« Blue sky money three: boomerang money | Main | "The supply of money is demand-determined" »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

@Luis Enrique: "If everybody (individuals, firms) did decide to spend their income as soon as they got it, and keep their bank balances at zero, there wouldn't be anybody to fund lending (except the central bank?)."

Since every act of spending creates a deposit in the recipient's account, how could all balances go to zero? Only, it seems, if everybody withdrew their money in cash and burnt it.

@Ritwik: "So, you're saying, there are negligible lending opportunities in the US beyond a risk adjusted rate of 0.25%? The world does not change radically if IoR is 0.25% instead of 0%."

That's the conclusion I came to after reviewing much of the discussion out there (and soliciting same):

http://www.asymptosis.com/answers-taking-ior-to-zero.html

@Dan Kervick: "Your target quantity of saving is simply an epiphenomenon of your anticipated income and desired spending, and has no independent preferential significance for you."

Your post helps explain to me why I've always been very uncomfortable with the widespread notion of "desired savings," and even "demand for money." They seem to rely underlying behavioral assumptions that are at least seriously questionable.

Dan: "What you seem to be claiming is that there is some sort of saturation point of dollars - either for individual business and household units or for the economy as a whole - where the quantity of dollars in dollar inventories becomes so high that the holders of those dollars actively seek to unload them. But there is no such phenomenon."

Yep. I claim that, and so does every other economist. Otherwise people would sell all their other assets and hold only money. There's an opportunity cost to holding money.

"Is there ever any day in which it is rational for you to say, "Enough! What am I going to do with all of these dollars?!" Of course not."

Indeed of course not, just as the dealer won't turn down a free car. But I'm not going to hold them all in inventory like Gollum. I will spend them on something else.

DeusDJ

I didn't say anything about a bank needing an existing stock of savings to lend (in fact I said they can lend first and fund later) and I didn't mention reserves at all.

maybe try dialling down the attitude a notch and reading more carefully.

simple question for MMTrs then.
Bernanke announces more QE tomorrow (pick a number). he says the fed will continue to buy assets until inflation hits 3%. in mmt land does or does this: not a) raise AD and/or b) raise inflation.

now, same question, instead he says "ngdp" or output gap.

explanations using terms like "hidden fiscal policy" or "verticaltranactions" will be ignored. plain english only for us intellectally impairec

.. and Android impaired, evidently

@Tschaff,
yeah i've read Mosler. there is silly stuff on there like "In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money."

Investment creates its own money!!! lol. Then he talks about CPI or gold targeting rate targeting to control money: "If there are indeed price increases due to changing supply dynamics, Fed policy that actually does restrict money may result in a slowdown of serious proportions which would not have occurred if they had left interest rates alone."

wait I thought the fed did not control money, or reserves, huh?

there is enough there to make it sound plausible, but in many cases even though any individual statements might be true, in aggregate, its bunk.

Sounds like he smoked a lot of weed before he wrote it.

@DWB-
"In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money."

It's not silly at all unless you've been taught the textbook money multiplier story. Mosler, unlike most economists owns a bank and spent years working in depository institutions. Everyone, even Nick Rowe and Paul Krugman agree loans create deposits. Anyways, this reverses causality that savers are required to fund investment, it's not true when you have a CB that will supply reserves at their target interest rate.

"Bernanke announces more QE tomorrow (pick a number). he says the fed will continue to buy assets until inflation hits 3%. in mmt land does or does this: not a) raise AD and/or b) raise inflation."

I thought I answered that the last time with the link I sent "what if the government just prints money." So if the Fed action means your portfolio grows nominally, sure you might spend more than you otherwise would have, and that could cause inflation. If all that changed was you lost a very liquid treasury bill, and gained cash, you might spend less since you'll be earning less interest income. Overall the Fed returns to the Treasury every month a sizable profit from interest it earned on its assets. Had the Fed not owned these, that interest income would have been going to those the non-govt sector. It's the economic equivalent of a federal tax increase or a spending cut.*

"now, same question, instead he says "ngdp" or output gap."

Look, if the Fed's actions expand the net-worth of the non-govt sector, as in capital gains/losses, interest from the federal reserve to banks, this can indeed effect their spending decisions and close the output gap. This is not typical monetary policy though, this is typical fiscal policy. It should be noted that the change in net worth of the non-govt sector will be equal and opposite to the change in federal government's budget. There is a reason why we have our elected officials decide fiscal policy and not unelected, unaccountable, independent central bankers.

"explanations using terms like "hidden fiscal policy" or "verticaltranactions" will be ignored."

Look, MMT doesn't fit on a single blog post, it requires a time commitment, a significant one, at least until we figure out how to do that thing Neo does to learn new stuff. :-)

*there are more things going on here, but I know you have little patients for long readings, so I just put the main point.

dwb
You don't seem to be taking this seriously. Your point on Mosler highlights two points for ridicule, the first is 100% correct (investment financed by borrowing does create money), the second a strawman (it's right there in what you quoted - it is all about interest rates not quantity of money).

reason: "Your point on Mosler highlights two points for ridicule, the first is 100% correct (investment financed by borrowing does create money),...

No it doesn't. If I lend you money to build a house that doesn't create money, it just transfers it from me to you. An increase in investment demand *may* cause the creation of money, depending on the banking system, and especially the central bank's reaction function. Given the Bank of Canada's reaction function (target inflation) it would probably destroy money.

"Given the Bank of Canada's reaction function (target inflation) it would probably destroy money."

I don't know the BoC well enough, so I am curious. What measure of money are you using, how, why, how will the BoC still maintain its target interest rate while doing so, and what is the accounting?

(of course allowing for the target rate to change)

Steve,

"Since every act of spending creates a deposit in the recipient's account, how could all balances go to zero?"

no, I don't imagine everybody's balances could all go to zero, I was more trying to illustrate that borrowers (negative balances) require savers (positive balances) by asking you to think about what a situation with no savers would look like. As I think I said on Asymptosis, it might be a more palatable thought experiment to think of everybody running zero balances over say a month. Of course some people are going to run positive balances, and those positive balances (savers) are available to fund lending (along with central bank lending to commercial banks).

@nick you are attacking some cruder MMT ideas - not Steve Keen who Krugman has attacked without landing the slightest blow.

‘An individual commercial bank can create money out of thin air simply by buying something. But the money it creates may not be its own. Its money may subsequently be redeemed for the money of another bank, or the central bank. The individual commercial bank that wants a permanent increase in its stock of money may need to persuade people not to redeem its money. Whether or not it needs to do anything to persuade them all depends on how the other banks, especially the central bank, react.’

Which is a better way of putting the point Krugman was struggling to.

But you don’t redeem money for money at another bank, you either redeem money for goods and then other people who supplied those goods deposit that money in banks - which is a liability for those banks – & is nothing to do with liquidity preference. Liquidity preference is a third order issue on the extent that businesses and the employees they pay hold idle balances, and even idle balances are put to work by banks. There is a basic stock flow confusion here. What matters is the flow of money out of balances not the stock of money in them relative to GIS. Keen uses a rigorous stock flow consistent accounting framework, if you did the same then you would see the error.

Profits/receipts must either be deposited in banks or stuffed under the bed – in the latter case it takes no part in transactions and adds nothing to aggregate demand. If the money is them used as collateral for another loan thats then another matter – then you get an exposte velocity multiplier (Moore, Goodhart)

‘ If the Bank of Canada wants to increase the supply of Bank of Canada money, it just does it. It doesn’t need to persuade people to want to hold more.'

Yes but thats inside money not endogenous money – the two channels exist side by side. Keen does not hold a cartelist position and criticises MMT on this score. He is developing an (as yet unpublished) model based on the interaction of horizontal and vertical money which covers these issues.

@Tschaff: accept that central banks target interest rates, and they achieve this by having a perfectly elastic supply of reserves at their target rate every day. Quantity of reserves will change up or down depending on lending behavior of banks which is influenced by the price of reserves.

I agree with that for about 6-8 weeks at a time. Then the central bank changes its target rate with the state of the economy and supplies a new level of reserves see below).

So if the Fed action means your portfolio grows nominally, sure you might spend more than you otherwise would have, and that could cause inflation.

how is that not the hot potato effect right there?


It should be noted that the change in net worth of the non-govt sector will be equal and opposite to the change in federal government's budget.

From the accounting identity, I think you mean: the change in private spending is equal and opposite to the change in government spending, excluding net exports. "non-govt net worth" includes things like the stock market, prices for housing stock...if the stock market goes up federal spending has not gone down.


So, it would appear in MMT that: (a) the central bank elastically supplies reserves at a given target rate (as i said, i probably agree with that 6-8 week at a time but no more); and (b)the central bank controls interest rates and can effect a slowdown of the economy and presumably the opposite).

in MMT what i am fundamentally interested in is the connection between (a) and (b). How does the central bank's choice of the target interest rate affect the economy, and savings/investment/consumption allocation.

@Luis Enrique: "asking you to think about what a situation with no savers would look like. As I think I said on Asymptosis, it might be a more palatable thought experiment to think of everybody running zero balances over say a month. Of course some people are going to run positive balances, and those positive balances (savers) are available to fund lending (along with central bank lending to commercial banks)."

So loan retirements in a period could equal new loans, for zero net new lending. Or the net change could be positive or negative. None of these has any direct effect on the "available" "stock" of "loanable funds."

@DWB accept that central banks target interest rates, and they achieve this by having a perfectly elastic supply of reserves at their target rate every day. Quantity of reserves will change up or down depending on lending behavior of banks which is influenced by the price of reserves.

I agree with that for about 6-8 weeks at a time. Then the central bank changes its target rate with the state of the economy and supplies a new level of reserves see below).

Glad we agree. After 6-8 weeks the CB defends its new interest rate just as it did its old, if it didn't we wouldn't see a stable overnight rate. :)

So if the Fed action means your portfolio grows nominally, sure you might spend more than you otherwise would have, and that could cause inflation.

how is that not the hot potato effect right there?

Raise income (income from capital gains in this case) and you'll see a multiplier effect until exports, taxes, and saving drains away all the demand that injection caused. Nick Rowe's hot potato was not caused by capital gains, but a portfolio shift, instead of holding a treasury sec, he holds cash of equal value (if I'm understanding him correctly). In the real world, we don't believe that if the Fed buys a treasury from you that you're going to go out and buy something. Treasuries are highly liquid, that's why you never hear people say, "I wish the government would pay off the debt so I can go buy something." It's even more silly to think people would do this if we're talking about their retirement portfolio. Similarly, we don't think banks will go make more loans, as the old bank money multiplier story suggests, banks individually or in the aggregate are not constrained by currency, deposits, or reserves in lending.

What i am fundamentally interested in is the connection between (a) and (b). How does the central bank's choice of the target interest rate affect the economy, and savings/investment/consumption allocation.

If you plot interest rates on one axis, and ΔGDP on the other, you'd see the two are positively correlated. :-) Junk economics aside, MMTers suspect at the zero bound monetary policy might be somewhat deflationary, and useless for stimulating the economy UNLESS we're talking about boosting the financial worth of the non-govt sector, which has historically been the role of fiscal policy, not monetary policy. Interest rates are a key distributional variable that determine how much income is transferred between creditors and debtors, presumably the two have different propensities to consume. I MMTers all think it's possible for the fed to torch the economy with high enough interest rates. Many (not all) prefer to leave rates at zero and use fiscal policy to control demand along the lines of Abba Learner's functional finance.

@Tschäff

assume no liquidity trap (full employment) and the CB targets reserves (the interest rate can be ANYTHING)

Similarly, we don't think banks will go make more loans...

the cost of the banks liabilities went up when the CB raised the funds rate. Why is the Q of loans unchanged?


banks individually or in the aggregate are not constrained by currency, deposits, or reserves in lending.

great. lets make reserves zero and drain them all out (paradigm shift: no interest rate targeting!). If you object to zero, really small, like $1 (CAD or USD, pick). reserves are infinitely scarce so interest rates are now REALLY high. Still the same number of loans being made?? Where are the funds coming from to make the loans?

@DWB

assume no liquidity trap
:-) Done. Easily since we don't agree with IS/LM

(full employment) and the CB targets reserves (the interest rate can be ANYTHING)
Hypothetical imputed!

"The cost of the banks liabilities went up when the CB raised the funds rate. Why is the Q of loans unchanged?"
It's perfectly possible lending is negatively correlated with interest rates. As I said in the last post, it's possible for the fed to kill off demand for loans at a high enough interest rate, did I misunderstand the question?

great. lets make reserves zero and drain them all out (paradigm shift: no interest rate targeting!). If you object to zero, really small, like $1 (CAD or USD, pick). reserves are infinitely scarce so interest rates are now REALLY high. Still the same number of loans being made?? Where are the funds coming from to make the loans?
Oh man, I totally didn't make myself clear. The reason that I said "banks individually or in the aggregate are not constrained by currency, deposits, or reserves in lending" is because the Fed ALWAYS supplies the required reserves at their desired price. Not that banks don't need reserves, which would be insane, even in countries where there are no reserve requirements like Canada banks demand enough reserves to settle payments.

Actually Hayek (distrustful of central banks) had that idea, every bank issue their own inconvertible currency and the banks will compete with each other over which bank's notes can maintain the function of store of value the best by avoiding printing too many. :)

http://research.stlouisfed.org/fredgraph.png?g=6al Fed Funds Rate and total commercial lending. Maybe in the early 1970's the >20% rate slowed down lending. Obviously the amount of commercial bank lending going on is determined by a lot more than the federal funds rate.

Wow. The trees are obscuring the forest again! But just for fun:

"Supply of money, eventually, creates its own demand."

Beautifully put, but does anyone argue the inverse? Could it also be true that demand of money, eventually, creates its own supply?

I would seem like for the former to be true, it's obverse compliment would also have to be true. And more generally, it' fun to re-engineer arguments from different conclusion.

Mr. Miyagi, good thoughts. Wouldn't it be great if Nick put endogenous money and debt-deflation dynamics into his thinking?

“No matter the industry, science and technology are driving the bottom line,” said Gary Goodyear, Minister of State for Science and Technology.

...see, for banking, it is primarily the regulations that affect profitability. Sure, ATM invention helped as does minute-to-minute bank wires. For oil/tar, it is oil prices. It would be better to focus upon R+D of industries and sectors that don't involve extracting known wells/mines and the parts of finance that can cause recessions if managed greedily. If anything, tax the latter to get the former R+D. Boy I'd love to work in a wind turbine part plant in Southern SK, adjacent to USA future market. Too bad no carbon tax to get advantage over petro and coal sources. A coal seam was peat, and oil was dinsosaur blood or something. Not R+D.

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad