Fed unexpectedly tapers

[TakeAStepBack]

I hope when the time comes, the FED gets absolutely hosed on that balance sheet accounting trickery. Nothing will make me giggle more schoolish than to watch the FED end up with decades in losses from their "buying" program.

 

[Kimura]

The Market initially took a dip and then shot up. Bernanke held a news conference (probably his last) and was pretty straight up with what's happening. The Economy's been getting stronger.

He leaves on a high note after what was a heroic and successful effort to rescue the US economy.

Well done, Chairman.

What happened to the total collapse of the market and the huge spike in GOLD as a result of the government backing off on buying these "assets"?

The FED is still buying 75 billion a month in MBS and Treasury, genius.

It would be completely possible to continue quantitative easing until all of US public debt has been purchased. This would result in the only liability being issued as the monetary base. In other words, the federal government would no longer issue interest bearing debt. Milton Friedman actually proposed the same thing of all people.

This could result in being somewhat inflationary, but that could be easily remedied by some tax increases (even though QE to date hasn't made tax increases necessary). This would really baffle the Austrians and their various cult members. The economic illiterates would be completely baffled.

It would be much more LOGICAL to cease issuing Treasury securities. Any deficit spending would result in excess reserve balances at the the FED. There is zero public purpose being served by issuing US Treasuries within a floating exchange/non-convertible currency. Issuing these instruments only supports the term structure of rates at increased levels. Higher interest rates distort the price structures of real goods and services.

We should not allow the Treasury to buy financial assets. Period. This should be the domain of the FED which has historically been the case. Whenever the Treasury purchases financial assets, as opposed to the FED, Congress, the media, etc misconstrue these purchases as deficit spending which somehow affects fiscal tools.

 

[TakeAStepBack]

He's like the Jim Carrey of economic thought.

 

[Norman]

What happened to the total collapse of the market and the huge spike in GOLD as a result of the government backing off on buying these "assets"?

The FED is still buying 75 billion a month in MBS and Treasury, genius.

It would be completely possible to continue quantitative easing until all of US public debt has been purchased. This would result in the only liability being issued as the monetary base. In other words, the federal government would no longer issue interest bearing debt. Milton Friedman actually proposed the same thing of all people.

This could result in being somewhat inflationary, but that could be easily remedied by some tax increases (even though QE to date hasn't made tax increases necessary). This would really baffle the Austrians and their various cult members. The economic illiterates would be completely baffled.

You are right and I think Friedman and austrians, even though they advocate vastly different policy than you, have understod this very well.

There is just a semantic difference. And by the way, I think MMTers use language that is in fact not in line what the system currently actually is. IE the treasury can't unprint money by increasing taxes. Or maybe it can but that won't practically ever happen in any meaningful quantity, even if they let the bonds mature the FED could buy something else and lower interest rates. What is collected in taxes is spent. That's the reality.

 

[Kimura]

The FED is still buying 75 billion a month in MBS and Treasury, genius.

It would be completely possible to continue quantitative easing until all of US public debt has been purchased. This would result in the only liability being issued as the monetary base. In other words, the federal government would no longer issue interest bearing debt. Milton Friedman actually proposed the same thing of all people.

This could result in being somewhat inflationary, but that could be easily remedied by some tax increases (even though QE to date hasn't made tax increases necessary). This would really baffle the Austrians and their various cult members. The economic illiterates would be completely baffled.

You are right and I think Friedman and austrians, even though they advocate vastly different policy than you, have understod this very well.

There is just a semantic difference. And by the way, I think MMTers use language that is in fact not in line what the system currently actually is. IE the treasury can't unprint money by increasing taxes. Or maybe it can but that won't practically ever happen in any meaningful quantity, even if they let the bonds mature the FED could buy something else and lower interest rates. What is collected in taxes is spent. That's the reality.

MMT explains monetary operations quite soundly. You said all taxes are spent. Of course they are. MMT simply points out that spending precedes taxation in the primary instance. For example, it would be literally impossible to collect tax $$$$ from the private sector unless it was spent into existence by the public sector. However, on a daily basis, the Treasury does receive tax payments, and there’s a daily clearing of government checks.

We can begin with spending, but it really doesn’t alter anything.

By the way, I’m not trying to engage in semantics. When MMT says “government”, they mean the entire central government, such as Congress, the Treasury, the “independent” bodies like the FED, etc. We should understand that the system is made up of these institutions and they were created by Congress. This means they are subject to regulation by Congress. This where the consolidated government sector comes from.

 

[Norman]

It would be completely possible to continue quantitative easing until all of US public debt has been purchased. This would result in the only liability being issued as the monetary base. In other words, the federal government would no longer issue interest bearing debt. Milton Friedman actually proposed the same thing of all people.

This could result in being somewhat inflationary, but that could be easily remedied by some tax increases (even though QE to date hasn't made tax increases necessary). This would really baffle the Austrians and their various cult members. The economic illiterates would be completely baffled.

You are right and I think Friedman and austrians, even though they advocate vastly different policy than you, have understod this very well.

There is just a semantic difference. And by the way, I think MMTers use language that is in fact not in line what the system currently actually is. IE the treasury can't unprint money by increasing taxes. Or maybe it can but that won't practically ever happen in any meaningful quantity, even if they let the bonds mature the FED could buy something else and lower interest rates. What is collected in taxes is spent. That's the reality.

MMT explains monetary operations quite soundly. You said all taxes are spent. Of course they are. MMT simply points out that spending precedes taxation in the primary instance. For example, it would be literally impossible to collect tax $$$$ from the private sector unless it was spent into existence by the public sector. However, on a daily basis, the Treasury does receive tax payments, and there’s a daily clearing of government checks.

We can begin with spending, but it really doesn’t alter anything.

By the way, I’m not trying to engage in semantics. When MMT says “government”, they mean the entire central government, such as Congress, the Treasury, the “independent” bodies like the FED, etc. We should understand that the system is made up of these institutions and they were created by Congress. This means they are subject to regulation by Congress. This where the consolidated government sector comes from.

Well if you just say that FED equals part of the government, then you are correct, but it also must be noted that

A) Most don't think that way. And for a very good reason, the FED is independent.
and
B) The private sector is involved in the money creation process as well, they need the public sector to do this, but this kind of goes back to the "Since government is the issuer of finance licenses, they are the monopoly on financial advise". Not so, It takes two to tango so to speak.

And that's why it still is a semantic issue. I just believe as do many that the MMT uses language that is very confusing. I basically view it as keynsian economics, but in spanish.

I don't think it's possible for government to spend before it taxes. Just that there are different ways of taxing, didn't keynes talk about inflation tax as well? Well certainly MMTers don't classify it as a tax... Seigniorage.

 

[Kimura]

Well if you just say that FED equals part of the government, then you are correct, but it also must be noted that

A) Most don't think that way. And for a very good reason, the FED is independent.
and

It’s independent but subject to regulation by Congress. Congress could change or remove its charter at will.

B) The private sector is involved in the money creation process as well, they need the public sector to do this, but this kind of goes back to the "Since government is the issuer of finance licenses, they are the monopoly on financial advise". Not so, It takes two to tango so to speak.

Not really. For example, let’s take a demand deposit at a bank. It’s a promise to settle in dollars as needed. This can be done as a cash withdrawal or the government payment system which uses government $$$$. Banks can’t issue their own currency so they need to get it somehow for settlement. Banks will try get deposits through borrowing from savers. This will increase the bank’s reserve balance. If they don’t do this, they will have to obtain reserves on the interbank market, or get them straight from the FED through borrowing or swapping them for securities.

Our monetary system is very hierarchical with government at the top of the pyramid as the currency issuer. This a good thing. It means we have a national currency as well as a whole host of benefits.

And that's why it still is a semantic issue. I just believe as do many that the MMT uses language that is very confusing. I basically view it as keynsian economics, but in spanish.

Think of it as Post-Keynesian with some functional finance.

I don't think it's possible for government to spend before it taxes. Just that there are different ways of taxing, didn't keynes talk about inflation tax as well? Well certainly MMTers don't classify it as a tax... Seigniorage.

Operationally, in order for us to obtain $$$$, the government must spend first before any $$$$ can be used to pay taxes or any borrowing occurs. For example, if we look at loans from the FED, then I’m correct. Any settlements from bond auctions or tax payments to Treasury can only happen from reserve accounts. The balances in reserve accounts are from previous government deficits, which boil down to credits to reserve accounts or loans from the FED. The FED will make these loans by purchasing private securities, repos, or loans. There must have been previous government spending at some point to settle bond sales or tax payments.

 

[Norman]

Well if you just say that FED equals part of the government, then you are correct, but it also must be noted that

A) Most don't think that way. And for a very good reason, the FED is independent.
and

It’s independent but subject to regulation by Congress. Congress could change or remove its charter at will.

Yes and "we the people" could dissolve the whole government immediately. But the government is still there, and the FED is still independent, not government controlled. What is isn't what could be. View it as you like though, it's just a semantics difference.

B) The private sector is involved in the money creation process as well, they need the public sector to do this, but this kind of goes back to the "Since government is the issuer of finance licenses, they are the monopoly on financial advise". Not so, It takes two to tango so to speak.

Not really. For example, let’s take a demand deposit at a bank. It’s a promise to settle in dollars as needed. This can be done as a cash withdrawal or the government payment system which uses government $$$$. Banks can’t issue their own currency so they need to get it somehow for settlement. Banks will try get deposits through borrowing from savers. This will increase the bank’s reserve balance. If they don’t do this, they will have to obtain reserves on the interbank market, or get them straight from the FED through borrowing or swapping them for securities.

Do you remember how the fed was actually formed? Not much government money there... The base money was originally created in the private sector. So there is a lot of money that did/still exists preceding that of the government which can well circulate, without the government spending anything. But my point was also that the government is not in control of the money supply solely. The banking system has not yet been nationalized.

Operationally, in order for us to obtain $$$$, the government must spend first before any $$$$ can be used to pay taxes or any borrowing occurs. For example, if we look at loans from the FED, then I’m correct. Any settlements from bond auctions or tax payments to Treasury can only happen from reserve accounts. The balances in reserve accounts are from previous government deficits, which boil down to credits to reserve accounts or loans from the FED. The FED will make these loans by purchasing private securities, repos, or loans. There must have been previous government spending at some point to settle bond sales or tax payments.

I was looking at this from the real flow of goods perspective. To have something government must first tax it. Semantics...

 

[Kimura]

Yes and "we the people" could dissolve the whole government immediately. But the government is still there, and the FED is still independent, not government controlled. What is isn't what could be. View it as you like though, it's just a semantics difference.

Do you remember how the fed was actually formed? Not much government money there... The base money was originally created in the private sector. So there is a lot of money that did/still exists preceding that of the government which can well circulate, without the government spending anything. But my point was also that the government is not in control of the money supply solely. The banking system has not yet been nationalized.

I was looking at this from the real flow of goods perspective. To have something government must first tax it. Semantics...

Got it. I just like to make the point that there isn't some pool of funds available to the FED that isn't available to the Treasury. This is what confuses people. It's not like the FED loans $$$$ to Treasury at some predetermined market price. All the FED does is provide the monetary basis for Treasury's fiscal policies. No semantics!

 

[Zander]

Sounds like a good time to trim equities. Take some profits. No need to get greedy.