Federal Reserve Interest Rates Should Be Near Zero Forever

[TakeAStepBack]

it's irrelevant, Shallow.

But since you are dying to know, I'm an civil/structural engineer. I study and follow economics (mainly macro) as a hobby. A 20+ year hobby.

Again, you profession has shit on a shingle to do with economics. You're an end user IT technician, dude. Doing it in the financial sector doesn't license you to check credentials or give you any authority regarding the topic. And for what it is worth, i agree with Toro here. Which you seemed to do also, which begs the quesiotn, why are you checking credentials anyway?

 

[Kimura]

The FED can continue QE indefinitely. We can continue to expand the balance sheet with paying interest on the IOR as well as POMO. There is no end game. Again, we're talking accounting adjustments and changing the composition of assets held by the public.

What happens if the Fed runs out of bonds to buy? There isn't an infinite amount of bonds in existence.

MMT strikes me as neither Modern, Monetary , or Theory. It seems chartilist and fiscal. It's not theory in that for some bizzare reason it's founded on an accounting identity (C+S+T+X=C+I+G+M). It doesn't seem to me to be very rigorous or wise to take an accounting identity and formulate fiscal or monetary policy from it. And an accounting identity is anything but an economic model. It seems this accounting identity usually ends up used as justification for some already a priori ideas and beliefs. If allowed by those who don't know what a statistical, economic model looks like, I could use this accounting identity to justify just about any policy I wanted.

It also seems to me to have a particular take on how the Treasury, Fed, Congress, and the banking system could operate, not how they in fact do operate. For example, MMT lobs the Fed and Treasury together as the "governement" and calls the government a currency issuer - which it could theoretically do (setting aside possible consequences of such an act). However, the Treasury actually operates as a currency user with the Federal Reserve as it's bank. Money is created when credit is created by the banking system (be it the Fed, a commercial bank, or investment bank). The Treasury could theoretically create money by pure deficit spending, but in fact it issues bonds to cover the outlays. In effect, it borrows from the banking system and it's the banking system that creates new net financial assets (a bond and a deposit). The loan from the banking system is what creates money by creating new deposits, the Treasury does not do it by fiat. I guess in theory the government could take over the banking system and do it all by fiat, but that may have some really bad unintended consequences that aren't captured in an accounting identity.

I can address each of those points. First of all, the Treasury and FED should be viewed as the government sector - or the consolidated government sector. Here's why: the US Treasury doesn't borrow from the Federal Reserve in any meaningful sense of the word. It would imply the Federal Reserve has a source of funds which isn't readily available to the Treasury, and that the FED will only loan $$$$ to the US Treasury at some agreed upon market price. The FED provides the monetary basis for the fiscal policy of the US Treasury. Government spending is what creates $$$$.

Bonds are not issued to cover outlays. The FED utilizes bonds as a way to CONTROL the short-term rate. If we have a net outflow of funds from the baking system, or even a net inflow, the FED purchases or sells short-term bonds to bring the banking system back into equilibrium and control the target interest rate.

If the FED let banks compete for existing bonds, the price of bonds would rapidly increase, and the interest rate, which is directly connected to bond price, would fall to zero. If we have a target above zero, the FED has act to and drain any and all excess liquidity. It does this by selling bonds (issuing debt) in exchange for any excess reserves. US debt is issued to control the interest rate, not to fund government in any capacity.

Let's go over national accounting identities to clear up any confusion.

First, we have Y = C + I + G ( X -M)

We have to remember households and firms can use (Y) for many things.

We can go:

Y = C + S + T

Ultimately, we can combine them as they are just expressions of total savings.

We have:

C + S + T = Y = C + I + G + (X – M)

Which gives us:

S + T = I + G + (X – M)

We can then take this a step further into sectoral balances. This enables us to see how fiscal policy has a direct correlation with private sector debt. All we have to do is rearrange the deck chairs to obtain our accounting identity for our sectoral balances equation, which contains the domestic private sector, public sector, and the foreign sector (foreign national governments, firms, households, etc.)

We have:

(S – I) = (G – T) + (X – M)

This tells us that savings minus investment must be equal to the public deficit with total net exports minus imports which gives us the net savings of the foreign sector.

This is a matter of accounting identity and not really open to debate.

 

[Rshermr]

Yes. But 1 + 2 +3 = 6

However, if a con feels it is better to believe that it equals 8 (which he has been told), then he will provide some vacuous argument showing that 8 is the correct answer. Because, he chooses to believe that truth is what he wants to believe, and what he has been told by those whom he wants to believe. He has a different understanding of what constitutes truth than does the rational person.
Believing what you want, and being told what to believe, is SO much easier than researching truth.

 

[Kimura]

EDIT TO ADD for JimmieD:

Come to think of it.....it would impossible for banks to add net reserves to any balances from their loans if the FED didn't create new reserves. The US Treasury does, in point of fact, spend new money into existence when deficit spending occurs.

We could let the Treasury issue money if we repealed some statutes. For example, we could let the Treasury run on an permanent overdraft the FED, so we could fund deficit spending, which would be the same as the Treasury "printing money".

If we follow this to its ultimate end game, the Treasury wouldn't have to pay back its overdraft over at the FED. Congress could repeal the statutes that require the US Treasury to issue debt. It's no longer The FED would still clear any Treasury checks. We'd have a scenario where overdrafts would continue on an infinite basis, which would be of no importance, since the FED can't really run out of $$$$$. The Treasury could deficit spend, and not have bother with issuing US Treasuries.

The should demonstrate that the federal government doesn't "borrow" in any meaningful sense of the world. It's the monopoly issuer of the dollar at the end of the day.

 

[JimmieD]

I can address each of those points.

But you didn't (see below).

First of all, the Treasury and FED should be viewed as the government sector - or the consolidated government sector.

That's just not how it functions though.

Here's why: the US Treasury doesn't borrow from the Federal Reserve in any meaningful sense of the word.

Technically the Treasury borrows from primary dealer banks. The Treasury even tells us exactly which ones. Primary Dealers List - Federal Reserve Bank of New York

So, yeah, the Treasury covers it's deficit by borrowing from the banking system. I don't know how much clearer they could spell it out.

Bonds are not issued to cover outlays.

Yes, they are. They even explicitly tell us:

Government - Frequently Asked Questions about the Public Debt

The FED utilizes bonds as a way to CONTROL the short-term rate.

The Fed utilizes t-bills and bank reserves to control the Federal Funds Rate. Only recently did it begin using bonds (specifically longer dated treasury bonds and mortgage bonds) to try to control the long rates.

If we have a net outflow of funds from the baking system, or even a net inflow, the FED purchases or sells short-term bonds to bring the banking system back into equilibrium and control the target interest rate.

It's not clear to me what you're trying to say here.

Let's go over national accounting identities to clear up any confusion.

There's no confusion on my part. In fact, your comments do not address my comments.

The approach I took is the mathematical fact that Leakages = Injections.

C+S+T+M=C+I+G+X

Rerrange the identity however you wish. It still won't change the fact that an accounting identity is not a very rigorous or wise way to formulate fiscal or monetary policy. And an accounting identity is anything but an economic model. It seems this accounting identity usually ends up used as justification for some already a priori ideas and beliefs. If allowed by those who don't know what a statistical, economic model looks like, I could use this accounting identity to justify just about any policy I wanted.

This is a matter of accounting identity and not really open to debate.

Yep, it's an identity and not very useful for justification of policy. We could really boil it down to simple terms and say that one person's expenditure is another persons income. Well, that seems pretty obvious when put that way. But that's about where it's usefulness ends - and even this isn't interesting at all - no accounting identity is very interesting, much less an economic model.

Come to think of it.....it would impossible for banks to add net reserves to any balances from their loans if the FED didn't create new reserves. The US Treasury does, in point of fact, spend new money into existence when deficit spending occurs.

That's just not what the Treasury says they are doing. The Treasury doesn't deficit spend without issuing bills or bonds to primary dealer banks. The Treasury is acting as a currency user - not issuer. The banking system itself is the issuer. When the Treasury runs a deficit, it covers the deficit by issuing bonds (whether or not there is some other way to do this - this is what it does). The Treasury's spends either from tax receipts or by borrowing from the banking system. It's the bank's loan to the treasury that creates the new deposits.

I mean, we can try to disagree here if we want, but this is what the treasury says they are doing. Should I believe MMT bloggers or the Treasury itself?

We could let the Treasury issue money if we repealed some statutes. For example, we could let the Treasury run on an permanent overdraft the FED, so we could fund deficit spending, which would be the same as the Treasury "printing money".

What are the consequences of the Treasury essentially bouncing checks at the Fed? Is this a free lunch without any consequences?

I think it would probably have some consequences. For one, it would create a mismatch between the Fed's assets and liabilities. The Fed's liabilities would increase while it's assets would amortize. So you would risk destroying the Fed's capital base - which could have some pretty bad side effects like currency destruction and stuff.

If we follow this to its ultimate end game, the Treasury wouldn't have to pay back its overdraft over at the FED. Congress could repeal the statutes that require the US Treasury to issue debt.

So you do believe the Treasury borrows to cover it's deficit...earlier you said this wasn't the case?

It's no longer The FED would still clear any Treasury checks. We'd have a scenario where overdrafts would continue on an infinite basis, which would be of no importance, since the FED can't really run out of $$$$$. The Treasury could deficit spend, and not have bother with issuing US Treasuries.

It would just eliminate it's capital base. But I guess this is supposedly unimportant? Why?

Is this finally the legendary free lunch of economics? What if we did something like have the Treasury mark up all the citizen's deposit accounts to $100 trillion for each person without ever borrowing to cover the deficit (and so overdraft it's account at the NY Fed)? No consequences, right? You could do this forever without a care in the world, right?

The should demonstrate that the federal government doesn't "borrow" in any meaningful sense of the world. It's the monopoly issuer of the dollar at the end of the day.

In fact it does borrow in a meaningful sense that leaves in tact some sort of connnection to economic fundamentals.

The Treasury acts as a currency user. Maybe there's some other way the world could function, but as it is now the Treasury is a currency user.

 

[Kimura]

That's just not how it functions though.

Technically the Treasury borrows from primary dealer banks. The Treasury even tells us exactly which ones. Primary Dealers List - Federal Reserve Bank of New York

So, yeah, the Treasury covers it's deficit by borrowing from the banking system. I don't know how much clearer they could spell it out.

Yes, they are. They even explicitly tell us:

Government - Frequently Asked Questions about the Public Debt

You're reaching. And I know what Primary Dealers are.

As a matter of practice, for example, if the Treasury wants to disburse $40 billion on any given day, it STARTS with that much in its FED account. It will later issue new Treasuries to refill its account at the FED. I really can't recall an overdraft being implemented.

That's just not what the Treasury says they are doing. The Treasury doesn't deficit spend without issuing bills or bonds to primary dealer banks. The Treasury is acting as a currency user - not issuer. The banking system itself is the issuer. When the Treasury runs a deficit, it covers the deficit by issuing bonds (whether or not there is some other way to do this - this is what it does). The Treasury's spends either from tax receipts or by borrowing from the banking system. It's the bank's loan to the treasury that creates the new deposits.

I mean, we can try to disagree here if we want, but this is what the treasury says they are doing. Should I believe MMT bloggers or the Treasury itself?

The cycle starts with government spending, which adds to the $$$$ supply, then Treasuries are issued for the same amount, which restores the $$$$ supply and the Treasury's FED account to where they were prior to spending. This is the order of operations: spending, issue Treasuries to refill the FED account. The fact that the Treasury started with some leftover funds in its FED account isn't really germane to understanding the flow of funds in any given year.

The Treasury will change up issuance to adjust for seasonal factors, as well to match outlays, and to prevent distortions in new issues. For example, at one point in the year, the Treasury may decide to issue more securities because they may expect the following month to have decreased tax revenues, or they might not expect to refill previous spending because the following month could have higher tax revenues. The seasonal adjustments don't affect flow of funds. The operation of operations still stands: spending then replenish. Debating this makes for an interesting philosophical discussion, but doesn't affect the operational aspect of the flow of funds.

Either way, the Treasury can always raise $$$$ by issuing securities. There is always more demand for US Treasuries than can be provided by the supply of new issues at each auction. I see it day in and day out. The purchasers at auctions get to park their $$$$ in risk-free form in the best form of liquid instrument in the world for US $$$$$. Everyone else keeps their $$$$ in banks which has risks involved. US Treasuries are ultimately dollar deposits at the FED.

This is why I hate the term "borrow" when it comes to issuing Treasuries. All the Treasury provides is way for investors to shift funds from banks to liquid Treasuries.

If critics of basic monetary operations obsess over technical matters regarding spending/issuance cycles, that's reaching as far reaching can go.

think it would probably have some consequences. For one, it would create a mismatch between the Fed's assets and liabilities. The Fed's liabilities would increase while it's assets would amortize. So you would risk destroying the Fed's capital base - which could have some pretty bad side effects like currency destruction and stuff.

So you do believe the Treasury borrows to cover it's deficit...earlier you said this wasn't the case?

It would just eliminate it's capital base. But I guess this is supposedly unimportant? Why?

Is this finally the legendary free lunch of economics? What if we did something like have the Treasury mark up all the citizen's deposit accounts to $100 trillion for each person without ever borrowing to cover the deficit (and so overdraft it's account at the NY Fed)? No consequences, right? You could do this forever without a care in the world, right?

In fact it does borrow in a meaningful sense that leaves in tact some sort of connnection to economic fundamentals.

The Treasury acts as a currency user. Maybe there's some other way the world could function, but as it is now the Treasury is a currency user.

Sorry about the confusion, it wasn't my intention.

Where to start... Ok, deficits create reserves and deposits. This option is available to the currency issuer without having to issue debt through consolidation or overdraft for the Treasury to the FED if we repealed some statutes. However, if we don't have IOR set at a targeted interbank rate, increasing reserve balances will result in the interbank rate to drop below the target rate. It will end up at zero. The only way around this is drain these excess reserve balances through issuing Treasuries if Uncle Sam desires a positive interbank target rate.

Obviously, the Treasury and FED are separate institutions within government, but the reality of monetary operations is much different if we look at a consolidated balance sheet.

My initial point about getting ridding of Treasuries is for this very reason. We simply let that $$$ sit in reserve accounts. From an operational standpoint, if we look at a consolidated balance sheet, we see that issuing debt really isn't required at this point.

By the way, I didn't avoid your posts about national accounting identities. I'll be back on this evening to pursue this further.

 

[oldfart]

The author says "permanent." By "permanent," I take him at his word, ie 50 or 100 years, not 5 or 10 years to get the unemployment rate down and to monetize the debt before resumption of normalized policy.

I'm not the author, but 50 years sounds good to me. Secular stagnation a la Hansen is about as permanent as anything gets.

 

[oldfart]

Here come the Obamapologists...

Please. Progressive economists regard Obama as a center-right politician at best, a corporate sell-out by any reasonable account. I have a somewhat lower opinion of his economic policies than that.

 

[Norman]

A other thread about MMT? How many of these do we need?

As for my opinion, this paper explains very well everything that's wrong with it. I have been pointing these errors of the logic for ages, and so have many others. But in this paper it's done in language that MMTers should be able to understand as well, since the author is an ex advocate or something along the lines.

http://pragcap.com/wp-content/uploads/2013/12/Critique-of-Modern-Monetary-Theory2.pdf

 

[editec]

POPPYCOCK!

FEDERAL RESERVE RATES ought to reflect the economies need for more cash in the system or LESS cash in the system.


In other words the FED ought to be seeking to keep the amount of specie in line with the overall productivity of society.

Ideally we would have no inflation, and no deflation if that was the TRUE GOAL of the FED.\

 

[Kimura]

A other thread about MMT? How many of these do we need?

As for my opinion, this paper explains very well everything that's wrong with it. I have been pointing these errors of the logic for ages, and so have many others. But in this paper it's done in language that MMTers should be able to understand as well, since the author is an ex advocate or something along the lines.

http://pragcap.com/wp-content/uploads/2013/12/Critique-of-Modern-Monetary-Theory2.pdf

I've actually had some debates with the MR folks. I read the PDF you posted.

Ok, the summation is as follows:

1) MR sides with Wynne Godley on the accounting issues.

2) MR views the State Theory of $$$$ as incomplete.

3) MR wants to focus more on productivity to add to consumption as opposed to just increasing aggregate demand.

4) MR rejects the Job Guarantee as a major component to understanding MMT.


They always seem confused. They mix productivity and living standards on one hand and value/viability of the national currency on the other. It's true, as the MR folks point out that REAL RESOURCES, such as labor, occur BEFORE taxation, and there would be little reason to tax if the non-government didn't have some resources. The non-government will always have some resources, even if its only their ability to perform labor. The value of currency is derived, as defined by state $$$$, as the amount of labor time that would be required to obtain a unit of the national currency.

The MR folks seem preoccupied that MMT ignores supply-side as it pertains to productive capacity. This is red herring and misconstrues our position, which is concerned with OUTPUT, price stability, and employment, while we maintain the Keynesians views of productivity and microeconomics.

It's widely agree by all schools that we have a supply-side bottleneck in the economy. A huge debate in macro is whether we can have a long-term demand constraint which rears its ugly before the supply-side bottleneck occurs.

 

[Toro]

The author says "permanent." By "permanent," I take him at his word, ie 50 or 100 years, not 5 or 10 years to get the unemployment rate down and to monetize the debt before resumption of normalized policy.

I'mnot the author, but 50 years sounds good to me. Secular stagnation ala Hansni about as permanent as anything gets.

You should take this idea to the Bundesbank.

I'm sure you'll get a good reception.

 

[Kimura]

The author says "permanent." By "permanent," I take him at his word, ie 50 or 100 years, not 5 or 10 years to get the unemployment rate down and to monetize the debt before resumption of normalized policy.

I'mnot the author, but 50 years sounds good to me. Secular stagnation ala Hansni about as permanent as anything gets.

You should take this idea to the Bundesbank.

I'm sure you'll get a good reception.

I'm game.

 

[Toro]

I'mnot the author, but 50 years sounds good to me. Secular stagnation ala Hansni about as permanent as anything gets.

You should take this idea to the Bundesbank.

I'm sure you'll get a good reception.

I'm game.

After you're done, it'll be implemented post haste!

 

[oldfart]

The author says "permanent." By "permanent," I take him at his word, ie 50 or 100 years, not 5 or 10 years to get the unemployment rate down and to monetize the debt before resumption of normalized policy.

I'mnot the author, but 50 years sounds good to me. Secular stagnation ala Hansni about as permanent as anything gets.

You should take this idea to the Bundesbank.

I'm sure you'll get a good reception.

Although the Bundesbank of late has behaved as if it were God, I don't think this situation will last long. German prosperity is deeply dependent on trade surpluses with those nations it is impoverishing through recommendations of austerity; they are destroying the basis of their own economy.

 

[Kimura]

I'mnot the author, but 50 years sounds good to me. Secular stagnation ala Hansni about as permanent as anything gets.

You should take this idea to the Bundesbank.

I'm sure you'll get a good reception.

Although the Bundesbank of late has behaved as if it were God, I don't think this situation will last long. German prosperity is deeply dependent on trade surpluses with those nations it is impoverishing through recommendations of austerity; they are destroying the basis of their own economy.

Exactly. Their whole economic model is dependent on running net surpluses and wage stagnation. Literally. Germany is literally destroying the monetary union.

 

[Toro]

I'mnot the author, but 50 years sounds good to me. Secular stagnation ala Hansni about as permanent as anything gets.

You should take this idea to the Bundesbank.

I'm sure you'll get a good reception.

Although the Bundesbank of late has behaved as if it were God, I don't think this situation will last long. German prosperity is deeply dependent on trade surpluses with those nations it is impoverishing through recommendations of austerity; they are destroying the basis of their own economy.

That's a way, way, way different argument than we should have free money until the sun turns into a Supernova.

 

[Toro]

Free money forever.

What could possibly go wrong with that?

 

[Kimura]

Free money forever.

What could possibly go wrong with that?

What is $$$$? I'm not being a douche. You've been in the business longer than I have. Money is not a commodity. We've both done well due to this very reality.

 

[Toro]

Free money forever.

What could possibly go wrong with that?

What is $$$$? I'm not being a douche. You've been in the business longer than I have. Money is not a commodity. We've both done well due to this very reality.

I get why the funds rate is at zero now. I don't know if it will work long term. Maybe, maybe not. I don't know.

But if capital is continuously mispriced, then distortions arise in the economy. When capital is mispriced, poor capital allocation decisions are made. Pinning the front end at 0% until the end of time will continue this bubble/bust cycle for as long. The perverse effect will be, at least to some extent, more and more resources devoted to financial speculation, at least until the system comes crashing down and we replace the dollar with something else.