it?

HJC, in this example:

"The best example is the use of Roman denarius as the unit of account in the middle-ages even though they didn't exist anymore. Apparently credit transactions were in terms of this. Money as we know it wasn't commonly used. (This is from Graeber's 'Debt' via my memory.) I will read the Neihans' chapter and see what else I can glean."

What is the:

1. UOA
2. MOA
3. MOE

And "why" for each. Thanks!

Also, in my link above, do you think that Marcus should stick with "MOA" in his "Two Kinds of Money" example, or should he change it to "UOA" (like he's now inclined to do)?

Nick,

"A bond-financed transfer payment + an open market purchase of bonds = helicopter money."

Isn't your view that only a permanent increase in the monetary base has an effect?

A bond-financed transfer payment + an open market purchase of bonds = a temporary increase in the monetary base, no? (unless the government 'prints money' to pay off the bond).

Philippe, that's true if the bond has a finite maturity (as all bonds do). Perhaps Nick mean an idealized infinite maturity bond (i.e. one that has to keep rolling over in practical terms with non ideal finite maturity bonds... giving rise to a constant sustained debt level.)

Philippe: "Isn't your view that only a permanent increase in the monetary base has an effect?"

No. An increase in the base that is expected to last one nano-second will only have a nano effect. The longer it is expected to last, the bigger the effect.

"A bond-financed transfer payment + an open market purchase of bonds = a temporary increase in the monetary base, no?"

No. It is a permanent increase in the (*level of* the) money base (but not a permanent increase in the *growth rate* of the money base), unless the central bank reverses that open market purchase with a subsequent open market sale.

Nick,

the Treasury has to repay the bond bought by the central bank (assuming it's a government bond).

It can do this by issuing more bonds, raising taxes or 'printing money'.

Say the CB buys a bond for $100, increasing the monetary base by $100. To repay the bond, the Treasury issues another bond for $100. This shrinks the monetary base by $100, ceteris paribus. The Treasury pays the $100 to the central bank, and the original bond is paid off. So the original expansion of the monetary base by the CB via an OMP was temporary (ignoring interest here for simplicity).

Basically the same thing occurs in the case of raising taxes.

If, on the other hand, the Treasury 'prints money', and pays it to the central bank, then the bond is paid off without any reduction in the monetary base.

What am I getting wrong here?

Philippe: If the central bank sells the bond again to the issuer when the bond comes due (or if it sells the bond to anyone for any reason) then it was indeed temporary. To ensure it is permanent, if the central bank is forced to sell one bond (because it comes due, or for whatever reason) it buys another.

Forget bonds; think about money. It does not matter (much) what it is the central bank buys. What matters is that it buys something, and that increases the stock of money, regardless of what it buys.

And Treasuries do not print money. That's MMT talk. (They maybe mint coins, in some countries). Central banks print money.

Tom: Reading Marcus' post (which is very interesting) - it seems that the URV did not exist between February and June 94. Then to my thinking, it's more accurate to call it a unit of account, it's not a medium because it is not an actual good. Frankly, I'm not really sure what a medium of account must be unless it is a money good where its unit is adopted as the unit of account as well. I don't really think that Niehans' definition is good enough, it just doesn't seem to cover all the conceivable cases. Does this counter JP's post?

HJC, no that doesn't necessarily counter JP... perhaps it countered my interpretation of JP at the time. I never asked him about that article in particular. Thanks for taking a look at that. What you say makes sense.

Nick Rowe:

"And Treasuries do not print money. That's MMT talk. (They maybe mint coins, in some countries). Central banks print money."

Nick, I didn't believe you, so I took a US dollar bill out of my wallet, and you were right! It was signed by Ben Bernanke!

In the US the Treasury actually does print the money and mint the coins: The Bureau of Engraving and Printing (BEP) under the Treasury Department prints the paper reserve notes and the Mint, also under the Treasury Department, mints the coins. The difference is the coins take on their face value from the moment they are minted and the Fed both buys the coins at face value from the Mint and sells them again to banks at face value. While the Fed is in possession of coins, they appear as assets on the Fed's balance sheet. They are assets to whichever entity it is that owns them, and liabilities to no one. The Fed, however, buys the paper reserve notes from the BEP for their production cost. While in possession of the Fed the notes are neither assets nor liabilities to any entity. The Fed sells the notes to banks for their face value, at which point they become assets of the banks which own them and liabilities to the Fed.

The raw materials in a US nickel exceed 5 cents of value, thus nickels are the only true money in the US. Everything else is just an IOU for nickels. Thus as the quantity of nickels goes to zero, the price level goes to zero. Scott Sumner read my argument about nickels and price level and pointed out he'd made a similar argument in an old post. If you don't believe me, I'll dig out the link. Lol. ;D

"The raw materials in a US nickel exceed 5 cents of value, thus nickels are the only true money in the US."

I don't get that.

Nick, I was just saying it as a possibility, in the same way that 'helicopter money' is a possibility even though there are laws against it.

Tom Brown,

"Capital taxes (very bad)"

Why are capital taxes very bad? I presume you to mean taxes on capital gains - yes? The funny thing is that capital gains taxes are completely avoidable - buy capital instruments (debt, equity) and never sell them. Also, even when you do sell them, capital losses are to a certain extent tax deductible.

My question is why liquid capital markets are important when that added liquidity results in a higher tax burden (all else being equal). It seems that if you want a lower tax burden on capital you would want less liquid capital markets.

Frank, that was Mark A. Sadowski's list. I don't understand the reasoning behind all of his opinions. Yes, I think he meant taxes on capital gains. That's about all I can tell you.

Philippe, my argument about nickels is a joke. Although I did try to put Vincent Cate's mind at ease by telling him that story to assure him we already have a metallic commodity based monetary system:
https://howfiatdies.blogspot.com/2014/03/living-like-parasites.html?showComment=1395884215532#c1545945673163816973

Here's the bit about how much the raw materials in a nickel are worth:
https://web.hbr.org/email/archive/dailystat.php?date=022712

Sumner responding to my argument about nickels, in particular my assertion that as the quantity of nickels -> 0, then P -> 0:
https://www.themoneyillusion.com/?p=26451#comment-326114

HJC, you write:

"Tom: Reading Marcus' post (which is very interesting) - it seems that the URV did not exist between February and June 94. Then to my thinking, it's more accurate to call it a unit of account, it's not a medium because it is not an actual good."

I had the impression thought that the URV was actually pegged to a "good" (which was revealed later): the US dollar. I know that doesn't make the URV a good itself, but does that change your opinion at all? Thanks.

Frank Restly,
"Why are capital taxes very bad? I presume you to mean taxes on capital gains - yes?"

No, "capital taxes" are taxes on capital *income*: corporate profits, dividends, rent, interest and some kinds of proprietor income. A capital gains tax is a tax on property.

Tom: No, it's still a unit of account. Niehans thinks that a unit must be pegged to a real good.

HJC, thanks. I thought that probably wouldn't change your mind. However, you might find this interesting:

https://www.themoneyillusion.com/?p=26552&cpage=2#comment-328763

and this:

https://www.themoneyillusion.com/?p=26552&cpage=2#comment-328771

Tom: Sounds like you guys want some more quotes from the book. What exactly is the "issue"? I haven't been following your discussion.

HJC, the issue for me is well described by the following excerpts from JP Koning's article:

https://jpkoning.blogspot.com/2014/03/credit-cards-as-media-of-account.html

Here are some of the issues: JP writes the following:

"The unit-of-account is a word or symbol like $, ¥, £. Inherent in the idea of UOA is the subdivision of the unit, so that $1 is comprised of 100 cents. (1)"

In JP's previous post I asked him an off-topic question related to a previous statement he'd made very much like the above. Here's my question and his response:

Me:
"Does that imply that the concept of UOA in isolation sets up a self contained system of names and symbols and relates the names and symbols to each other internal to this system with numerical ratios, but that this self contained system is not tied to any value or anything at all in the outside world? It sounds like the "definition" (which I take to be the thing which gives the UOA value in terms of an MOA) you now consider to be part of the MOA. Am I correct?"

JP responds:
"Yep, that's right. (Funny you ask, my next post is on MOA. I'll try to clarify therein.)"

Here's that thread (it includes some links to further comments exchanged between myself and Mark A. Sadowski):
https://jpkoning.blogspot.com/2014/03/is-value-premium-liquidity-premium.html?showComment=1394474536196#c4054499394272339372

Mark A. Sadowski doesn't agree: he says that there is a value associated with the unit of account. Which brings me to the footnote (1) JP included in the Credit Card post (then next post after the above thread: my first link up top):

"(1) As Tom Brown points out, some economists describe the unit-of-account not just as a sign, but also as a fixed quantity of the medium-of-account. So if the unit of account is the $, and the medium-of-account is gold, than the number of grains of gold that defines the dollar is rolled into the concept of unit-of-account. Alternatively, we can leave the unit-of-account as a mere sign, and refer to the medium-of-account not just gold but a given quantity of gold grains. Thirdly, we could give the quantity of the medium of account that defines the $ an entirely different term, say the "Tom Brown multiple". As long as we remember that there's a sign, the thing that represents that sign, and the quantity of that thing then we can avoid unnecessary semantic debates"

So that gets back to my four options on this I posted above:
Tom Brown | April 07, 2014 at 12:56 PM

Make sense?

Great post. You write, "And it is us Market Monetarists who should be making that critique." It's out there. See this recent post by David Beckworth. He writes, "To further unpack this idea, I want bring up a point I have repeatedly made here: open market operations (OMOs) and helicopter drops will only spur aggregate demand growth if they are expected to be permanent. This idea is not original to Market Monetarists and has been made by others including Paul Krugman, Michael Woodford, and Alan Auerbach and Maurice Obstfeld. Market Monetarists have been advocating a NGDP level target (NGDPLT) over the past five years for this very reason. It implies a commitment to permanently increase the monetary base, if needed."

Mark,

"No, capital taxes are taxes on capital *income*: corporate profits, dividends, rent, interest and some kinds of proprietor income. A capital gains tax is a tax on property."

A government does not collect a portion of the property when it assesses a tax, it collects a portion of the income from the sale of that property. A government usually limits the taxation to the net of resale price - purchase price and normally waits until gains / losses are realized before assessing the tax. And so how is economically different than a tax on dividends or interest or rent or any other income?

I can understand the argument that earnings obtained by a company (corporate income) are rolled back into funding the production of new goods and so taxing that income too heavily results in a reduced supply of goods.

Nick, can't the arguments you present in this post be applied to this post: "There can be an excess supply of commercial bank money"

In other words, if people don't expect the excess supply of commercial bank money to be permanent (and who's telling them that anyway in that case?), won't that affect the excess supply's ability to do anything (i.e. raise the average price level)?

Tom: yes, I think you could make a similar sort of argument.

Thanks Nick. Do you suppose it's possible for expectations to override the "mechanics" of a particular situation? Suppose, for example, that Neo-Fisherite thought does a great job of marketing itself and people really believe them to the exclusion of all other schools of thought. Then if the CB permanently reduces the monetary base saying it's doing so to raise NGDP, could that actually happen?

BTW, have you seen McConnell and Brue's intro macro text? The section on banking (Chapter 24) gives a formula for the "deposit multiplier" (money multiplier) and derives it in the usual way. But this is followed by a part describing why it's a good idea to keep central bank plans secret. It raises the concept that this is controversial, but says the long success of that approach argues against making it public. I think the edition I was looking at was from the early 2000s, so perhaps that's been amended since then.

This is fine as far as it goes.

You're still missing something, which Bill Black has explained... and it's the same dynamic but with a different cause...

"The current state of the balance sheet matters less than the expected future balance sheet,"
This is also true of the private commercial banks. In the US, *all of the giant banks are insolvent* and are hiding it with phony accounting. I could give a rundown of the phony accounting tricks, but mostly it's a matter of keeping worthless assets on the books at inflated prices.

However, the insolvency doesn't matter as long as the FDIC and OCC and Federal Reserve don't swoop in to shut them down. At the moment, it seems like the FDIC and OCC and Federal Reserve have declared that they aren't going to shut down insolvent, accounting-fraud banks.

But the insolvent, accounting-fraud banks *know* that *eventually* some regulator is going to catch up with them. So they are desperate to "repair their balance sheets" (you'll see that phrase a lot in the papers) or "earn their way out of bankruptcy", hoping that they will have a non-insolvent balance sheet by the time the regulators decide to crack down.

Accordingly, they hoard all the money they get; they only lend it out if they can get usurious rates of profit on it. They charge fees, often illegally, in order to try to extract more profit and "repair their balance sheets". They steal houses.

None of the money coming from the Federal Reserve to the megabanks makes it into sensible business expansion or other real-world-useful lending. It all gets poured into these mad attempts to "repair the balance sheet".

GM was simply declared bankrupt and recapitalized with new management. If the same had been done with the insolvent megabanks, we might see them behaving in a fashion which is more helpful to the general economy.

But instead we see the behavior of crooks who got caught, didn't get punished, and are trying to scam money so they look better before the next audit.

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