The Washington Post this morning writes about the central issue, buried in all the blah blah about stimulus this and stimulus that: what the heck is going to happen in light of the trillion (trillions?) in new money created by the Fed to create the illusion that the bust isn’t happening? How will the U.S. avoid a Weimar scenario?
The article just presumes that the money will be sucked out the same way it was pumped in: “Determining the best time to withdraw that money is a classic quandary for central bankers.”
A classic quandary? When was the last time a central bank set out to shrink the money supply? A similar question: when was the last time a gang of thieves put property into people’s houses rather than took it out? Or: when was the last time a fox protected hens from harm?
Anyway, the article quotes Helicopter Ben: “We’re working very hard, and it is important for us to provide a lot of support right now. The economy needs support… We understand the necessity of winding this down at the proper moment so we will not have an inflation problem at the other side.”
His “other side” comment tempts one to gastrointestinal metaphors that I’ll avoid.
{ 32 comments }
Title typo, with -> will
Regards, Don
Jeffrey:
You don’t seem to recognize any difference between money that is issued in exchange for bonds and money that is simply dropped from a helicopter. When the fed issues money in exchange for bonds, the fed automatically acquires the means to buy that money back. Whether the fed will buy the money back remains to be seen, but in the helicopter case, the fed wouldn’t even have the bonds with which to buy the money back.
When money is dropped from a helicopter, there is less backing per unit of money, and price inflation results. When money is issued in exchange for equal-valued assets, then the fed’s assets rise in step with its liabilities, and there is no price inflation.
Even assuming that the Fed is driven by good intentions, how will it know when the “proper moment” has arrived to withdraw the massive amount of new reserves that it has created over the past several months? More fundamentally, the “proper moment” reference reflects the fallacious Keynesian mindset that dominates the Fed’s and the mainstream economics profession’s thinking.
This is the same organization that refuses to accept responsibility for the crisis it has caused, and has largely acted to bail out and prop up the politically powerful financial institutions that it was created to subsidize and protect from the consequences of their actions.
Mike,
“When money is dropped from a helicopter, there is less backing per unit of money, and price inflation results. When money is issued in exchange for equal-valued assets, then the fed’s assets rise in step with its liabilities, and there is no price inflation.”
You’ve fallen for an equivalent of the Trust Fund fallacy. When the Fed buys back a bond, it is NOT acquiring an asset, it is retiring one, at least in effect. If you pay off a personal IOU, are you acquiring an asset? Of course not. There will be little significant difference between the Fed reselling an old bond again and the gov’t issuing new debt.
Regards, Don
@Dennis – Don’t you know? The “proper moment” is determined by the Keynesian Witch Doctor, who, with his infinite wisdom and clarity of mind, “feels” the time is right by querying the animal spirits, (and checking that the bank owners are good with it, and checking for political fallout), throws his bones, rattles his PhD laurels, and drums up a good line of B.S. for the media.
This is all heady scientific stuff that mere mortals such as you and me can never really fathom. So don’t worry your self over it. The Big Boys have everything under control. If they can’t do it right, No one can! Go Fed! Woo Hoo!
(Support HR833, HR1207, Repeal 18 USC 486 and 489)
Come on everybody! Sing along OK?….
I told the witch doctor I was in love with you
I told the witch doctor I was in love with you
And then the witch doctor, he told me what to do
He said that ….
(Chorus:)
Ooo eee, ooo ah ah ting tang
Walla walla, bing bang
Ooo eee, ooo ah ah ting tang
Walla walla, bing bang…
Ooo eee, ooo ah ah ting tang
Walla walla, bing bang
Ooo eee, ooo ah ah ting tang
Walla walla, bing bang
I told the witch doctor you didn’t love me true
I told the witch doctor you didn’t love me nice
And then the witch doctor, he gave me this advice
He said to …
(Repeat Chorus)
Now, you’ve been keeping love from me
Just like you were a miser
And I’ll admit I wasn’t very smart
So I went out and found myself
A guy that’s so much wiser
And he taught me the way to win your heart
My friend the witch doctor, he taught me what to say
My friend the witch doctor, he taught me what to do
I know that you’ll be mine when I say this to you
Oh, Baby ….
(Repeat Chorus)
Keynesian Economics in “One Lesson”
“Ooo eee, ooo ah ah ting tang
Walla walla, bing bang”
Don:
When governments first issued paper money, they committed to buy the money back by collecting it as taxes. Thus, the money was backed by taxes receivable. Nowadays, the central bank issues money that is backed by bonds, which are in turn backed by taxes receivable. The bonds just add a step to the process.
But compare a helicopter drop to a bond purchase: With a $100 bond purchase, the combined balance sheet of the government and the central bank shows +$100 of cash on the liability side, but it is offset by -$100 (on the liability side) of bonds that used to be owned by the public, but are now owned by the fed. With a helicopter drop, the only entry is +$100 on the liability side.
Of course the whole question could be side-stepped by assuming that the Fed buys British government bonds. Then there would be no confusion about the US government buying its own IOU, and the difference between a bond purchase and a helicopter drop would be clearer.
The Fed may want to sell but I don’t see anyone in the world who will have the funds to purchase them.
The US Treasury has 2.5T of debt due in 2009 which needs to roll even if some of the current owners don’t want to roll it. In addition there is another 2.5T of new money to raise.
So a total of 5T or about 100B/week.
The Fed doesn’t have a choice but to issue lots of money to allow this debt to be sold. I think it’s likely that all the talk about what the Fed might do is just cover so that the debt can be sold.
The problem is that the assets that the Fed is buying are not of equal value. It has bloated its ballance sheet with worthless, I’m sorry, I meant “toxic” or “illiquid” junk that it will not be able to unload except at a large loss, meaning the money will stay out in the economy, i.e. it is inflationary. Worse, the Fed has begun to ramp up outright monetization of Federal government debt. It will be further bloating the ballance sheet with treasuries. But yields are rising and prices are falling as everyone sees the treasury storm on the horizon. The Fed will cap the yield and support the price by becoming the Buyer of Last Resort for US treasury debt. Then the rush will be on to sell treasuries to the Fed at the supported price before they are worthless. The Fed will not be able to unload it’s treasuries, either. All of the money for this will stay in circulation. Interest rates will go through the roof, including for the government. There is no way they will be able to tax US citizens enough to service the interest on the debt at 20+% or whatever it will have to be to get people to loan to the people that just screwed their creditors out of trillions in purchasing power via the printing press. Of course, however, the size of the government won’t shrink. The Fed will be directly monetizing to fund Federal government outlays, and the states as well, since the Feds cannot allow them to fail, not to mention all of the fascist banks and corporations they will have taken over by then. It will be explosively inflationary. Then come the price and wage controls, the capital controls, the emmigration controls, the shortages, the rationing, the accelerated nationalizations and other power grabs, etc.
Mike:
First you say there’s a difference between a helicopter drop and an open market purchase, then you say early money was backed by taxes receivable and bonds are just a middleman for the same process, and then you go back to the helicopter. Is a helicopter drop not backed by taxes receivable? If the state felt like lowering the money supply, couldn’t it just tax back the helicopter infusion and use the cash to fuel Obama’s fireside chats? Make up your mind.
Mike:
First you say there’s a difference between a helicopter drop and an open market purchase, then you say early money was backed by taxes receivable and bonds are just a middleman for the same process, and then you go back to the helicopter. Is a helicopter drop not backed by taxes receivable? If the state felt like lowering the money supply, couldn’t it just tax back the helicopter infusion and use the cash to fuel Obama’s fireside chats? Make up your mind.
As soon as my investments break even, I cash them out and buy gold, I have no trust in government whatsoever.
Dennis,
If the government “withdraws” the massive money, we will be in another bust again. If it hikes the interest rates, it will be another bust again.
Stagflation !
My understanding is that the Fed purchases debt on the balance sheets (bonds on the asset side) of the members banks. So the asset side of the Fed is increased +$100 billion (example) of bonds. Since they “bought” the bonds, they issue Fed Reserve Notes which are applied to the liability side of the ledger. +$100 billion of federal reserve notes, which shows up as cash to the bank (+$100 billion asset).
The Fed doesn’t purchase the bonds directly from the government. Member banks purchase the Treasuries and then the Fed purchases the bonds from the banks. When the Fed purchases these bonds, they are “monetizing” the debt. The government will spend the money and service the debt through tax income (or by issuing more bonds; rinse and repeat). The member banks use their cash reserves to loan out (eventually by the inverse of the reserve requirement). The Treasury bonds may show up as a liability on the government’s ledger, but they’ve received cash for them and simply have to service the debt at the issued interest rate.
The Fed could “sell back” the bonds in return of their Fed Reserve Notes. But then the banks wouldn’t have enough cash to cover their reserve requirement. If the Fed has been purchasing non-performing securitized loans, selling back those bonds becomes a serious problem because those bonds don’t command the money they were originally “purchased” for by the Fed. In the end, it doesn’t matter because the Fed has no intent of ever selling off these assets and redeeming their outstanding notes.
Is this incorrect?
Toxic assets?
Thinking about “real” values, when the Fed holds treasury securities
all it can collect for them are it’s own notes back.
Since the US is running a deficit and if the Fed is the major (or
only?) funding source available to purchase treasury securities, then
what kind of value is there in purchasing a debt which can only be paid
back if you roll them?
If the Fed wanted Fed notes it could just print the money for itself
anyway…
Now the “bad” debt the Fed is collecting is also payable in Fed paper
so that doesn’t seem as much of an improvement, however some of it
may be forclosed/defaulted and have real assets as security. So the
“bad assets” might contain some claims which are not dollars.
Now which were the “bad assets”?
Michael Owen:
“The problem is that the assets that the Fed is buying are not of equal value.”
Correct. When the Fed pays $100 for bonds worth only $60, there is less backing per dollar, and the dollar loses value. One exception to this is that if the Fed has high net worth to begin with, the $40 loss will burn up the fed’s net worth without causing price inflation. Of course, once the Fed has burned through its net worth, the $40 loss will cause price inflation directly.
Alex:
“Is a helicopter drop not backed by taxes receivable? If the state felt like lowering the money supply, couldn’t it just tax back the helicopter infusion and use the cash to fuel Obama’s fireside chats?”
ANSWER: The helicopter drop does not create any new ‘taxes receivable’, so assets do not rise in step with liabilities, and price inflation results. A bond purchase is different. The bonds were already in public hands–already a liability of the treasury. As the fed issues $100, the fed gets another $100 of bonds, while the US treasury’s assets and liabilities are unchanged.
Justin: Correct, except that the fed is not limited to buying bonds from banks. When the fed sells back its bonds, bank reserves normally fall, just as they rose when the fed bought bonds in the first place. This would not normally be problematic for the banks–especially now, when bank reserves are so high.
The difference between a helicopter drop and bond purchases is that a helicopter drop benefits the people who catch the money, while bond purchases benefit bond speculators.
Mike Sproul,
Your understanding of lending money and liquidating the economy is correct. Liquidity can leave the economy if said items are paid off in full. Just as 10 dollars is lent into existence it can be paid off out of existence.
This however is not the case when FRB is applied as the 10 dollars that are lent into existence, a fraction of that 10 dollars eventually gets deposited somewhere at a bank where it is then considered part of its reserve. Effectively creating 1-2 NEW dollars into existence. So even if the original 10 is paid off, a new 1-2 dollars have already been created at various banks throughout the system. Multiply this out by several trillion and you can clearly see the effects. Ultimately it becomes no different then helecoptors dropping new money onto the masses. Zimbabwe just went through this, did you miss it? They did it with a Centeral “Reserve” bank. The same exact way our Fed is doing it.
If the fed were to not create money at all we would still have this problem with regards to FRB but at least the process would be drastically slower. The Fed is basically speeding up this process. With a FRB system you create an irreversible pyramid of growth in your money supply.
Also, you seem to forget the number one reason why Hyper-inflation kicks off. You assume that the central bank has the political and economic power to reverse it’s standpoint and begin removing liquidity from the market. Unfortunately once a central bank feeds it’s economy heavily with cheap credit it becomes highly addicting for the economy as a whole. The economy then grows into an un-realistic normally un-obtainable bubble, the bubble must be expanded and grow from more and more cheap credit if it is to survive. Sure, we can start paying off these depts but to do that in mass would mean massive devastation to our economy. Basically taking away the crack rock from a drugy in the middle of his high. Either way though the bubble will reach a high in which it’s foundation cannot support itself and it will come crashing down. This is why credit is addicting, to avoid that crash.
The EXACT same concept happens to people who are addicted to pay-day loans.
Stifling the supply of credit once the economy has grown addicted to it creates the recession/depressionary state. Then the question becomes political. Which party will allow this to happen while they are in power. It is in their best interest to perpetuate this as long as possible, in turn making the problem bigger and bigger and the ultimate fall much worse.
So in other words, there are several factors you are either forgetting to mention or are not aware of.
I’ve been wondering how the Fed is going to “sterilize” the amount of money they’ve pumped in. They can’t really sell treasuries or any other government debt instruments because they’ve inflated and borrowed too much already. Nobody wants to buy. They can’t sell the toxic mortgage debt even at a massive discount either, so they have to have another solution.
I imagine they might try a complete nationalization of major banks or sell every last bit of gold they have. With a nationalization, the could directly control the money supply and could better determine what to take out and how. By dumping gold, they could suck up the money from the people wanting safe assets and probably depress the price of gold significantly at the same time. Of course, I think both of these would fail, but I think they sound stupid and crazy enough that they might try it.
Who knows what steps they will take? I doubt the Fed and Treasury even know themselves. Maybe someone can help me understand what their real options are. Because at the moment, I don’t see how they can take the money out.
filc:
When private banks issue money, they do not affect the assets or liabilities of the Fed, so they do not affect the value of fed-issued dollars. The same thing is true in the option market: When someone issues call options on GE stock, those options do not affect the assets or liabilities of GE. A checking account dollar is really a call option on a fed dollar, so it’s the same process at work.
Also: There is no ‘inverted pyramid’ created by fractional reserves. A bank that has issued 100 checking account dollars might hold only $10 cash in reserves, but it also holds $90 in other assets. To imagine that the $100 is supported only by the $10 in cash is ignoring the other $90 of assets.
It remains to be seen whether the Fed can successfully buy back the trillion ‘extra’ dollars it has issued, but the fact that most of those dollars are currently piled up in extremely high levels of bank reserves means that quite of few of those fed dollars can be bought back without affecting the quantity of checking account dollars issued by private banks.
Questions For Mike Sproul:
What are the book keeping entries used to record the $90 of assets?
What productive activity is associated with the $90 of assets and when does it occur?
Should all those have deposits arrive at the bank immediately after the loan was made, assuming the loan was taken in cash, will all the depositor be able to withdraw all of their cash?
Mike Sproul
You missed my point I believe. When participating banks fall below a required reserve or feel they are heading towards the road of insolvency they attempt to cover themselves by taking up loans from other large banks. If they cannot take a loan out from other participating banks who do they approach the fed, AKA Lendor of last resort. In times of political pressure the Fed makes loans to encourage banks to continue lending. So the point becomes, the Fed loans to banks, so that they can then make their own loans. So to make a statement that participating banks have nothing to do with the Fed is rather silly. The whole argued existence of the Federal Reserve is to supposedly protect the large banks.
Unless everything I have read is wrong you have a mis-understanding of how FRB works. As new money is created in the way of credit. Deposited new credit becomes new reserves for other banks. This rotates around multiple banks and spirals upwards. A small percentage of each sum of new credit that is created ends up being permanent liquidity in the market. No amount of paying off depts will remove it.
This is the primary argument for a 100% FRB system, have you not heard this? I do admit it is somewhat complex and I won’t waste my or your time explaining it here. I can only recommend doing some of your own reading. Wikipedia is a great place to start, not considering the massive amount of material on this site alone.
Fred:
Start a T-account with 10 paper dollars as assets and 10 checking account dollars as liabilities. A gambler then asks for a $90 loan, offering some vacant land as collateral. 90 new checking account dollars show up as a liability, while the gambler’s $90 IOU shows up as the bank’s asset. In this case no productive activity took place, though you could replace the gambler with a farmer and work through various productive scenarios. It turns out, however, that ‘productivity’ is irrelevant. Only the value of the IOU matters to the banker or anyone else.
If all 100 checking account dollars suddenly demanded redemption, the banker could sell the IOU for $90, then buy back all 100 checking account dollars. Or the banker could sell the IOU for 90 of his own checking account dollars, and then use the $10 cash to buy back the last 10 checking account dollars.
Fred:
“Unless everything I have read is wrong…”
You have no idea.
Banks do not normally lend green paper dollars. They normally lend checking account dollars, which they created. Only when reserves are at bare minimum levels do they constrain bank lending. And right now bank reserves are sky high.
I said that when private banks lend checking account dollars there is no effect on the fed’s assets or liabilities. This has nothing to do with your statement that participating banks have nothing to do with the fed.
As for the loan expansion process, the textbooks neglect to explain that as new dollars are created, banks get equal-valued assets at the same time.
I’ve already done a bit of reading. I’d guess that you haven’t read about the real bills doctrine. You should.
Mike,
A lot of what you just posted, while may be true, does not make very much logical sense.
To start so far as I am concerned there is no difference between a “green dollar” or “checking dollar” as you call it. There may be some accounting technical differences in the way they are handled but that becomes symantecs on a broad scale. A dollar is a dollar and is spendable. It makes little difference to me. That said I more clearly understand what you are saying that checking account dollars has no effect on the fed’s asset liabilities. On an economic level though it makes little difference what type of “dollar” it is. More dollars means more inflation. Regardless of the accounting rules behind it.
My questions for you now are these.
A)
How often does this really happen on a large scale?
If and When the bank sell’s the IOU who buys it?
If the IOU is technically representing land which was suppose to be calateral but later on finds out that the land is un-sellable are those IOU still considered of value?
I assume so since the bank can’t take back an IOU. When you say IOU it sounds like your just replacing “Newly Created Currency” with IOU.
B) Please see these articles from Reuters
http://www.reuters.com/article/businessNews/idUSN3163777720080731?feedType=RSS&feedName=businessNews
http://www.reuters.com/article/ousiv/idUSTRE48O9B920080925
http://www.reuters.com/article/newsOne/idUSTRE49F97920081017
Who is the fed lending to in these articles? Why are they lending to them? What is that newly lent money used for? How can the fed account for 380+ billion dollars in NEW assets each day?
C) This entire website, houses hundrds of articles which make statements that in this process of FRB new money is created. It is also to my knowledge the underlying argument for the proponents of a 100% FRB system. What am I, and they, missing which you seem to contradict? Or is it that I do not understand it completly? Enlighten me or to save you time share some articles or resources online I can read up on.
D)
This does not make sense. You previously made the argument that no new money is created as everything is supposedly representing an asset of some form. When new dollars are created is new steel magically fabricated into existence? What equal-valued assets magically appears? How are these “equal” assets obtained? Are they purchased? By what financial means are they purchased?
I assume you are going to give me some information about Bonds, but that just leads to more questions then answers. Assets in the form of Bonds are direct inflation. It is completely new money fabricated. It’s only backing in asset is the dept itself. No physical asset of value represents the newly created currency as I understand it.
E)How acurate or in-acurate is this series of presentations? Videos 1-5
Sorry for the lengthy post but I have many reasons to question your short statements.
filc:
A green paper dollar was issued by the fed, is the fed’s liability, and is sometimes bought back by the fed when the fed deems that inflation is too high. A checking account dollar was issued by a private bank, is the private bank’s liability, and will be bought back by that private bank. By analogy, GE issues genuine shares of stock in GE. Merrill Lynch issues various kinds of financial securities (IOU’s) that promise to deliver 1 share of GE to their owners. The genuine shares are GE’s liability, while the IOU’s are Merrill Lynch’s liability. As ML issues new IOU’s, there is no change in the assets or liabilities of GE, and no change in GE’s stock price.
A) I borrow $100,000 from my bank. The bank gets my $100,000 IOU. I pay back the IOU, and $100,000 of my checking account dollars are retired in the process. This happens all the time. If the IOU is backed by my land, and my land loses value, then my IOU loses value, and the value of the bank’s checking account dollars can fall as a result.
B) Sorry, no time for outside articles. If you can ask a direct question I’ll try to give an answer.
C) The standard textbook presentation is missing an understanding of the real bills doctrine, which you can read about by clicking my name above.
D) When a bank lends $100, it gets at least $100 of collateral in exchange. Thus every loan results in bank assets moving in step with bank liabilities. The $100 of collateral was not created for the loan. Those were pre-existing assets that used to be owned by the borrower, but are now owned (liened, actually) by the bank.
E) Again, no time for outside articles. I assume that those u-tube videos, as usual, neglect the real bills doctrine.
Thanks Michael,
Unfortunately the articles I cited for you pose large problems with the information your advocating. When you get time I suggestion you take a moment and read them.
I actually wrote a long post in argument to your previous posts. Unfortunately I have wasted my time and deleted that post as I did some brief research on the RBD. It has left me confused though and I am concerned that we are disputing each other but for the wrong reasons.
Is it your beleif that we currently follow the RBD?
Also it seems to me that you have done some research or know a little about the internal mechanics of banking. I do not think you quiet understand what the Federal Reserves role is however. We issue paper money when the Treasury, As I understand it, deems it necessary. This may be done through the fed but it is not their primary role. On a daily basis loans are made to banks. These are not “paper” loans. It seems to me you may understand a niche of the industry but may have missed entirely what the Federal Reserves does.
I admit that I am not as read on the matter as I should be. I have only read “The Creature from Jekyll Island” by G Edward Griffin. Still I have read alot more about the theory of central banking and issuing credit. I have also read quiet a bit of news on the fed, please see the articles I linked above.
At any rate, if you have enough time to respond to this post then you probably have the time to read the articles I cited for you. They pose large problems with your notion of the RBD.
Additionally, I highly suggest doing a search on the mises website regarding the “Real Bills Doctrine”. Including the heavy criticism the doctrine has historically received this site alone has a few articles discussing it. It seems being a proponent of RBD you would be better off there.
Keeping things generalized however and using a little common sense. If we pretend for a moment that we use one type of currency. Lets call it say, the “Dollar”. If more dollars are created then you have a higher volume of “Dollars” reflecting the same amount of goods and services. This then lowers the value of each individual unit of the “Dollar”. This makes prices appear to rise as adjustment occurs. This is formally called “Inflation”. RBD seems to make the argument that the amount of new “Dollars” that are created will get curbed based on daily business activity. Since this is not the current system we follow it makes little difference to me what the argument for RBD does as it is not what my point was aiming at.
In short. Whether or not the RBD is a good idea or not is really a mute point. Since it is not something we currently follow then you may be mis-understanding me. My previous posts were not arguing for or against RBD. They were arguing against our current system of banking and issueing credit. We do not currently follow RBD. So it seems to be a frivilous argument.
Now whether or not you wish to argue that RBD should be re-introduced is a whole other topic entirely and is not related to the points I am trying to made.
You stated yourself that the assets that these loans are backed by are bonds or IOUs. Since an IOU is not a physical tangible object there is no limit to the amount of IOU’s which can be issued. There is also the issue of scarcity not being applied to a non tangible object.
The system of RBD which I have read in short makes a claim that there ends up being a limit on the amount of bonds that are created based on daily business operations. Modern times though have proven that we do not follow the rules of RBD. Credit is issued on demand when it is deemed politically necessary. The rules and argued effects of RBD currently do not apply.
RBD maintains
However this has been perverted from being issued to represent assets to representing bonds which are not assets at all, just IOUs. I think theoretically RBD may work, if your paper money is reflecting an object, like gold. However since our paper dollars reflect 1 unit of credit/dept this is not the case. Each dollar is worth how many dollars are in existence. The more dollars that are in existence the less it is worth. This is simple supply and demand. In periods of credit expansion more loans are created then are repaid. Not too mention how many of those loans are forclosed and the collateral used is not worth what it was suppose to be.
Also, if RBD supposedly blocked inflation. How come the value of a dollar is a fraction of a penny compared to what it was in the past? It’s clear there is a role the Fed is playing that you may be missing.
Perhaps we are hitting each other at different angles?
filc:
You won’t find the real bills doctrine discussed in any economics textbook. Economists have regarded it as discredited since 1810, when David Ricardo and Charles Bosanquet argued the point. Ricardo did a better job of arguing, so economists have been stuck with the quantity theory ever since. Unfortunately, laissez faire economists from Adam Smith to Mises to Friedman have accepted the quantity theory. This led them to advocate some bad monetary policies, discrediting not only themselves, but laissez faire economics in general. This created an opening for even worse theories, such as Keynesianism.
Anyway, the real bills doctrine just says that the value of money is equal to the value of the assets backing it. It does not block inflation. It says that if a bank issues more money, and does not increase backing in step, then there will be inflation. The same thing is true of any financial security, so the real bills view says that money has value for the same reason as any other financial security. The quantity theory, which is advocated by Austrians, says that money, alone among all financial instruments, has value because the supply of it is limited.
It’s odd to me that you would lump Mises understanding with money and credit with Keynesianism. Most readers of this site would view them as opponents or opposites.
It seems to me in a sense you hi-jacked the thread by attempting to promote RBD. You attack Jeffery by not taking the RBD theory into considering when writing his articles and auto assume that the doctrine should be considered by all economists as sound fact. It seems to me that the discussion at whether or not RBD factors are still credible is a whole other discussion entirely and is not directly related to the points of this article. It seems awfully presumptuous to make your case in this fashion.
Additionally you accuse of Mises and libertarians as having poor monetary policy yet their form of monetary policy has never truly been implemented so you would not be able to conjur any information to support such a notion.
In this method your argument could hijack every single monetary policy article on this site, which is probably 1-3 articles published here. It seems to me the topic should be separate so as not to confuse posters like myself.
I’m not trying to discredit the argument you are proposing. I am mearly stating, at least, if you want to argue the legitimacy of RBD over the Quantity Theory of money please make it more obvious. Otherwise you simply give the appearance as trolling. Especially to people like me who do not know where you are coming from.
Since there are not many articles written here that discuss RBD I recommend bringing your arguments to the forums. Otherwise it’s become clutter and I fear we have both participated in derailing any constructive discussion relating to the original article.
filc:
Mises was, of course, opposed to Keynesianism. It was his mistaken acceptance of the quantity theory that led him to advocate bad monetary policies. This, in turn, led people to doubt all of his ideas, and opened the way for Keynesian fallacies.
The article confused money issued by helicopter drop with money issued through open-market operations. That is an error that is directly relevant to the real bills doctrine.
A little thought experiment might help clear up the whole bonds-as-backing, further backed by taxes thing.
Suppose that instead of the current sort of paper money, bond and tax system, cash was in bullion and taxes were collected on behalf of the government by municipalities, and the government just issued (sold) zero coupon bonds that each specified that they could be used to pay $A of tax in municipality B for year C or later. When the time came around, there would be a shortfall of actual cash remitted to the government, corresponding to the bonds that came back to be scrapped instead. However, each year the government would be issuing some and getting cash directly, only less according to the discount factor. This is actually pretty close to the mediaeval tally stick system that was reformed by Henry VII in England – and which did cause price inflation, because merchants could use tally sticks for purchases instead of bullion cash.
Now suppose that B weren’t specified, and taxes were raised directly by the government. It would still work out the same. Since the ordinary sort of bond is equivalent to a bundle of zero coupon bonds, that would work out the same too. You still get price inflation.
Add back in paper money instead of bullion cash, and remember it can be used to pay taxes. Basically you’ve moved one step back towards the zero coupon system, with ordinary bonds paying off in zero coupon ones dated for the year they were paid out. You might as well have stayed with the original thought experiment (dated zero coupon bonds for paying tax at future dates, all handed over up front instead of the regular bonds) and not bothered with the regular bonds.
So the bonds used now don’t provide any backing, as “real bills” or otherwise, beyond what the tax system gives them. They only look like assets within the books of one entity – the central bank that issues paper money against them – but their only function is as a shock absorber to spread things over time. If the books of the whole government system were consolidated, there would only be the tax backing left and the discounting of future taxes would be clearer. It’s the need for that discounting that works through to price inflation.
If interest rates were zero, i.e. no discount factor, zero coupon bonds could be bought back continually with later dated ones so they never reached the tax system. Even with positive interest rates, you still can – only, you need more on each cycle, so it eventually gets big enough to reach the tax system. It turns out there is a mathematical limit to how much you can push everything back into the future: the discounted value of all taxes out to eternity. So, any attempt to push harder won’t raise the real value, it will just make the paper money worth correspondingly less. And there isn’t any bullion cash left in the system, so that’s all there is.
PM Lawrence:
Let’s say the present value of all possible future tax collections is 100 oz of silver. If that government had no claims against it, its net worth would be 100 oz. Now the government issues a bond worth 20 oz., in exchange for 20 oz of silver. The bond gets entered on the right side of a T-account, and the silver on the left. Nothing remarkable so far. Next the government issues 30 currency units, each worth 1 oz, and uses them to buy a desk. The desk becomes an asset, and the currency a liability. Still nothing remarkable. Next the government issues 15 currency units and uses them to buy 15 oz worth of that 20 oz bond. The government’s T-account now looks like this:
ASSETS………………………….LIABILITIES
100 oz taxes receivable……….100 oz. net worth
+20 oz silver……………………..+20 oz. bond
+30 oz desk………………………+30 oz. currency
………………………………………+15 oz currency
………………………………………-15 oz bonds
There is no price inflation here, since assets are sufficient to buy back liabilities. The currency is clearly backed by the taxes receivable, which also help to back the bonds. Inflation only happens if assets fall relative to liabilities. For example, tax collections might fail, counterfeit money might be issued, or the desk might be lost. You are correct in saying that the bonds are backed by taxes (plus the desk and the 20 oz silver), but if new assets are acquired as new money is issued, price inflation can be avoided.
-Mike
I think I have laid out my arguments plainly enough and have little more to say. You have not read half of the information I have provided for you. You state you have no time to read articles yet somehow have time to continue your attempted failed argument. At what point is someone considerd a zelout if they cannot research their oppositions provided data?
At any rate there is no amount of silver that could account for 20 trillion new dollars created in a single year. Additionally you made the comment below.
Again you are drenched in a real heightened state of presumptiousness.
He didn’t confuse that at all. Since I think it’s safe to assume Jeffery is at least aware of RBD and has already considerd its notions it’s safe then also to assume that the article’s premise is based on the fact that RBD rules do not apply when backed assets are bonds of money, not hard assets. He rejects your ideas. Why should he consider your theory when he rejects it so obviously?
This is the equivilient of an atheist and religious person arguing. With the Religious person’s rebuttal as “You forgot that god did….”. The athiest looking confused, “But I don’t beleive in god, so how can that be your argument?”
The argument you have presented here today is exactly the same as those popular circular arguments such as whether or not evolution is real, or should we have abortion. This is the case because both sides of the party provides evidence which is completely subjective and cannot present objectional data, or the zelout on one side refuses to consider the objectional data provided. Most of those arguments are often created for rhetorical purposes. I believe your attempt was to do the same and to stir the pot a bit.
To bring up your quote again.
I think the only one who is confused here is you. Since there is no such thing as money issued through “open-market” rules. Money is issued arbitrarily and on a need-be basis as deamed necessary by political agenda’s. There is no free-market mechanism which manages the introduction of new credit.
We do not currently have a system which follows RBD. There is no 20 trillion dollars worth of gold and silver hiding in the basement of the fed. There is no way to create 20 trillion dollars in hard assets in 1 year short of considering the new paper money itself the hard asset. Or if you beleive in god have gold rain from the sky. That would then ofcoarse diminish the value of gold so how then can one magically create 20 trillion dollars of new wealth? They cannot.
Even if silver was represented as the backing of the dollar. If we could make silver out of thin air we’d have the same problem. As creating 20 trillion dollars in new silver would devalue that silver.
The only one who is confused here is you. Suprisingly the concepts we have provided for you are chidlishly easy. I cannot fathom why it is so hard to grasp. I’m not discredit your idea of an RBD. There may or may not be legitimacy too your argued system. However we do not currently follow in an RBD regime, not even in the least bit. We are 100% fiat. Any one who attempts to argue otherwise, like you, only brightly shows his or her inadequacy’s and understanding in the current banking system.
Finally, I have read other posts by you on various other similar topics where you continue to make the claim that we do not consider the rules of RBD. It’s absolutely ludicras! It’s like telling us we forgot to consider the rules of the Gold Standard. But we are not on the Gold Standard! Nor are we anywhere remotely close to a RBD followed Regime.
I think my arguments have been stated plainly enough. You can continue to try and correct me but the differences between us remains.
*You believe that somehow RBD is in effect and we should consider inflation based on those rules
*I reject the notion that the Real Bills Doctrine is being applied and make the argument that Paper backed bonds are not hard assets. They 100% inflationary and purely fiat. In effect creating new dept/credit is the same as dropping money off a helicopter
Those are our differences nothing else. Now that I have provided them in plain text anyone can take 5 minutes to do some research on RBD and come to their own conclusion.
Your argument may be different if all our currency was backed by a real asset. Our differences lie in the fact that I, nor Jeffery(I assume), nor most on this website consider “Paper Money” to be hard assets.
Your attempt at obscuring the argument to try and legitimize yourself is poor. It has failed on all previous attempts on this site. Instead of obscurely trying to promote your RBD standpoint why not more appropriately try to educate people your point of view?
Untill then I stand by my notion that the rules of RBD are not applicable in a Dept based monetary system.
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