Monetarists Versus Money

In my article on NGDP Targeting, I  argued  – among other things – that traditional monetary policy transmission mechanisms are now ineffective, and the banking system stops any ‘hot potato’ effect in its tracks. I felt the nature of which alternative monetary transmission mechanisms we might use to target NGDP was not always made clear by market monetarists; however, they proved me wrong with responses that discussed just that.

But I am still not satisfied.

The problem here is that their suggestions, which imply transcending ‘traditional’ monetary policy, may simply undermine the role of money in the economy. Market monetarists sometimes display a tendency to believe that those who conduct monetary policy simply don’t ‘get it‘, or are just constrained by petty politics. I’d instead suggest that policymakers just realise they’ve come up against some fundamental, inescapable constraints, implied by the nature of monetary policy itself.

One unconventional monetary policy tool was suggested by commenter J P Koning: negative interest rates on reserves. When I said that this would simply induce people to hold cash, he suggested that the central bank could stop 1:1 conversion of cash to deposits, making cash just as unattractive as deposits as the ‘price’ between cash and deposits adjusted to reflect the negative rates. Yet one of money’s fundamental roles is a store of value, and you undermine that by charging people to hold it. If you charge people to hold money, they will no longer see it as a desirable asset and will simply reject it. It is also worth noting that ‘floating’ deposit conversion rates could potentially play havoc with the value of bank’s balance sheets (bubble in deposits anyone?), as if these didn’t need more disruption.

Another suggestion, which I’ve seen before, is that the central bank could buy other assets than government bonds. First, I don’t really see why this would result in actual spending rather than people simply depositing or (assuming J P’s idea is not in play) holding cash. Second, this seems to undermine what it means to have somebody invest in your business – why bother having a business plan if the central bank will just buy up your bonds? I could set up ‘Unlearning Economics PLC’ and sell millions of pounds worth of bonds to the central bank – free money! Obviously this would quickly undermine the scarcity of, and trust in, money.

I suppose the central bank could screen who it invests in, but that just makes it another bank. This might help somewhat if the central bank were more willing to lend than private banks, but it doesn’t change the fact that banks aren’t lending for a reason: there’s just not much demand for goods and services in the economy, and businesses will have limited success.

Obviously, even the proposed introduction of such changes would likely meet widespread political opposition. However, if they were implemented I simply see it undermining the value of money and the workings of the financial sector, possibly resulting in widespread instability. I’m not talking about ‘the money is coming!!!’ gold bug style instability; more ‘what is going on, why is the central bank buying my house and the local branch of KFC?’ or ‘why am I not allowed to save money safely any more?’ type instability.

My basic view is that that monetary policy can primarily alter the costs in the economy, but not the demand conditions. This is why it can often effect changes in NGDP and other variables, albeit indirectly. However, when those costs go as low as they can go (0), beginning to tamper with the fundamentals only risks completely undermining the term ‘monetary policy’ and how it should ensure that money retains its traditional roles, including that as a reliable store of value.

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  1. #1 by K Michael Wilson 白非马 (@kmichaelwilson) on August 10, 2013 - 5:45 pm

    I think you might be able to design progressive, hence gradually more humanistic, monetary policy, but yeah, you’d have to start buying diverse goods. It would be a war, a complicated maneuvering in order to wrench economic rent out of private hands. It already is a war, just an asymmetric one. And I’m not convinced that an alternative strategy of demonetization (particularly of key goods like housing, food, and healthcare), combined with attempts to invoke a new kind of culture in which parasitism is less socially acceptable (again, a non-monetary strategy), would not be preferable.

    But there’s no a priori reason to think that private capitalists are invulnerable to intrusion by state or semi-state entities like a central bank. That’s mysticism. As it stands, they pay for system-level stability, and the price they pay is ridiculously low.

  2. #4 by JW Mason on August 10, 2013 - 5:49 pm

    I think you are making a very important point here. The ZLB isn’t an accidental result of the exact technical specifications of monetary policy. It’s an example of the much more general principle that prices in general don’t go below zero. If the interest rate is the price of liquidity, and monetary policy works by varying the supply of liquidity, then maximally expansive policy — an infinite supply of liquidity — will only push rates to zero.

    Some kind of monetary policy is still possible at the ZLB, but it has to change the shape of the yield curve and not just move the whole thing around.

  3. #5 by JW Mason on August 10, 2013 - 5:54 pm

    The broader point is that monetary policy is going to have to start changing various relative prices and not just “the” interest rate. In other words, the central bank must become a kind of planner and substitute its own judgement (e.g. f the appropriate price for the bonds of Unlearning Economics PLC) for the judgement of private banks.

    Now where I disagree with the post is that there is anything inherently unfeasible about this. Lots of countries combine production by private businesses with a pubic or semi-public banking system, and it doesn’t lead to any kind of widespread instability. In fact, I think if we were to write up a list of countries experiencing sustained, stable growth, a large fraction of those toward the top of the list would lack private banks. But it is certainly true that this is a radical departure from what we mean by “monetary policy” today.

    • #6 by Unlearningecon on August 10, 2013 - 6:02 pm

      Yes – perhaps I should have been clearer: I am quite happy to for the CB to finance fiscal operations, or a state investment bank of some kind. I am not screaming hyperinflation at any sort of innovative policy.

      However, I see this as beyond market monetarism. First, it’s basically fiscal policy. Second, would such a bank mechanistically target NGDP, treating loans like open market operations, or would it be making lending decisions based on the pros and cons of each potential project? It seems obvious to me the best way to run the bank would be the second option, else it’d be forced to invest in poor projects sometimes, and not invest in good ones other times, depending on whether or not it was on target.

      • #7 by Dinero on August 11, 2013 - 10:04 am

        True if the central bank beomes too pro active it executing fiscal policy and would require a electoral mandate, else it would risk becoming a command economy.

  4. #8 by JP Koning on August 10, 2013 - 8:24 pm

    “If you charge people to hold money, they will no longer see it as a desirable asset…”

    You say that as if it is a bad thing, but that’s exactly the point. In a depression, the expected return on assets and projects plunges into negative territory. If a central bank can’t drop the rate on deposits and banknotes below zero to match the return on competing assets and projects, then it offers a free lunch to investors. Buy cash and you’re guaranteed a superior return, the CB is saying.

    Introducing a charge on money during a depression only brings the excess return offered on money holdings in line with the rest of the economy’s assets and projects. I don’t think it kills money as a store of value.

    • #9 by Unlearningecon on August 10, 2013 - 11:08 pm

      Of course I cannot predict what would happen, but my inkling is that people would head for alternative assets: foreign currencies, gold, or whatever else. As J W Mason says, I feel that a ‘price’ of zero is a fundamental constraint of money, rather than a mere political one.

      • #10 by Dinero on August 11, 2013 - 10:44 am

        Inflation makes a cost on holding cash, does it not.

      • #11 by Unlearningecon on August 11, 2013 - 10:59 am

        Absolutely, but I figure if we are talking significant enough to make anything happen, we are talking significant enough to cause potential problems, too. This also applies to inflation.

      • #12 by Michael Byrnes on August 11, 2013 - 9:02 pm

        People cannot alchemistically transform their cash into another asset – they can only find a willing party and exchange their cash for another asset.

        “Heading for other assets” is only possible if there is someone with “other assets” who wants to “head for cash”.

      • #13 by Unlearningecon on August 11, 2013 - 9:10 pm

        I’m envisaging a situation where some people are willing to buy cash at first, but over time this diminishes as people realise its loss of value, and existing stocks sit there and become more worthless.

      • #14 by JakeS on August 12, 2013 - 8:23 am

        Going out of legal tender and into some other, less privileged, asset class has non-trivial costs of its own. The interest bound below which your economy dollarizes is likely to be substantially lower than zero.

        – Jake

      • #15 by JP Koning on August 12, 2013 - 10:31 pm

        “I’m envisaging a situation where some people are willing to buy cash at first, but over time this diminishes as people realise its loss of value, and existing stocks sit there and become more worthless.”

        But why would a CPI or NGDP-targeting central bank ever let cash become worthless? It drops rates below 0 to ensure that cash eases to offer investors an excess return, and when inflation begins to rise again it raises rates until cash ceases to offer a deficient return.

      • #16 by Unlearningecon on August 13, 2013 - 12:33 pm

        As I said to dinero, I figure anything substantial enough to make things happen would also cause people to look elsewhere to satisfy their ‘liquidity preference’.

  5. #17 by Magpie on August 11, 2013 - 11:01 am

    @Unlearning

    WILDLY OFF-TOPIC

    Taylor and Francis website made available a series of papers on Joan Robinson and F.A. von Hayek:

    http://explore.tandfonline.com/page/bes/great-economists/great-economists-hayek-and-robinson

    You’ll never guess what I found in one of the Taylor and Francis papers (Talking About Joan Robinson: Geoff Harcourt in Conversation with John King):

    Harcourt: “And Joan, partly in retrospect, saw that the thrust of the attack of Imperfect Competition on laissez faire, and capitalism generally, was showing that it was a system of exploitation, because it discredited marginal productivity. As soon as you had imperfect competition, workers got paid less than the value of their marginal product.” (page 34)

    The only difference to what He-Who-Must-Not-Be-Named said is that the much maligned and ridiculed German Bearded One (and apparently, the other guys) extended this conclusion to perfectly competitive markets. In other words: Marx’s criticism is even more damaging.

    • #18 by Unlearningecon on August 19, 2013 - 9:17 pm

      Thanks.

      Yeah, I’ve always shied away from a critique along the lines of “well, in the real world markets aren’t so xyz”; I prefer “even if we assume this…”. Keynes also used this approach in The General Theory.

  6. #19 by Dinero on August 11, 2013 - 11:08 am

    Last week the BoE head anbounced it would be setting interset rates with a regard to employment. That is a very political thing to do. Objectively the unemployment rate has nothing to do with running a banking system. It is using the BoE as an arm of goverment, with political motives. This Pretty much like the dual mandate of the FED and a foreign concept for the UK.

  7. #20 by NicTheNZer on August 11, 2013 - 12:42 pm

    I think its rather funny that various Monetarist commentators are now threatening to use fiscal policy.
    http://neweconomicperspectives.org/2013/07/you-can-call-for-helicopter-money-but-drop-the-call-for-coordination.html

  8. #23 by Luis Enrique on August 11, 2013 - 8:42 pm

    ” if they were implemented I simply see it undermining the value of money”

    The value of money is its purchasing power. Undermining the value of money means causing inflation. If you can cause inflation you can target NGDP.

    I think the existence of banks counter argument to hot potato misses the point. Yes if the CB just goes on and on buying non-money assets, most people will no doubt just hold bank deposits because they wish to store value as best they can. The point is to change some of the behaviour of some people, you just need some people to decide to start spending as the supply of yielding assets shrinks. I am presuming banks would cut interest rates on savings accounts to zero, or near.

    One reason you might want a business plan is that if UE plc borrows money, it will need to repay it or be declared bankrupt.

    Remember nobody Is really proposing the CB buys everything, but it could buy equity, securitised loans etc. the point is just that if it keeps taking assets away and replacing them with cash it will start to get some traction.

    I am not Particularly satisfied with those arguments myself, and prefer fiscal policy, helicopter money. But to be fair to these guys, they are not arguing NGDP targeting is a panacea, merely that it’s better than the status quo.

  9. #24 by Dinero on August 11, 2013 - 10:42 pm

    Inflation. People investing in order to avoid losing purchasing power due to an accountng artifact of the unit of exchange reducing rather than investing in something that will create real utility does not soud like a sound basis for a productive ecoomy

    • #25 by JakeS on August 12, 2013 - 8:30 am

      There’s at least three serious problems in that sentence:
      1) Inflation is not an accounting artifact, it’s the price you pay for moving purchasing power into the future – this is a service society provides for you, and it is not free to provide it, so you get to pay for it.
      2) Hoarding claims to enjoyment that one does not intend to exercise at any definite time is even less conducive to a productive economy.
      3) Utility “theory” is garbage.

      – Jake

      • #26 by Dinero on August 12, 2013 - 8:47 am

        By accounting artifact i meant a business’s assets going up in market price due to inflation rather than the business providing a service of real value.

      • #27 by JakeS on August 12, 2013 - 9:02 am

        If the business provides no real value, then the customers will not keep paying it (one must assume, if one wishes to argue the case for private enterprise at all). If customers do not keep paying you, your business will not appreciate in line with inflation.

        Even individual assets will only appreciate if they are kept in good working order and up to date technologically. This is a service you provide to society: You store real value – productive capacity – for future use. There is nothing wrong with inflation remunerating you for this service.

        By contrast, placing your money in your pillow, or, what comes to the same thing, in a CB reserve account or Treasury issue, provides no service to society that the Central Bank’s printing press cannot do just as well. Therefore this should not be remunerated.

        – Jake

      • #28 by JakeS on August 12, 2013 - 9:07 am

        Business’ assets will not automagically appreciate in line with inflation – they will only do so if they are kept in sound working order. This is a service to society: It builds and maintains the capital stock. I see no issue with businesses being paid for that through inflation accruing on their business assets.

        By contrast, holding CB reserves, or, what comes to the same thing, cash or Tsy issue, does nothing for society that the CB’s printing press cannot do just as well. Hence, there is no reason to remunerate money hoarding.

        And business’ market value will not appreciate in line with inflation unless people keep paying it. In which case one must suppose that at least some people feel that it does provide some value.

        – Jake

      • #29 by Dinero on August 12, 2013 - 9:22 am

        > JakeS 9:07 am

        But inflation is an increase in money circulating . That is a variable quantity that is unconnected with the service provided by storing an asset or storing purchasing power.

      • #30 by JakeS on August 12, 2013 - 9:34 am

        No, that’s the quantity fallacy of inflation.

        But irrespective of the causes of inflation, inflation is just the price society charges people who want to use legal tender to transfer purchasing power into the future. This is a service society provides to the holders of legal tender, and society gets to name the price of that service.

        Other asset classes may have different costs of transferring purchasing power into the future. Some of those costs may be lower, leading people who wish to transfer purchasing power into the future to move into those asset classes. This is the market at work. I fail to see the problem.

        – Jake

      • #31 by Dinero on August 12, 2013 - 2:57 pm

        You simply restated your previose assertion.

        The point is you can’t value the service someone does in stroring a case of baked beans by inflation , which is what you are saying at comment 9.07 am,
        That would mean that you valued their service as greater simply because inflation went higher during that period

      • #32 by JakeS on August 12, 2013 - 3:37 pm

        Storing food for future consumption certainly is a service to future times.

        Why should the remuneration of that service be constant and unchanging? And if it should not, why is it less legitimate that it depends on policy variables, such as inflation, than on the vagaries of private speculation?

        I mean, unless you have some sort of irrational dislike of government policy fixing macroeconomic variables.

        – Jake

      • #33 by Dinero on August 12, 2013 - 5:05 pm

        because prices carry infomation

      • #34 by JakeS on August 12, 2013 - 5:08 pm

        Prices mostly express power relationships. Any other information that happens to get passed along is a happy coincidence, but neither necessary nor sufficient for price formation (nor for the efficient flow of commerce in general).

        – Jake

      • #35 by Dinero on August 12, 2013 - 5:15 pm

        Prices carry infomation about supply , demand, and how much usefulness a paricular activity offers. All of which help to allocate resources to the general benefit

      • #36 by JakeS on August 12, 2013 - 5:32 pm

        Anybody who has spent more than a week studying or performing strategic planning, procurement, supply chain management or trade and marketing functions in any large business would find the notion that markets and prices convey information to be laughable in its naivity.

        It might perhaps be the case if one were to pretend that “markets,” sui generis, are the only sort of human social institutions available for organizing the material provisioning of society. But that would be blatantly begging the question.

        – Jake

      • #37 by Dinero on August 12, 2013 - 5:46 pm

        If someone makes a chair with two legs it will not sell for as much as on with four. That tellsyou something about its utility.

        Here is an example of misallocation of resources where
        you invoke the idea of government useing inflation to promote economic activity.
        To preserve purchasing power people buy Gold
        -money goes to golminers who build more gold mines. Then inflation subsides and we have an over abundance of goldmines.

      • #38 by JakeS on August 12, 2013 - 7:59 pm

        If someone makes a chair with two legs it will not sell for as much as on with four. That tells you something about its utility.

        Straw man, false dichotomy and special pleading.

        The fact that sufficiently shoddy merchandise is difficult (but, given sufficient power differential, not impossible) to move at a remunerative price in no way disproves that the power relationships play the most substantial role in price-setting.

        The point that power relationships are more important than fairie-tale notions of “utility” and “supply and demand” (as if those were independent of power relationships) is not that the usefulness and reliability of merchandise plays no role, nor that no information is transmitted through prices. The point is the far more modest one that there is no “correct” set of prices, sui generis, from which any deviation is “mispricing” which promotes “misallocation of resources.”

        The allocation of resources in society is a political decision. Markets (of which there are a great many different kinds) is one of a great many subsets of political institutions which society can bring to bear on the question of resource allocation. It is a blatant case of special pleading to place “the market” above all other political institutions as the meterstick of “correct allocation. Especially since the particular version of “the market” that you favor can only be maintained by reliance on a set of political institutions which precede, support and surround “the market.”

        Along with the earlier question-begging, that brings you to four fallacies in as many posts. Let’s see if we can also get the Fallacy of the Heap (spurious discretization) that Hayek was so fond of.

        Here is an example of misallocation of resources where you invoke the idea of government useing inflation to promote economic activity.
        To preserve purchasing power people buy Gold
        -money goes to golminers who build more gold mines. Then inflation subsides and we have an over abundance of goldmines.

        Sucks to be a gold bug, or someone who tried to protect his voluntarily idle money by placing it in gold. My heart bleeds for them.

        What I don’t see is why anyone else should care. The miners who brought forth the gold cannot be said to have suffered from this allocation of resources: They have been maintaining their flow of material provisioning, and their mortgages have been paid down due to the increase in their spending power. Likewise the people who build the mining machinery, and the people who cast the steel to build the machines, and the people who mine the iron to make the steel.

        Society cannot be said to have suffered, compared to the alternative of letting industrial capacity stand idle: Supply chains have been maintained and created, which can now be deployed to more useful pursuits. Skills have been honed (or just prevented from rusting) which can now be put to use in more long-term industrial development.

        Sure, by any reasonable standard it would have been a more optimal allocation of resources to leave the gold in the ground, confiscate the gold bugs’ voluntarily idle purchasing power, and put the miners to work digging out metals that society actually needs. But since that option is politically infeasible (and, even were it feasible, would come with costs of its own that society may not be willing to pay), we must go by the roundabout way of inflating away the purchasing power of idle wealth.

        – Jake

      • #39 by Dinero on August 12, 2013 - 8:24 pm

        I did not express a favour for a market. And by definition there is no “correct price”. There seems to be a fallacy in your comments that purchasing power is a limited resource.

      • #40 by JakeS on August 12, 2013 - 8:28 pm

        Purchasing power shouldn’t be a limited resource.

        But when hard money quacks get their way, they turn purchasing power into a limited resource, and then society breaks. This is why hard money quacks should not be allowed anywhere near positions of power over the allocation of resources in society.

        – Jake

  10. #41 by Mike Sproul on August 12, 2013 - 12:03 am

    Unlearningecon:

    “I could set up ‘Unlearning Economics PLC’ and sell millions of pounds worth of bonds to the central bank – free money! Obviously this would quickly undermine the scarcity of, and trust in, money.”

    Assuming you took those millions of pounds and spent them wastefully, then the CB would have given you millions of paper pounds in exchange for your worthless bonds. The problem with this is that it undermines the BACKING of the CB’s money, and thus reduces money’s value. If the CB had gotten millions of pounds worth of bonds for its money, those same newly-created millions of pounds would have been adequately backed, and would not have caused inflation.

    • #42 by Unlearningecon on August 12, 2013 - 11:02 am

      I remain uncertain about, though not dismissive of, this idea – how do we tell between the two?

      • #43 by Mike Sproul on August 12, 2013 - 6:27 pm

        When you say “between the two” I presume you mean:
        1) The quantity theory, which says that the value of a dollar is determined by how many dollars there are in relation to the REAL OUTPUT of goods in the economy, and
        2) the backing theory (aka real bills doctrine), which says that the value of a dollar is determined by how many dollars there are in relation to the ASSETS HELD by the bank(s) that issued those dollars.

        Empirical work on this question would require finding historical episodes where the money supply, the output of goods, and the assets of issuing banks have gone in various directions. These episodes will either favor the backing theory or the quantity theory. There has been some work done on this by Bruce Smith, Thomas Cunningham, Pierre Siklos, Bomberger and Makinen, and a few others who are cited in my paper “There’s No Such Thing as Fiat Money” (www.csun.edu/~hceco008/realbills.htm )

        As far as the logical underpinnings of the two theories, I find it helpful to put together arbitrage scenarios. For example, if a money-issuing bank issues dollars worth 1 oz of silver, and if it holds assets worth only 99 oz as backing for $100, then arbitragers could profit by selling those dollars short, or by issuing rival moneys. I conclude that dollars are valued according to their backing.

        JP Koning is the best blogger on this subject, and his last two posts about the analogy between the backing of stock and the backing of money give a good explanation of the backing theory view.

      • #44 by Dinero on August 12, 2013 - 9:06 pm

        > Mike

        Bank notes do not have the banks balance printed on them so no one knows what assets a bank has ,so it must be the amount of currency combined with the predeliction to spend that governs the curreny’s spending power.
        You keep refering to the quality of a banks bonds and thus the amount of outsatanding currency, and so it is the same thing.

  11. #45 by Rafael on August 12, 2013 - 3:34 am

    I think Market Monetarists suggest that the Fed could help by engaging in QE that results in a permanent monetary base. In think about this, I do see this as a possibility actually. Imagine a scenario where I issued a bond where the fed purchased it. The banking system would credit my bank account. The Fed would credit my bank’s reserve balance, and the fed would be holding my security as an asset. Now imagine, I defaulted and the fed accepted this outcome without any punishment toward me. I would have increased my net worth balance sheet position at the expense of the fed. The increase to the monetary base would be permanent as the fed would not have a security to sell back to the banking system. The fed would have a negative net worth position… BUT this is a form of fiscal policy! The fed would no longer be able to remit the same level of interest payments to the treasury resulting in an increased budget deficit. This process would eventually result in negative remittances, which increases government spending and the budget deficit.

    Now the Fed could just as easily state that the increase in the monetary base is permanent and that they will “destroy” the treasury securities leaving the fed with negative net worth which would result in negative remittances. However, this is still reliant on the treasury issuing new securities. So, the Fed policy depends upon on the private sector or treasury issuing securities.

    Alternatively, if the Fed were given legal permission to force banks to credit private bank accounts while increasing the bank’s excess reserves without swapping for an asset, the Fed would increase the private sector’s aggregate net worth position. The Fed would run a negative net worth position which is still fiscal policy due to the negative remittances. This is the Fed engaging in helicopter drops which is not something that they can currently do.

    • #46 by Rafael on August 13, 2013 - 1:23 am

      In thinking about the above, Market Monetarism as described above could work. If the Fed were allowed to engage in helicopter drops in equal amounts to either individuals or households, this action would directly reflate real incomes resorting their purchasing power. The treasury, as instructed by congress, could just as easily work such an operation as well. Even so, both are forms of fiscal policy.

      It seems that fiscal policy is politically unfeasible partially because of how it is framed. Fiscal policy is easily conflated with cronyism that results in wasteful/corrupt spending. It is easy to be sympathetic to this view considering some of the spending is most likely channeled in a very unfair way to special interests. It is unfortunate that we don’t have a political process that results in using spending to raise everyone’s living standards by funding education, infrastructure, healthcare etc.

      Direct transfers to individuals, households and/or municipalities could cut through this corrupt bureaucratic process. All the spending would be localized, real incomes would reflate, and through individuals/households the rest of the economy would reflate. If fiscal policy was framed as “giving money back to the people” until the economy is on solid footing, I doubt regular people would be opposed to this idea.

      In order to get the Market Monetarists on board, have the Fed do this while targeting NGDP or median real wages. The program could persist as long as real wages rise. Once the rate of inflation is greater than the rate of change in nominal wages, the program would stop or congress could increase some form of taxation. I’d imagine by that point that the Fed would be off the zero lower bound as well, so that channels effectiveness would be restored fully.

      Cutting taxes financed by such an operation could work as well, but is not as fair given that the tax cut would not directly impact everyone equally. Some of the most vulnerable, the unemployed, unemployed, disabled, retired all would not benefit directly. Same goes for a modern debt jubilee. Only those with a form of debt would benefit directly. Direct transfers appear to be the most fair, “free” market solution.

      If Market Monetarists want the Fed to be able to absolutely hit a NGDP target, at least give them the tools first. Unless the fed starts buying up private securities and “ripping them up”/ “behave recklessly,” I am afraid NGDP targeting is doomed to fail. If they are banking solely on expectations, what happens when expectations aren’t met? What if the private sector calls the Fed’s hand? Besides, if the fed were to acquire and destroy newly issued private securities? That would be ridiculously unfair/regressive.

      • #47 by Unlearningecon on August 13, 2013 - 12:32 pm

        I agree with this comment up until the idea that taxes can control inflation. This seems to have two problems for me:

        – Taxes increases costs, and as such generally tend to push inflation up.

        – Since a large part of ‘M’ is created and destroyed by the banking system, even if taxation does reduce inflation I don’t see how it alone could control the money supply with any certainty.

      • #48 by Rafael on August 13, 2013 - 2:52 pm

        Ok couldn’t the operations work as follows.

        1. Government deficit spends by instructed the treasury to issue new treasury securities.
        2. If the bank acquires the t-security, the government has a newly created bank deposit to spend.
        3. The bank’s balance sheet has expanded (A: t-sec L: deposit)
        4. The Fed engages in QE by swapping the bank’s t-sec for excess reserves.
        5. If the government distributes the newly created deposits fairly to all individuals/households, a “helicopter drop” has been achieved going through the treasury. The household/individual has new purchasing power.
        6. The banking system ends up with excess reserves which they cannot get rid of. The reserves can be drained by either the Fed selling back the t-security or the treasury issuing new securities. The bank would swap the excess reserves for the t-security and then sell the t-security to the private sector. The bank’s balance sheet would shrink.

        On net there has been an increase in “M” (bank deposits) until the bank’s balance sheet shrinks after it has expanded.

        Say inflation is too high where nominal wages are rising albeit more slowly than inflation. The government institutes a consumption tax.

        1. This implicitly increases the cost to the consumer due to the tax, but not the explicit price. The consumer can either refrain from spending which puts downward pressure on inflation, or spend while incurring the added cost.

        2. If the consumer spends their bank deposit, the treasury will accumulate bank deposits via the tax collection. The treasury would use these deposits to buy t-securities. The private sector now has fewer net financial assets. If the treasury bought back the t-securities from a bank using the deposit gained from the tax, the bank’s balance sheet would shrink. The broad supply of money would have declined. Do this until inflation is under control.

        3. After taxation, the treasury could just as easily hold onto the new deposits gained from the taxation. This would reduce the supply of deposits held by the non-bank private sector, which puts downward pressure on inflation.

        Therefore, either the consumption tax disincentivizes consumption, reduces the net financial assets held by the private sector, or reduces the aggregate number of deposits held by the non-bank sector. All of which put downward pressure on inflation. This is what I think Marriner Eccles was referring to when he said to curb inflation through taxation.

        “Since a large part of ‘M’ is created and destroyed by the banking system, even if taxation does reduce inflation I don’t see how it alone could control the money supply with any certainty.”

        I 10000% agree. Banks can always expand their balance sheets by accepting new loans/credit creation by issuing deposit-liabilities. If this is the source of the growth in ‘M’ than macroprudential policies must be used to curb bank leverage if it results in too much spending which is causing undesirable levels of inflation.

        Presumably the Fed would also no longer be at the zero lower bound. If too much bank credit was a problem, they could raise interest rates to a punitive %.

        So between taxation and the Fed, but would be able to influence the growth in ‘M’ but not determine it. Behavior and how the private sector responds is the driver.

        For all I know maybe the consumption tax causes consumers to increase their use of bank credit in order to offset the new cost. So macroprudential policies are still very important.

        To sum up, taxation can only influence, but never directly determine/control the money supply (level of bank deposits held by the non-bank sector). Such is the endogenous nature of the system. People’s behaviors and responses matter.

      • #49 by Unlearningecon on August 19, 2013 - 9:50 pm

        I don’t disagree with your accounting (and it is above my own understanding), but I just think any effects on inflation will be dwarfed by what’s going on elsewhere. Maybe I’m wrong.

        The consumer can either refrain from spending which puts downward pressure on inflation, or spend while incurring the added cost.

        This seems to assume an upward sloping supply curve and a neoclassical relationship between demand and price. However, post-Keynesian pricing theory suggests this may not happen.

        One tax I am willing to think would reduce inflation would be the Land Value Tax, due to the fact that it doesn’t create a rise in headline prices and cannot be avoided. But would this be enough?

        Overall, I think the right taxes might discourage inflation to a certain extent. But I think regulation of lending and other mechanisms are also required, something which you seem to agree with (?)

      • #50 by Rafael on August 27, 2013 - 6:13 am

        If we can concluded the following than the purpose of the tax will be made clear I think

        1. Direct transfers to non-banks (households) via new deposit creation (fiscal policy – helicopter drops) increases ‘M’

        2. ‘M’ is also increased when banks create new loans which create new deposits.

        3. ‘M’ consists of bank deposits and physical bills coins. That said, the creation of the bank deposits precede the bills/coins as bills/coins come into existence when a non-bank exchanges their bank deposits for bills/coins. Thus, this exchange for bills/coins do not result in the expansion of ‘M’ but does change the composition of ‘M’ held by the non-banks.

        4. When ‘M’ is spent on goods and services, ‘M’ is transferred to the producer. Producers may respond by either increasing quantity of goods or services if possible or increasing price.

        5. A goal is to increase ‘M’ as long as it results in the increase in aggregate quantity of goods and services and not so much the increase in the aggregate price level.

        6. When the productive capacity of a competitive economy has hit its natural limit for any given period of time, producers will only be able to respond by increasing price.

        ——————————————————————————-

        If the above is plausible, then the increase in ‘M’ has resulted in excessive spending which is not supported by the economy’s current productive capacity.

        This also occurs if the turnover/velocity of ‘M’ has increased.

        MV = PQ, where Q has reached a limit. The increase in price is either resulting in an increase in M or V. (Determining causation using this equation becomes tricky as the change in P can cause a change in M or V as well… I think)

        Since ‘M’ comes from two sources, bank credit creation or direct transfers of new deposits, then the possible solutions would have to be different in nature. The goal of any solution in this scenario is to reduce the excessive spending on goods and services which is causing the price level to rise.

        In other words either the process of bank credit creation needs to be restrained or the direct transfer amount needs to either be reduced, stopped, or reversed.

        The purpose of the tax is to reverse the fiscal operation by removing the newly created deposits from the hands of non-banks who are spending on goods and services. I am not sure what the best way of doing this would be. The goal would be to either reduce ‘M’ or reduce the desire of non-banks to use deposits to spend on goods and services.

        —————————————————————————-

        “But I think regulation of lending and other mechanisms are also required, something which you seem to agree with (?)”

        Absolutely. This is in part becomes banks create part of the ‘M’ and thus have the ability to always expand ‘M’ via the credit creation process.

        Right now I tend to side with the idea that banks should not be allowed to create new deposits. The deposits held by non-banks should instead be in the form of central bank liabilities instead of commercial bank liabilities. Money would be effectively nationalized. However, the business of banking would not be. A bank would be an institution that would attract and then hold central bank deposits as their assets. The business of banking would be to transfer those existing deposits to borrowers in exchange for a loan. The bank would now no longer be in the business of creating new deposits as their liabilities. They would instead be true lenders of previously existing deposits.

        In this regulatory framework, the expansion of central bank deposits could result from direct transfers to non-banks by crediting their accounts at the central bank. The central bank would directly control the quantity of ‘M’ which could be determined by real economic variables.

        As part of a rules based system that monitors real economic variables, the quantity of ‘M’ would be set by the needs of the real economy.

        If this is not possible, and if banks are still allowed to create new deposits as their own liabilities, than at the very least capital requirements need to be elevated. Furthermore, how and why banks create new deposits via lending would need to be strictly monitored. This more closely resembles bank nationalization by a matter of degrees by having the state enforce strict regulations.

        I’d much prefer money be nationalized instead of the business of banking.

  12. #51 by Jordan on August 12, 2013 - 8:02 am

    I see your defense of ‘store of value’ value of the money as an attack on ‘exchange value’ of money. Fiat money has essential ‘exchange value’ which is undermined by ‘store of value’ use of the same money.
    Is it not that ‘exchange value’ use of money describes the demand that is lacking which you mention?
    Is it not the ‘store of value’ overuse of money describing lack of demand that is needed to provide supply.
    I.E. “but it doesn’t change the fact that banks aren’t lending for a reason: there’s just not much demand for goods and services in the economy, and businesses will have limited success.”
    what your quote says is that people overuse fiat money as ‘store of value’ instead as it was designed as ‘exchange value’. In, other words, saving pattern has changed which is up which means higher savings decrease demand which you are looking for to increase.

    Another thing is that banks do not lend because there is no demand for goods and services which is acctually proven to increase by bank lending. That is correct, bank do not lend enough to provide for demand for goods and services because the lack of lending is not increasing demand for goods and services.

    What money lending is? It is pulling forward future demand and supply.
    If lending decreases, then such supply and demand is going back to the future where it came frrom.
    Monetary sustav is such that it makes demand and supply move trough time. Are we going to allow it to go back to future just because we believe we engaged a warp speed and that we will have to go back to the starting point just because of a belief that using warp speed is unatural.

    That is what your claim is comming down to, “it is unatural what we achieved so there must be some consequences, lets prevent those unknown consequences by demolishing achievement” Fiat money is not a sacred Holly Grail, but human suffering is. Fiat money is just a tool for humanity just as a gun is just a tool in human hand. It can be used for the good things or for the bad things.

    • #52 by Unlearningecon on August 12, 2013 - 12:59 pm

      I’m not sure I follow what you mean. It seems to me that the same processes which undermine money’s role as a store of value would also undermine its role as a medium of exchange by making the ratio at which it is traded for other things uncertain and volatile.

      Fiat money is not a holy grail; it is a tool to be used to attain certain ends. But not all ends are equal, and if you try to force certain properties onto money, ones which are opposed to what it is commonly used for, may well create problems.

    • #53 by srini on August 12, 2013 - 8:48 pm

      Jordan,

      It is not a “defense” of the store of value function. Rather a simple statement of the condition. Investors desire a “store of value.” If you attempt to satisfy that desire by undermining the store of value function of money, do you think the problem will be solved? Do you think that desire will go away? No, people will find other avenues and policymakers will lose whatever control they currently have.

      The fundamental problem with monetarists and market monetarists is that they ignore the store of value (and speculative function) and focus on the exchange value. The exchange value of money (especially state money) has never been important. Credit has long facilitated trade. The flight to money largely reflects credit problems and risk assets problems and the desire to hoard liquidity to address credit crunch and shift portfolio balance toward safe, uncorrelated assets. Money can also been seen as an “option” to wait and buy risk assets at cheaper prices. It become more attractive and cheaper to hold that option when uncertainty is high and when yield is low. Negative interest rates increase the cost of that option. But do you really want to be fiddling with that?

      I think unconventional monetary policy is the wrong way to go. Fiscal policy can address the desire to hold safe assets while actually achieving the ends of full employment more directly and without jeopardizing faith in money.

    • #54 by Jordan on August 13, 2013 - 2:37 pm

      In order to present what i mean by ‘store of valu’ works against ‘exchange value’ use of money, i will go to the extreme to show how they are opposing and balancing forces.

      Lets say, hypotethically, that in a particular month all money, 100% of it, is used as ‘store of value’ only. Would there be any exchange, any production and consumption during that month except by barter in order to survive and then many would not survive. Barter limited exchange would tremendously reduced production and consumption.

      If, on the other hand, another particular month all money was used as medium of exchange, how the economy would change? It would overheat the economy and cause inflation destroying great deal of ‘stored value’ money, particulary in the sectors that used money as ‘store of value’ overwhelmingly.

      This mental game points to opposing functions of money as ‘medium of exchange’ and as ‘store of value’.

      • #55 by Unlearningecon on August 14, 2013 - 11:48 am

        I see what you mean but surely in ‘normal’ times there is not such a tension, and both those who use and hold money have an interest in keeping inflation relatively stable?

      • #56 by JakeS on August 14, 2013 - 11:57 am

        but surely in ‘normal’ times there is not such a tension, and both those who use and hold money have an interest in keeping inflation relatively stable?

        Not necessarily, no. Those who use money have no particular interest in the stability of the rate of inflation, so long as it is kept below the level where the function as medium of exchange is impaired (as a historical rule of thumb somewhere around 10 % pr. year).

        Now, if stabilizing inflation were a costless operation, then those who use money would not be greatly opposed. However, stabilizing inflation is not costless: It comes at the cost of instability elsewhere in the system (historically, the rates of unemployment and nominal income growth). Which those who use money primarily for exchange may very well care about.

        Further, there is the point that having relatively robust (4-8 %) inflation rates denudes credit balances, which serves to stabilize the financial system (yes, also in the long run, but the margin of this post is too narrow to contain the argument).

        – Jake

  13. #57 by Luis Enrique on August 12, 2013 - 8:56 am

    “My basic view is that that monetary policy can primarily alter the costs in the economy, but not the demand conditions.”

    What do you mean by “costs” in this sentence? Is it same thing as “prices”? Demand is a function of prices. How can you alter costs but not demand conditions?

    ” However, when those costs go as low as they can go (0)”

    What cost are you talking about here? The cost of inter temporal trade? Of moving purchasing power over time, storing it, borrowing it for later repayment?

    If so, why are you looking at the nominal cost and not the real one? The real interest rate is already negative on uk savings accounts.

  14. #58 by Dinero on August 12, 2013 - 9:08 am

    In the economy business profit and price rises of assets are deemed to indicate some signal of utility of the underlying activity, and direct investment appropritely. If monatarist monkey about with prices then things may look okay on the surface but it may be the case that prices are simply being generated from the unit of account varying or speific injections of credit.

    • #59 by JakeS on August 12, 2013 - 9:29 am

      And this is a problem for what reason?

      The purpose of economic activity is to ensure a secure, uninterrupted and tolerably efficient material provisioning of society. If denuding the purchasing power of idle money, or performing some retail credit intervention ensures that the material provisioning of society can continue uninterrupted, then what is the problem with that?

      That it is immoral? Shrug. Economics, like diplomacy, is not a morality play.

      That it is inefficient? Perhaps, although most such claims are, in my experience, long on rhetoric and assumption and short on historical precedent. But even if it were the case, security and continuity are also priorities in the material provisioning of society, and where those priorities conflict with efficiency, they must be granted due weight.

      That it makes the world unsafe for international banking? My heart bleeds for the poor banksters. Really, it does. But banking exists to serve the material provisioning of society, not the other way around.

      – Jake

      • #60 by Dinero on August 12, 2013 - 2:42 pm

        a problem because of mis-redirected resources

      • #61 by JakeS on August 12, 2013 - 3:43 pm

        Not in the general case, no. Throughout the history of industrial civilization, insufficient inflation has proven to far more severely misallocate resources than excess inflation.

        Likewise, throughout the history of industrial civilisation, ad hoc interventions to ensure the smooth flow of material provisioning has proven necessary – or at least far superior to the alternative of permitting periodic general industrial depressions.

        – Jake

  15. #62 by Luis Enrique on August 12, 2013 - 9:25 am

    Some of this post is just plain weird

    “Obviously this would quickly undermine the scarcity of, and trust in, money.”

    increasing the money supply will reduce its scarcity? Ya think? And undermine trust in money? Who are you, Rand Paul?

    • #63 by Unlearningecon on August 12, 2013 - 10:10 am

      I probably threw the word value around too much in this post, a word which always causes problems. My bad.

      I’m not really talking about mechanistic inflation but more like political unease. Obviously I can’t predict what would happen but I just see an increase in hoarding and, if necessary, a shift into other assets.

      As srini said on my previous post, this kind of thing is just treating symptoms. People and firms/banks aren’t spending because they are in terrible financial positions. Making them move money around might have some superficial effects but it doesn’t change the fundamentals.

      • #64 by JakeS on August 12, 2013 - 10:21 am

        Well, yeah, you’ll see political unease when you hit the zero bound. You usually don’t hit the zero bound until you’ve been in depression for a couple of years, and a multi-year general industrial depression tends to cause political unease.

        Letting the general industrial depression go untreated, however, is going to generate a good deal more than “unease.” The term you want in that context is “unrest.” Or maybe “coup d’etat.”

        – Jake

  16. #65 by Luis Enrique on August 12, 2013 - 10:37 am

    We are talking about some very low probability eventuality in which the CB has run out of “quality” assets to purchase in secondary markets (bonds, other credit instruments, equity) and worrying about political unease? As Jake says, yes I imagine there would be some unease in that scenario. And we are talking about short run macro policy here, where trying to treat “symptoms” is exactly what we should be doing. All this talk of fundamentals makes you sound like a supply sider.

    This whole the CB could buy everything line is a reductio ad absurdem, not an actual plan of action. Sumner would expect monetary policy to gain traction long before the CB runs out of normal assets to purchase.

    Jwmason I am puzzled by “general principle that prices in general don’t go below zero.” a price below zero means you are being paid to take whatever. An example might be refuse. It has a positive price if it has scrap value, zero price if it’s free to take, negative price is you’d need to be paid to take it. There is no ZLB on real rates, there is a ZLB on nominal rates under standard policy constraints. What additional deep point about fundamental ZLB on prices is being made here? I don’t see it.

    • #66 by Unlearningecon on August 12, 2013 - 10:59 am

      Well, let’s not be too blase about “low probability” events – remember 2008😉

      And we are talking about short run macro policy here, where trying to treat “symptoms” is exactly what we should be doing. All this talk of fundamentals makes you sound like a supply sider.

      I don’t live in a world of supply versus demand side, though. Japan did a fair amount of both fiscal and monetary stimulus but never bothered truly sorting out its banks and debt levels (the latter has decreased recently, though). The result was a sclerotic recovery. I think the financial sector is the root of the problem and no amount of any stimulus will change that.

      This whole the CB could buy everything line is a reductio ad absurdem, not an actual plan of action. Sumner would expect monetary policy to gain traction long before the CB runs out of normal assets to purchase.

      Yeah, sure. But I just think it would end up as cash or as bank reserves.

      There is no ZLB on real rates, there is a ZLB on nominal rates under standard policy constraints.

      However, if you control real rates only through controlling the nominal rate, as I believe, then it really is an impasse.

      edit: btw, Luis, I know we have our disagreements, but apart from that: please try not to do 2-3 comments in a row.

      • #67 by JakeS on August 12, 2013 - 11:10 am

        2008 was not a “low probability event.”

        Depression-inducing financial panics are a routine consequence of inadequate financial regulation and gross income and wealth inequality. The last time we had as permissive financial regulations as we do today, depression-inducing financial panics happened roughly once per decade.

        “However, if you control real rates only through controlling the nominal rate, as I believe, then it really is an impasse.”

        This is the problem that demurrage solves for you.

        – Jake

      • #68 by Unlearningecon on August 12, 2013 - 12:35 pm

        2008 was not a “low probability event.”

        Sure, it was just a semi-joke. More like “we should be careful not to dismiss what we regard as low probability events”

        This is the problem that demurrage solves for you.

        However would substantial demurrage not result in a rejection of cash as a s’tore of value’ and a switch to, say, foreign currencies or various metals?

      • #69 by JakeS on August 12, 2013 - 12:46 pm

        Demurrage has not historically caused dollarization where it has been tried – quite the opposite (as Gresham also noted in respect of specie double standards).

        It may have led people to discontinue using the currency as a store of value, but the store of value function is the least interesting and least important of the four functions of currency. Indeed the entire point of demurrage is to deal with situations where currencies are *too good* a store of value, to the extent that it impairs their ability to function as the standard of deferred payment (which is a much more important function of currency).

        – Jake

      • #70 by Unlearningecon on August 12, 2013 - 1:13 pm

        I just can’t see this stuff doing any more than leading to a shifting around of financial assets and hoarding. The ‘hot potato’ effect may take place within the financial sector but that doesn’t lead to recovery.

      • #71 by JakeS on August 12, 2013 - 1:15 pm

        Negative real interest rates denude credit balances. This helps to end the credit-deflation cycle underlying recessions and depressions.

        – Jake

  17. #72 by Luis Enrique on August 12, 2013 - 11:08 am

    Well right, 2008 happened and the Fed is nowhere near having bought all of govt bonds, the Dow Jones, etc.

    Ah, I see what you mean. If interest rates are your tool for controlling inflation, but you need to be able to,push up inflation to push real rates into negative territory, you are in a chicken and egg position. So you need another channel, like buying up assets and having your hot potato and expectations help you there. Real rates are i-E(inflation). I don’t think the impasse exists, unless you take the position that CB cannot effect inflation expectations at ZLB but where is empirical support for that? Doesn’t Abenomicis refute that idea?

    • #73 by Unlearningecon on August 12, 2013 - 12:37 pm

      I predict if the fed expanded its operations into DJ etc. we would simply see stock market prices rise, and corporate cash holdings increase, and not much else happening, which is basically the effect it seemed to have.

      • #74 by Dinero on August 12, 2013 - 2:50 pm

        If the FED buys an interest earing asset the previouse owner now holds a non-interest earning asset and goes looking for one- that is the idea behind how QE is ,supposed, to work

      • #75 by Unlearningecon on August 12, 2013 - 8:29 pm

        Right but that doesn’t necessarily result in an actual recovery, as with existing QE.

      • #76 by Dinero on August 12, 2013 - 8:53 pm

        I agree ,

        I was just identifying that QE and open market operations are different

      • #77 by JakeS on August 12, 2013 - 8:57 pm

        Only in which maturities they target.

        QE is just interest rate policy at the > 3 month maturities. And as such it has all the same uses and limitations as any other interest rate policy.

        – Jake

      • #78 by Dinero on August 12, 2013 - 9:23 pm

        QE is practicaly different from OMO because it leaves non GEM market partipants without interest earning assets

  18. #79 by AlienObserver on August 14, 2013 - 1:50 pm

    Are You aware, that the swedish Rijksbank allready worked with negative interest to address the crisis? (See FT http://www.ft.com/intl/cms/s/0/5d3f0692-9334-11de-b146-00144feabdc0.html )

    Even the good old Bank of England has recently played with that idea.

    The fact of the matter is, that if growth comes to a stop, or your GNP goes down, it can no longer produce positive interest.

    What polititians and mainstream economists both seem to have problems with, is coming to grips with the concept of limited growth. I say Kenneth E Boulding was right after all.

    • #80 by Unlearningecon on August 15, 2013 - 12:00 pm

      Interesting, though that article actually seems to be arguing it hasn’t had much effect. It’s quite a low negative rate, and I think that the kind market monetarists have in mind would be higher, to the extent that it may cause the problems I outline. But as I said, I can’t be sure what would happen.

  19. #81 by dannyb2b on August 18, 2013 - 4:21 am

    A central banking mechanism whereby the CB monitors inflation and when it is insufficient it increases the money supply in a an even manner amongst the populace would be highly effective IMO. Stimulus wont depend on commercial banks or be misdirected into the economy.

    • #82 by JakeS on August 19, 2013 - 9:21 pm

      That, however, is a fiscal operation, and therefore the purview of the Treasury.

      You don’t want the CB usurping Treasury operations. That is, shall we say, not going to improve democratic accountability, transparency and general good governance.

      – Jake

      • #83 by dannyb2b on August 20, 2013 - 1:34 am

        Why do you term it a fiscal operation? Is it because of the transfer mechanism? I would classify policy conducted by the central bank with regards to adjusting the money supply as monetary policy.

        Democratic accountability, good governance needs to be instilled in central banking by making the cb committee publicly elected.

      • #84 by JakeS on August 20, 2013 - 8:48 am

        The way I distinguish between fiscal and monetary operations is that fiscal operations change the non-government sector’s nominal net financial asset position, while monetary operations change discount rates. Of course in the real world the separation is never quite so clean.

        To some extent the distinction between fiscal and monetary operations is an artificial one, just as the distinction between treasury and CB operations is an artificial one. However, so long as the harmful fiction of “central bank independence” is being perpetuated, we do need a way to distinguish between fiscal operations (the purview of the treasury) and monetary operations (the purview of the CB).

        Because if you allow people to slip into the conventional definition that everything the CB does is a monetary operation and everything the tsy does is a fiscal operation, then you open yourself to all sorts of shell games by people who don’t like democratic oversight.

        – Jake

      • #85 by Rafael on August 20, 2013 - 12:59 pm

        Plus, if the Fed were to start conducting monetary policy by acquiring non-government guaranteed securities, this increases the risk that the Fed will suffer a loss.

        This will either cause the Fed to remit less in interest payments to the Treasury which in itself increases the budget deficit or if the loss is severe enough where the Fed ends up in a negative equity balance sheet position, the Treasury would have to recapitalize the Fed. This would be done by having the Treasury issue T-securities which in itself increases the budget deficit.

        I believe only the treasury can run a perpetual negative equity position which enables the private sector to perpetually run a positive equity position on aggregate.

        However, this allows the Fed to circumvent political oversight at least initially initially. It is as if the Fed would do now and ask for forgiveness/permission after the fact if the non-government guaranteed securities become worth less.

        The question becomes why did the Fed acquire such securities and did they know that they would not be redeemed in full do to loss? Why were they buying bonds from certain entities and not others etc?

        At least if the Fed wanted to engage in a direct transfers to all individuals/households, no one entity would be favored. The Fed clearly cannot do this without the permission of Congress. It does get a bit strange if say every household issued “securities” (that would never be explicitly never be redeemed) in equal amounts only for the Fed to acquire such things. The Treasury again would have to recap the Fed, but at least this is a fairer reason for doing it I think.

      • #86 by JakeS on August 20, 2013 - 1:03 pm

        It’s actually not obvious to me why a CB couldn’t continue to operate with a negative equity. (Aside from conventional wisdom and, perhaps, some legal fluff.)

        It will, after all, never be faced with a margin call it can’t meet (unless it is accruing foreign currency debts in excess of its strategic hard currency reserve).

        – Jake

      • #87 by Rafael on August 20, 2013 - 1:14 pm

        JakeS,

        You make a good point. Aside from legal issues, why couldn’t the fed run a negative equity position? At that point though is it accurate to really call the Fed a central bank in the way we now understand them to be? They would become s pseudo treasury and CB combo. If the Fed can run a negative equity position, why even buy securities? Why not just instruct banks to credit private bank accounts in exchange for Fed reserves?

        This is perhaps the truest form of helicopter drops/direct transfers which solely impact private balance sheets. No political process that explicitly looks to impact the real economy by having individuals perform real tasks (or the government buy materials).

        Heck if this operation was transparent enough, it could be better than going through a corrupt political process.

    • #88 by Unlearningecon on August 19, 2013 - 9:48 pm

      This fine, but it is fiscal and hence would be subject to political oversight.

      edit: JakeS beat me to it

  20. #89 by dannyb2b on August 20, 2013 - 10:03 am

    Jake

    “The way I distinguish between fiscal and monetary operations is that fiscal operations change the non-government sector’s nominal net financial asset position, while monetary operations change discount rates. Of course in the real world the separation is never quite so clean.

    To some extent the distinction between fiscal and monetary operations is an artificial one, just as the distinction between treasury and CB operations is an artificial one. However, so long as the harmful fiction of “central bank independence” is being perpetuated, we do need a way to distinguish between fiscal operations (the purview of the treasury) and monetary operations (the purview of the CB).”

    Completely agree that separation of CB and treasury is artificial to a large degree. But then again so is separating the judiciary from the executive arm of government. So the question becomes is it beneficial to do the separation? I would say separating the cb from the treasury is beneficial In order to reduce the responsibility and burden on the “fiscal” authority which already has a large job on its hands. Also the power to create money can corrupt.

    Monetary policy IMO is when the monetary authority manages the money supply either directly with the public by direct transfer or alternatively by targeting rates. The delivery mechanism doesn’t stop it from being monetary policy.

    “Because if you allow people to slip into the conventional definition that everything the CB does is a monetary operation and everything the tsy does is a fiscal operation, then you open yourself to all sorts of shell games by people who don’t like democratic oversight.”

    Independance of the cb from other arms and democratic oversight are two separate things though. You can have an independant cb in which the committee is democratically appointed in direct public elections.

    • #90 by JakeS on August 20, 2013 - 10:50 am

      Completely agree that separation of CB and treasury is artificial to a large degree. But then again so is separating the judiciary from the executive arm of government. So the question becomes is it beneficial to do the separation?

      “No.”

      This has been another edition of “Simple Answers To Simple Questions.”

      Central bank refusal to discount treasury issue causes major industrial depressions. Major industrial depressions have casualties countable in ten to twelve digits. Ergo, the central bank must always be subservient to the needs of the treasury. That is the point of having central banks.

      Monetary policy IMO is when the monetary authority manages the money supply

      The monetary authority has no more discretion over the money supply than the electrical utility has over the electricity supply: They both must either supply what is needed, when it is needed, every minute of every hour of every day, or crash the grid. The “grid,” in the case of central banks, is the interbank clearing system. Crashing the interbank clearing system causes major industrial depressions, which a central bank must not be allowed to do.

      Central banks, like electrical utilities, control prices, not volumes.

      either directly with the public by direct transfer or alternatively by targeting rates. The delivery mechanism doesn’t stop it from being monetary policy.

      There is one important difference between setting interest rates and doing helicopter drops. Consider the reversal of the policy. With interest rate policy this is easy: You dropped interest rates yesterday, today you raise them (or vice versa). On the other hand, reversing a helicopter drop requires the CB to helicopter lift money out of people’s bank accounts. This is called “taxing” and is the purview of the treasury.

      But since taxation is identical to a helicopter drop, modulo a sign convention, the helicopter drop must also be a treasury operation. Otherwise you are splitting the two arms of the same operation between two different agencies. And what could possibly go wrong with that?

      Independance of the cb from other arms and democratic oversight are two separate things though. You can have an independant cb in which the committee is democratically appointed in direct public elections.

      That sounds like a great way to punch a ticket to the Constitutional Crisis Express. An independent CB has effective veto power over government outlays, in that it can simply refuse to discount treasury issue and thereby bring all treasury outlays to a halt overnight.

      Suppose that parliament authorizes a spending item and the CB simply refuses to release the funds. Who gets to make the decision? Parliament, which can lawfully decide upon expenditures? Or the central bank, which has to monetize the resulting deficit? If they have to agree, then you have effectively just added another chamber of parliament that all government initiatives must pass (in addition to one or two existing chambers, judicial review and, under the Madisonian system, an executive veto). Since government activity is generally necessary and desirable and one of the major contemporary economic problems is that we don’t have enough of it, that strikes me as, eh, A Bad Idea.

      – Jake

  21. #91 by dannyb2b on August 20, 2013 - 12:16 pm

    “Central bank refusal to discount treasury issue causes major industrial depressions. Major industrial depressions have casualties countable in ten to twelve digits. Ergo, the central bank must always be subservient to the needs of the treasury. That is the point of having central banks.”

    The treasury can just fund itself from borrowing and taxes.

    “The monetary authority has no more discretion over the money supply than the electrical utility has over the electricity supply: They both must either supply what is needed, when it is needed, every minute of every hour of every day, or crash the grid. The “grid,” in the case of central banks, is the interbank clearing system. Crashing the interbank clearing system causes major industrial depressions, which a central bank must not be allowed to do.

    Central banks, like electrical utilities, control prices, not volumes.”

    Thats why its innefective. It needs to have discretion over the money supply so it can provide the quantity which is optimal for the efficient functioning of the monetary system.

    “There is one important difference between setting interest rates and doing helicopter drops. Consider the reversal of the policy. With interest rate policy this is easy: You dropped interest rates yesterday, today you raise them (or vice versa). On the other hand, reversing a helicopter drop requires the CB to helicopter lift money out of people’s bank accounts. This is called “taxing” and is the purview of the treasury.

    But since taxation is identical to a helicopter drop, modulo a sign convention, the helicopter drop must also be a treasury operation. Otherwise you are splitting the two arms of the same operation between two different agencies. And what could possibly go wrong with that?”

    If inflation is insufficient the money supply is expanded, but if it is excessive it is stabilized. If the money supply is not expanding when the price level is increasing then the source of inflation is not monetary so reducing the money supply will not have any positive real effect. Therefore money is a one way street I suppose.

    “That sounds like a great way to punch a ticket to the Constitutional Crisis Express. An independent CB has effective veto power over government outlays, in that it can simply refuse to discount treasury issue and thereby bring all treasury outlays to a halt overnight.

    Suppose that parliament authorizes a spending item and the CB simply refuses to release the funds. Who gets to make the decision? Parliament, which can lawfully decide upon expenditures? Or the central bank, which has to monetize the resulting deficit? If they have to agree, then you have effectively just added another chamber of parliament that all government initiatives must pass (in addition to one or two existing chambers, judicial review and, under the Madisonian system, an executive veto). Since government activity is generally necessary and desirable and one of the major contemporary economic problems is that we don’t have enough of it, that strikes me as, eh, A Bad Idea.”

    The cb wont have veto power over anything. The gov will simply have to fund outlays from taxes or borrowing. Government activity is desirable when it is accountable. Money printing as a source of funding for the gov isn’t very accountable.

    • #92 by JakeS on August 20, 2013 - 12:50 pm

      The treasury can just fund itself from borrowing and taxes.

      Not unless you either repeal the rules of addition and subtraction, or allow the private money market to set important government policies like interest rates. I’m quite fond of the rules of addition and subtraction, and I see no particular reason to let hedge fundies anywhere near interest rate policy.

      In order to accommodate a nominally growing economy (and you always want the economy to grow in nominal terms, because the alternative is systemic insolvency and general industrial depression), the government must necessarily deficit spend on average over the business cycle. There is absolutely no reason to make the government’s ability to deficit spend contingent upon the good humor of the money markets.

      Thats why its innefective. It needs to have discretion over the money supply so it can provide the quantity which is optimal for the efficient functioning of the monetary system.

      That is fundamentally impossible in a monetary production economy.

      The central bank must defend the clearing system by providing such amounts of legal tender as are required for clearing transactions. This is not an arbitrary rule that you can monkey around with to satisfy your political idiosyncrasies. It’s a direct consequence of some very deep institutional features of the monetary system.

      If inflation is insufficient the money supply is expanded, but if it is excessive it is stabilized.

      You are apparently operating under the quantity fallacy or (inclusive) the loanable funds fallacy, or (inclusive) you are confusing money supply, cash flows and non-government sector net financial assets.

      The “money supply” (insofar as this is even a well defined variable) does not drive price developments. Cash flows drive price developments.

      Government activity is desirable when it is accountable. Money printing as a source of funding for the gov isn’t very accountable.

      In a democracy government is accountable to elections, not to the money markets. Your policy prescriptions would give the money markets veto power over government policy, thereby allowing the unelected money managers to override the outcome of democratic elections.

      – Jake

  22. #93 by dannyb2b on August 20, 2013 - 1:25 pm

    “Not unless you either repeal the rules of addition and subtraction, or allow the private money market to set important government policies like interest rates. I’m quite fond of the rules of addition and subtraction, and I see no particular reason to let hedge fundies anywhere near interest rate policy.”

    If treasury spends 110, receives 100 in taxes and 10 in borrowing how is math repealed? What does a hedge fund have to do with this?

    “In order to accommodate a nominally growing economy (and you always want the economy to grow in nominal terms, because the alternative is systemic insolvency and general industrial depression), the government must necessarily deficit spend on average over the business cycle. There is absolutely no reason to make the government’s ability to deficit spend contingent upon the good humor of the money markets.”

    You want the economy to grow in real terms. You may actually have a decline even if you have nominal growth. The gov needs to provide net financial assets for the money supply to grow under the current system because the system is poorly structured. If the economy needs a greater money supply just expand it directly under monetary policy and if we need gov spending for infrastructure or whatever just do it directly with fiscal policy.

    ” Thats why its innefective. It needs to have discretion over the money supply so it can provide the quantity which is optimal for the efficient functioning of the monetary system.

    That is fundamentally impossible in a monetary production economy.

    The central bank must defend the clearing system by providing such amounts of legal tender as are required for clearing transactions. This is not an arbitrary rule that you can monkey around with to satisfy your political idiosyncrasies. It’s a direct consequence of some very deep institutional features of the monetary system.”

    The central bank can be reformed so it simply expands the money supply directly with the people instead of indirectly affecting lending. Of course the payments system has to clear but its irrelevant.

    ” If inflation is insufficient the money supply is expanded, but if it is excessive it is stabilized.

    You are apparently operating under the quantity fallacy or (inclusive) the loanable funds fallacy, or (inclusive) you are confusing money supply, cash flows and non-government sector net financial assets.

    The “money supply” (insofar as this is even a well defined variable) does not drive price developments. Cash flows drive price developments.”

    Of course but the supply of money affects its flow.

    ” Government activity is desirable when it is accountable. Money printing as a source of funding for the gov isn’t very accountable.

    In a democracy government is accountable to elections, not to the money markets. Your policy prescriptions would give the money markets veto power over government policy, thereby allowing the unelected money managers to override the outcome of democratic elections.”

    People would have veto power because the gov would need to raise money from taxes or borrowing. People arent stupid if the gov is effectively spending they will pay higher taxes if they want to go invade places then the funds wont be there.

    • #94 by JakeS on August 20, 2013 - 1:41 pm

      If treasury spends 110, receives 100 in taxes and 10 in borrowing how is math repealed? What does a hedge fund have to do with this?

      Where did the private sector get this money?

      Ultimately, it can have gotten the money from three places:
      – It can have borrowed the money from a private bank, which in turn borrows it from the central bank (you can daisy-chain a few private banks together and call them an “interbank market,” but in the final analysis all liquidity comes from the CB). However, this increases the indebtedness of the private sector, and so cannot continue indefinitely.
      – It can have sold foreign currency to the CB in exchange for domestic currency. However, this requires the private sector to have a net foreign surplus, and not all the world can be net exporters (so long as trade with the Moon and Mars remain limited).
      – The Tsy can have spent it (or the CB can have helicopter dropped it, which comes to the same thing).
      – (There is a fourth way to get the money: Counterfeiting. But that’s generally frowned upon.)

      In order to accommodate a nominally growing economy with a balanced current account, without chronically indebting the private sector, the government must deficit spend.

      You want the economy to grow in real terms.

      Real growth may or may not be possible, feasible, or desirable. That depends on the availability of natural resources, the degree to which society’s material needs are already sated and personal and political decisions about the allocation of work and leisure.

      Irrespective of whether you have real growth, however, nominal growth is required for the stability of the financial system, and to prevent creditor rent-seeking.

      The central bank can be reformed so it simply expands the money supply directly with the people instead of indirectly affecting lending. Of course the payments system has to clear but its irrelevant.

      No, that’s highly relevant. Your method of expanding the money supply also expands the private sector’s net financial assets, which has zero-order influences on the cash flows of the private sector. Whereas if the CB restricts itself to manipulating interest rates and providing rediscount facilities for interbank clearing, then the CB affects only higher-order effects on cash flows.

      Of course but the supply of money affects its flow.

      No, the causality goes from cash flows to money stock, not the other way around. Unless you constrict the money stock sufficiently to destroy cash flows due to clearing failure. But then you’re Doing It Wrong.

      People would have veto power because the gov would need to raise money from taxes or borrowing.

      People also have veto power if the government can fund itself out of seigniorage. It’s called “elections.” Go look it up, it’s a rather important concept.

      – Jake

  23. #95 by dannyb2b on August 20, 2013 - 2:02 pm

    “Where did the private sector get this money?

    Ultimately, it can have gotten the money from three places:
    – It can have borrowed the money from a private bank, which in turn borrows it from the central bank (you can daisy-chain a few private banks together and call them an “interbank market,” but in the final analysis all liquidity comes from the CB). However, this increases the indebtedness of the private sector, and so cannot continue indefinitely.
    – It can have sold foreign currency to the CB in exchange for domestic currency. However, this requires the private sector to have a net foreign surplus, and not all the world can be net exporters (so long as trade with the Moon and Mars remain limited).
    – The Tsy can have spent it (or the CB can have helicopter dropped it, which comes to the same thing).
    – (There is a fourth way to get the money: Counterfeiting. But that’s generally frowned upon.)”

    Under the current system thats how the private sector gets money. The system needs to improved so that if the money supply needs to expand it is injected directly into individual accounts so that the central bank can focus on the money supply and monetary matters while the other arms focus on the real economy. Money and the real economy are two separate things.

    “In order to accommodate a nominally growing economy with a balanced current account, without chronically indebting the private sector, the government must deficit spend.”

    Under the current system yes. But the system could be changed so that money is expanded when needed to underpin the economy without needing the gov to spend. If we need government to expand on its projects then it should spend. Gov Spending for the sake of monetary outcomes will misallocate real resources.

    “Real growth may or may not be possible, feasible, or desirable. That depends on the availability of natural resources, the degree to which society’s material needs are already sated and personal and political decisions about the allocation of work and leisure.

    Irrespective of whether you have real growth, however, nominal growth is required for the stability of the financial system, and to prevent creditor rent-seeking.”

    Under the present system you need may nominal growth to keep it ticking but only because it is poorly structured.

    ” The central bank can be reformed so it simply expands the money supply directly with the people instead of indirectly affecting lending. Of course the payments system has to clear but its irrelevant.

    No, that’s highly relevant. Your method of expanding the money supply also expands the private sector’s net financial assets, which has zero-order influences on the cash flows of the private sector. Whereas if the CB restricts itself to manipulating interest rates and providing rediscount facilities for interbank clearing, then the CB affects only higher-order effects on cash flows.”

    Where would the payments system be troubled in expanding under my idea?

    “Of course but the supply of money affects its flow.

    No, the causality goes from cash flows to money stock, not the other way around. Unless you constrict the money stock sufficiently to destroy cash flows due to clearing failure. But then you’re Doing It Wrong.”

    How does the flow of money affect the quantity of money?

    • #96 by JakeS on August 20, 2013 - 4:23 pm

      Money and the real economy are two separate things.

      And that assumption, right there, is what’s wrong with everything you wrote.

      Under the current system yes. But the system could be changed so that money is expanded when needed to underpin the economy without needing the gov to spend.

      A universal lump-sum “monetary base expansion” helicopter drop every year is a government expenditure. You can dress it up in all sorts of obfuscatory rhetoric about monetary base adjustment. But the economic consequence is that of an expenditure.

      It’s not that it’s necessarily a bad idea, so long as it really is equally distributed across the population (if it’s distributed in proportion to existing account balances, it is effectively a massive interest rate hike, which would be, eh, Bad). But there is no reason whatever to suppose that it will always be better than any of a variety of other things the government could spend its seigniorage on.

      If we need government to expand on its projects then it should spend. Gov Spending for the sake of monetary outcomes will misallocate real resources.

      You can’t separate real and monetary outcomes. And “misallocation” does not exist sui generis, only relative to some other outcome (and no, you don’t get to compare it to some fictional global optimum – only plausible causal stories need apply).

      Under the present system you need may nominal growth to keep it ticking but only because it is poorly structured.

      No, that’s a fundamental property of contract economies: Intertemporal contracts require growing cashflows in the unit of account, or they become brittle from inability to dissipate random fluctuations.

      Where would the payments system be troubled in expanding under my idea?

      If you want to place an upper limit on the monetary base, you will need to deny rediscount facilities to banks once you reach that upper limit.

      And then the clearing system breaks, because the clearing system requires availability of rediscount facilities for its smooth functioning.

      How does the flow of money affect the quantity of money?

      Cash flows determine the demand for money, both for transactions and for prudential reserves against possible margin calls. And the central bank has no discretion to refuse supplying all the money that is demanded, unless it wants to break the clearing system.

      – Jake

  24. #97 by dannyb2b on August 21, 2013 - 2:16 am

    “A universal lump-sum “monetary base expansion” helicopter drop every year is a government expenditure. You can dress it up in all sorts of obfuscatory rhetoric about monetary base adjustment. But the economic consequence is that of an expenditure.”

    It can be structured so the arm of gov (CB) is independant and it doesnt have discretion as to how money is employed into circulation. All it can do is increase the accounts of people.

    “It’s not that it’s necessarily a bad idea, so long as it really is equally distributed across the population (if it’s distributed in proportion to existing account balances, it is effectively a massive interest rate hike, which would be, eh, Bad). But there is no reason whatever to suppose that it will always be better than any of a variety of other things the government could spend its seigniorage on.”

    There is no guarantee of course. But that applies to anything. The cb can focus on monetary issues the rest of gov on real economic so there is greater focus and accountability. The economic gov will have less on its plate and also wont be able to abuse the power of monetary creation. People will directly participate with cb making them more educated and instill more confidence in system.

    “You can’t separate real and monetary outcomes. And “misallocation” does not exist sui generis, only relative to some other outcome (and no, you don’t get to compare it to some fictional global optimum – only plausible causal stories need apply).”

    The monetary system and real economy affect each other and are obviously interelated but they individually need to be addressed. Sort of like a pilot and the aircraft mechanic both focus on their job individually and both depend on each other. For example say the economy may have adequate investment in infrastructure and all other gov areas but the money supply is inadequate to underpin the system. You don’t want the gov to build a bridge that isn’t needed just because it will supply the economy with new funds. You simply use the cb to bring new money into circulation without undergoing unnecesary investment.

    “Where would the payments system be troubled in expanding under my idea?

    If you want to place an upper limit on the monetary base, you will need to deny rediscount facilities to banks once you reach that upper limit.

    And then the clearing system breaks, because the clearing system requires availability of rediscount facilities for its smooth functioning.”

    What rediscount facilities are you refering to specifically?

    • #98 by JakeS on August 21, 2013 - 8:54 am

      It can be structured so the arm of gov (CB) is independant and it doesnt have discretion as to how money is employed into circulation. All it can do is increase the accounts of people.

      What is it with this fetish for removing government discretion?

      It’s a bad idea. Government needs a certain amount of discretionary policy space to function.

      No sane executive would attempt to hard-code the behavior of the bureaucracy of a major corporation to the extent that the divisions have no discretionary policy space. Yet you have people (often the same people who profess belief that private bureaucracies must have full discretion to do or not do business however they want with whomever they want) who claim to believe that public bureaucracies don’t need anywhere near the same level of discretionary policy space granted to any corporate division.

      The monetary system and real economy affect each other and are obviously interelated but they individually need to be addressed. Sort of like a pilot and the aircraft mechanic both focus on their job individually and both depend on each other.

      In the real world the separation between monetary and real is not nearly so clean. A better analogy would be grid utilities and power plants… and the previous couple of decades’ experiments with electrical grid unbundling have revealed it conclusively to be a jobs programme for the City of London.

      For example say the economy may have adequate investment in infrastructure and all other gov areas but the money supply is inadequate to underpin the system.

      Please get back to me with a real-world example of that.

      What rediscount facilities are you refering to specifically?

      When a bank issues a loan (which, remember, the bank can always do, subject to the existence of a creditworthy borrower able and willing to pay the policy rate plus the bank’s costs, profits and overhead), then it generates a regulatory requirement for liquidity. This liquidity must be provided, or you will lose control of the interest rate.

      – Jake

      • #99 by dannyb2b on August 22, 2013 - 4:36 am

        “What is it with this fetish for removing government discretion?

        It’s a bad idea. Government needs a certain amount of discretionary policy space to function.

        No sane executive would attempt to hard-code the behavior of the bureaucracy of a major corporation to the extent that the divisions have no discretionary policy space. Yet you have people (often the same people who profess belief that private bureaucracies must have full discretion to do or not do business however they want with whomever they want) who claim to believe that public bureaucracies don’t need anywhere near the same level of discretionary policy space granted to any corporate division.”

        The government excluding the CB has discretion to tax and borrow. But also providing it with the ability to create money is too much.

        “In the real world the separation between monetary and real is not nearly so clean. A better analogy would be grid utilities and power plants… and the previous couple of decades’ experiments with electrical grid unbundling have revealed it conclusively to be a jobs programme for the City of London.”

        Monetary is targeting the efficient functioning of the monetary system to underpin the economy. Managing the money supply, inflation etc… Real economy is affecting qualitative measures such as education, infrastructure, employment etc…

        ” For example say the economy may have adequate investment in infrastructure and all other gov areas but the money supply is inadequate to underpin the system.

        Please get back to me with a real-world example of that.”

        The government can overextend itself if it has too responsibility and power. The more things it performs and the larger it gets the less efficient it performs. Sorta like a TBTF bank or any entity that is too large.

        “When a bank issues a loan (which, remember, the bank can always do, subject to the existence of a creditworthy borrower able and willing to pay the policy rate plus the bank’s costs, profits and overhead), then it generates a regulatory requirement for liquidity. This liquidity must be provided, or you will lose control of the interest rate.”

        Under the current poorly structured system you need a central bank to provide funds to the banking system when they have a higher demand for fed funds. But the current system is not effective and needs to be changed so that the central bank doesn’t even deal with banks for monetary policy.

      • #100 by JakeS on August 22, 2013 - 7:33 am

        The government excluding the CB has discretion to tax and borrow. But also providing it with the ability to create money is too much.

        Why?

        Monetary is targeting the efficient functioning of the monetary system to underpin the economy. Managing the money supply, inflation etc… Real economy is affecting qualitative measures such as education, infrastructure, employment etc…

        This is the Monetarist creed. It was attempted. It failed. Miserably. So miserably that it took less than five years to disappear entirely from all practical policy.

        I can haz reality-based policies, plz? Kthxbai.

        The government can overextend itself if it has too responsibility and power.

        That is not in dispute. It’s also not relevant to the discussion, because if you allow the tsy to borrow, then you are allowing it to print money – you merely give the private money markets the ability to tax the tsy’s money printing. (If the CB is doing its job, tsy issue is cash-equivalent.)

        I see no reason to subsidize the private money markets like that.

        The more things it performs and the larger it gets the less efficient it performs.

        That is a much stronger statement than the preceding one, and one you need to prove. With data.

        Under the current poorly structured system you need a central bank to provide funds to the banking system when they have a higher demand for fed funds. But the current system is not effective and needs to be changed so that the central bank doesn’t even deal with banks for monetary policy.

        Since private banks create the majority of the money in circulation, that would require a revolutionary restructuring of the entire payment system.

        To convince me of the desirability of revolution, you need better arguments than “efficiency.”

        – Jake