Money and Finance

[Random Guy]

Here is a Modern Monetary Theory (MMT) founder's response to the Fed paper release, for folks interested in how political monetary economy fights affect gov policy over the long term:

 

https://bilbo.economicoutlook.net/blog/?p=49871

 

 

 

 

 

[Random Guy]

(Just FYI, and apologies for spamming this thread).

 

The Fed has released a paper last week (linked above), which asserts that mainstream economics theories of inflation are incorrect, and that the competing heterodox theories of inflation are correct. The Fed just shot Milton Freidman's Monetarism in the face with a shotgun. 

 

 

[Lord Ratner]

On 5/30/2022 at 6:09 AM, Random Guy said:

ICYMI: The Federal Reserve has released a paper taking a heterodox econ position which refutes the argument made by Monetarists (Freidman) about inflation. Inflation is not always and everywhere a monetary phenomenon.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note that the source of this argument is classical Marxism, which is one of the foundations of heterodox econ (power & class based analysis). 

https://www.federalreserve.gov/econres/feds/files/2022028pap.pdf

 

How shocking, an organization that uses monetary policy as its sole tool to meddle with the economy releases research that absolves them from the obvious and measurable effects of their meddling.

 

I look forward to NAMBLA's soon-to-be-released study that disproves the connection between pedophiles and childhood trauma in victims.

[HeloDude]

On 5/20/2022 at 1:27 PM, nsplayr said:

At the rates Uncle Sam gets, I'm fine with borrowing, in fact I wish we would borrow more for things that have a tremendously positive return on investment and less on things that are just a straight-up cost.

Basically: borrow to invest, don't borrow as a shortcut to spending above your means.

Yeah, definitely allows us to spend money that has a “tremendously positive return on investment”…

“U.S. Spent $384,000 to Study Peruvian Brothels”

https://www.realclearpolicy.com/articles/2022/06/02/us_spent_384000_to_study_peruvian_brothels_834482.html?fbclid=IwAR04gSHh7uGawa-weNa4SfZs6T15OoVCYa1OT_3gndNje21WmBRiAD68Vx4

 

[Random Guy]

As the Fed raises rates and begins to reduce the size of its balance sheet (sell assets it purchased, also referred to as 'Quantitative Tightening'), the total value of its assets will be less than its liabilities. In other words, the Federal Reserve will be insolvent. To offset this imbalance, it will begin to record a 'deferred asset', which will reflect the total value of the losses it records over time. Essentially, the Fed is recording its losses as an asset. 

Another way to think about this is the instruments on the Fed ledger themselves. The Fed purchased many US Treasuries during the COVID crisis, which pay a low rate of interest (~0%). The Fed itself must pay a rate on interest on its liabilities held by banks (Interest on reserves ~2%). As the Fed raises the rate it pays on reserve deposits, the income from its US Treasuries becomes less than the amount of new Reserve Deposits it creates for banks that hold existing reserve deposits. 

 

 

https://www.federalreserve.gov/econres/notes/feds-notes/an-analysis-of-the-interest-rate-risk-of-the-federal-reserves-balance-sheet-part-2-20220715.htm

 

 

 

 

Edited July 20, 2022 by Random Guy

[Lord Ratner]

6 hours ago, Random Guy said:

As the Fed raises rates and begins to reduce the size of its balance sheet (sell assets it purchased, also referred to as 'Quantitative Tightening'), the total value of its assets will be less than its liabilities. In other words, the Federal Reserve will be insolvent. To offset this imbalance, it will begin to record a 'deferred asset', which will reflect the total value of the losses it records over time. Essentially, the Fed is recording its losses as an asset. 

Another way to think about this is the instruments on the Fed ledger themselves. The Fed purchased many US Treasuries during the COVID crisis, which pay a low rate of interest (~0%). The Fed itself must pay a rate on interest on its liabilities held by banks (Interest on reserves ~2%). As the Fed raises the rate it pays on reserve deposits, the income from its US Treasuries becomes less than the amount of new Reserve Deposits it creates for banks that hold existing reserve deposits. 

 

 

https://www.federalreserve.gov/econres/notes/feds-notes/an-analysis-of-the-interest-rate-risk-of-the-federal-reserves-balance-sheet-part-2-20220715.htm

 

 

 

 

You can't play a game where the referee is allowed to change the rules at will.

 

This will end poorly

[Random Guy]

18 hours ago, Lord Ratner said:

You can't play a game where the referee is allowed to change the rules at will.

 

This will end poorly

What do you think will happen?

[Lord Ratner]

7 hours ago, Random Guy said:

What do you think will happen?

It'll be riots either way, but how we exit is a big question mark.

 

We now get to choose between runaway inflation or the collapse of the credit markets. The only eventual emergence from this mess involves the complete destruction of the modern financial system. Keynesian economics and MMT are dead. But it has to be unwound over time, rather than allowed to implode. Our entire system only functions with the fed "printing money" through two incredibly stupid mechanisms:

- Bond purchases to artificially suppress interest rates so the government can maintain insane deficit levels. This in turn suppresses the private rates and encourages unproductive, irrational (wasteful) investing. Reference pretty much every SPAC from 2020/2021, and the housing market.

- Forcing reserves down the throats of the banks such that the Fed has to offer a *higher* rate for overnight deposits than the fed funds target. So we force banks to take these reserves to "stimulate" the economy, then we pay them to do fuck-all with them. 

 

If your system *requires* a government entity with the unconstrained ability to spend money that does not exist, your system is broken. And everyone in the industry plays along with the bullshit excuse of "that's just how banking works" or "the modern world needs these instruments to keep the transactions flowing." It's all horseshit. We've been riding the high of a slowly and artificially decreasing interest rate since Volker blew everything up in the 80s. That allowed for ever-increasing borrowing, which only stimulated growth by taking (stealing) it from the future.

 

Sounds great, except once you hit 0%, the party ends. And here we are. 

 

Now we have to reconcile the fact that 50 years after the wide scale adoption of fiat currency, the experiment failed. We've run out of countries with cheap labor to exploit and the boomers didn't have enough kids to sustain the growth rates they wanted. But they made billions in what effectively became a Ponzi scheme.

 

It'll start with a recession, soon. Then once the credit markets crack, the Fed will step in and go back to the only thing they know: printing. That'll be the unofficial signal to the world that high inflation is baked in for the next 5-10 years. But now the loss of earnings means no raises. There's a lot less distance between the Sri Lankan riots and American riots than we think. With a savings rate of 4%, there's no slack to handle inflation like we had in the 70s. And the collapse of globalism thanks to China and Russia is only going to pour plutonium onto a uranium fire.

 

At the end we'll end up back on the gold standard, or something similar. It'll be a generation or two before the world trusts fiat currency again. But they always go back to it, because rulers always have bigger dreams than they have wallets, and voters are easily bought.

 

Lots of people have seen this coming, but they had no idea just how much the government could spend to prop it all up. Turns out inflation was the party-crasher we were waiting for.

[Milton]

9 minutes ago, Lord Ratner said:

At the end we'll end up back on the gold standard, or something similar. It'll be a generation or two before the world trusts fiat currency again. But they always go back to it, because rulers always have bigger dreams than they have wallets, and voters are easily bought.

We either need to go back to a gold standard, or have people who are disciplined, ethical, and transparent managing the currency and peg inflation to GDP growth (e.g. 2% per year). Since the latter is nearly impossible due to inevitable human corruption and a fickle, disinterested citizenry, the former is probably the best solution. 

 

Edited July 21, 2022 by Milton

[nsplayr]

2 hours ago, Lord Ratner said:

It'll be riots either way, but how we exit is a big question mark.

We now get to choose between runaway inflation or the collapse of the credit markets. The only eventual emergence from this mess involves the complete destruction of the modern financial system.

 

2 hours ago, Milton said:

We either need to go back to a gold standard, or have people who are disciplined, ethical, and transparent managing the currency and peg inflation to GDP growth (e.g. 2% per year). Since the latter is nearly impossible due to inevitable human corruption and a fickle, disinterested citizenry, the former is probably the best solution.

Bollocks to both. Doomerism and/or predictions of massive, rapid, chaos-driven systematic change can be soothing but they rarely come true.

The U.S. is a strong country and we have survived much worse and emerged stronger, and despite our massive collective stupidity, human beings as a species have managed to conquer the planet and in large part thrive for thousands of years.

I will bet each of you a bottle of Johnnie Walker Blue (or your prefered substitute) that the US economy and global financial situation will be more or less like it is now in 6-9 years.

To be clear, the specific manchester here is that if either of the two following things happen in the timeframe offered (NLT 6-9 years from today), I will send you a nice bottle of your choice (JWB or equivalent):

1. "...the complete destruction of the modern financial system."
   • My interpretation of that statement is no central banks, no world bank, no IMF, no USMCA, no EU, massive and withering tariffs employed by most nations rather than free trade, etc., unless you had something specific in mind here
2. The U.S. returning to a gold standard

What I see is a modern financial system that factors in recessions and shocks and that through it all will continue making everyone a lot of money fairly unabated. Powerful central banks will continue to exist and will innovate toward CBDCs before deciding suddenly that what you're allowed to do as a nation is dependent on the amount of shiny rocks you have in your basement. There will be political strife and unrest and we may even see that here at home a bit more than in the past 50 years, but there will be no massive overthrow of the western-led global capitalist political or economic systems.

If neither of the above happens and y'all accept the manchester, I have some nice bottles in mind that y'all can send me. I accept the judgement of the peanut gallery if there is a disputed outcome. Deal?

I'll even be generous and give you 9 years...no guarantees I'm hanging around here after I retire 🇺🇸

Check back in July 2031 for the thrilling results haha! 😎

[Lord Ratner]

1 hour ago, nsplayr said:

Bollocks to both. Doomerism and/or predictions of massive, rapid, chaos-driven systematic change can be soothing but they rarely come true.

It's already happening. Is Belgium developed enough to count? Because the farmer revolt isn't a minor dispute. Keep inflation above 6% and the natives are going to get mighty restless, especially if unemployment starts rising, which it *always* does during a recession.

 

Also, how rare are you talking? It's been 100 years since the US had a major disruption. That's actually a long time, historically. We're due.

 

1 hour ago, nsplayr said:

The U.S. is a strong country and we have survived much worse

We haven't, actually. Nothing is more dangerous to a society than demographics, and we are going the way of Europe as far as birth rates go. And immigration isn't a solution. Low skilled labor won't prop up an advanced economy, and poaching skilled labor from the rest of the world just outsources the problem for a while. Social Security and Medicare are excellent gauges of our country's ability to leverage a smaller population of more productive workers to pay for everyone else. It isn't going well.

 

The only way out of debt without pain is growth, and our growth has been abysmal *with* unprecedented monetary and fiscal stimulus for well over a decade. What's it going to look like without the debt fairy?

 

1 hour ago, nsplayr said:

human beings as a species have managed to conquer the planet and in large part thrive for thousands of years.

Agreed, but no one is arguing the extinction of the species. 

 

1 hour ago, nsplayr said:

My interpretation of that statement is no central banks, no world bank, no IMF, no USMCA, no EU, massive and withering tariffs employed by most nations rather than free trade, etc., unless you had something specific in mind here

This is a bit too vague. 

I would consider the system unchanged if:

 

- The dominant 5 currencies are all still fiat

- Central banks are still engaging in Quantitative Easing *and* inflation is managed (<3%).

- The Eurozone currency block maintains the same membership. In particular, Greece, Italy, Portugal, and Spain remain while the Euro maintains relative parity with the dollar. 

- Tariffs, or a schism between the west and China, basically some sort of end to the free trade arrangements between the alleged superpowers. Taiwan must still be independent. 

- Social Security and Medicare largely remain true to their current incarnation. Same for the social safety nets of the European nations

- And this will be the interesting one. 9 years you say? Then our debt will have to be *above* ~$50 trillion, since deficits are a feature, not a bug in this Keynesian world. The extreme austerity required to prevent this would be, I think, a sign the system failed.

Changes to any of the above will be accompanied by massive social disruption. 

2 hours ago, nsplayr said:

What I see is a modern financial system that factors in recessions and shocks and that through it all will continue making everyone a lot of money fairly unabated.

We disagree here. I see a system that magnifies bubbles to increasingly dangerous levels. And the growing income inequality, a direct result of the Fed's policy, clearly indicate that "everyone" is not getting richer. Inflation is going to kill the argument that "income inequality doesn't matter since everyone is still better off," an argument I've made for years, erroneously. Inflation will bring the ultra rich back to being rich and the "enriched poor" will be poor again.

 

2 hours ago, nsplayr said:

what you're allowed to do as a nation is dependent on the amount of shiny rocks you have in your basement.

It could be something like crypto, but I doubt it. Whatever it is, it will tie a currency to a fixed asset. It'll be the only way to restore trust in a reserve currency.

 

2 hours ago, nsplayr said:

Deal?

Surely. Believe me, I hope I'm wrong. But there were a lot of people holding your position in the mid 30's. They ignored the signs, as I think we are now. The pandemic just accelerated the timeline a couple decades.

[nsplayr]

That’s a lot of specifics man and a lot of ways you could “win” the bet while the world remains largely as it does today, which isn’t the intent of “the complete destruction of the modern financial system” if you ask me.

If you truly believe the entire modern financial system is going to collapse, are you stopping 401k contributions and buying cans of tuna, gold and ammo? That’s my main point…the world is gonna keep working and even through wars and recessions are inevitable, I am confident that the U.S. in particular and mankind more broadly will continue our long march toward prosperity. I am a long term optimist and doomers are just baffling to me…it’s no way to live your life IMHO. 

So no deal on the bottle if you’re gonna have so many potentially uncorrelated events/conditions, sorry.

Deal’s still live for Milton on the gold standard making a come back.

[Lord Ratner]

1 hour ago, nsplayr said:

are you stopping 401k contributions and buying cans of tuna, gold and ammo

No, but I am planning to transition from investing in the market (401k) primarily to investing in real estate and hard assets. Not entirely, because I could be wrong. But I don't trust the government to stop meddling with the market. The ECB just announced they will buy private debt if needed to stabilize their policy across the EU... "Purchases of private sector securities could be considered, if appropriate."

 

That's insane. The entire premise of investing is using information and intellect to judge the likelihood of one business succeeding or failing in the marketplace. How can you make that assessment when the government can apply huge asymmetric force simply because they decided a company is useful in supporting their policy plans? I'm sure the selection process for these securities will be transparent and consistent...

 

And yes, definitely buying gold. Not because I have use for it, but because that's where people and governments go when they get scared. 

 

2 hours ago, nsplayr said:

the world is gonna keep working

Uh, yeah. What's that got to do with anything? The world kept working after Bear Stearns and Lehman vanished. But if you were financially involved with them, your world might have been rocked. The financial crisis gave way to Occupy Wall Street on the left and the Tea Party on the right. But there was no inflation, so the furor died down. Will it this time around? Dunno. 

 

The 20%+ inflation in some European countries isn't going to just "keep working" either. 

2 hours ago, nsplayr said:

So no deal on the bottle if you’re gonna have so many potentially uncorrelated events/conditions, sorry.

That's fine. You've established that pretty much anything that doesn't result in humanities extinction will count as success for you. You asked for specifics, and I've pointed out pillars of the modern financial system that I consider unsustainable, with pretty specific metrics. 

 

You seen to have confused the collapse of *this* financial system with there being "no financial system," which is clearly absurd. 

[Milton]

11 hours ago, nsplayr said:

Deal’s still live for Milton on the gold standard making a come back.

Oh I'm not saying it's going to happen, in fact its highly unlikely any government would revert to a gold standard. It would be a safe and stable alternative to fiat currency, but its probably too big of a swing for financial markets, governments, and banks who rely on free and easy money.

[Swizzle]

New monetary theory is based off of most trusted financial, therefore governmental, system...who wins the game of trust is anyone's guess...but my money would be the most open, accessible, and largest financial system/economy. Options, and not just typical trading options, are the true king. Flexibility and portability can't be underestimated.

[Random Guy]

Lord Ratner's position treats money and government as separate from one another, he conceives of money strictly in commodity-money terms. Meanwhile, Nsplayr is arguing from an endogenous-money framework, where banks create money. This is the source of their disagreement. 

 

If we find ourselves analyzing the economy where we treat money like a commodity, its very similar to flying a jet with instruments that aren't connected, so the instrument readings don't relate to outside conditions. This is because the financial system behaves differently when money is a commodity (like gold) compared to bank ledger entries (pure credit). 

 

@Lord Ratner@nsplayr I'm asserting several premises below, I would be grateful for your participation, if you would either agree or disagree. I'm asserting:

 

1) Banks create new bank deposits when they issue a loan. 

2) Banks create loans without first taking on deposits (pre-existing deposits are not 'collected and loaned out').

3) Bank deposits exist solely on the respective bank's ledger.   

4) Central Bank reserve deposits exist solely on the Central Bank ledger. 

5) Central Bank reserve deposits are used by banks for settling transactions between banks.

6) Bank deposits cannot be moved from one bank ledger to another bank ledger, or transferred between banks. 

 

If you disagree, can you elaborate how your opinion differs?

 

[ViperMan]

On 7/21/2022 at 3:11 PM, nsplayr said:

Bollocks to both. Doomerism and/or predictions of massive, rapid, chaos-driven systematic change can be soothing but they rarely come true.

The U.S. is a strong country and we have survived much worse and emerged stronger, and despite our massive collective stupidity, human beings as a species have managed to conquer the planet and in large part thrive for thousands of years.

Rapid, chaos-driven system-level changes always happen. The 20th century alone is replete with them. Rare? Maybe the chances of any given individual living through one is rare, but that is a matter of timing, location, and perspective.

The biggest one happening right now is the dissolution of our monetary system. In ordinary times, this would be a huge deal. Right now, we're setting ourselves up (and being set up) for catastrophe.

 

[nsplayr]

2 hours ago, Random Guy said:

If you disagree, can you elaborate how your opinion differs?

My opinion is you’re either really quirky or you’re an AI chatbot. Either way, I don’t really wanna engage here. GL!

[SurelySerious]

you’re an AI chatbot

[Random Guy]

@ViperMan Not being cagey at all. It's a fair question to you, 'What part is MMT?' Specifically--I want to know your level of knowledge, what makes something 'MMT', how do you know? 

In this thread I've posted an MMT source, a response by Bill Mitchel, which is just a current event for folks interested in current economic news. The rest is entirely Post-Keynesian and official gov sources, such as the Fed and the Bank of England (central banks themselves). I've specifically avoided MMT sources because of the political antagonism between US Republicans and MMT'ers in the US progressive party, given most folks here aren't US progressives and were taught Neoclassical Econ. I don't need MMT sources to describe the financial system, and I'm not advocating policy (excluding our earlier discussion of "Favorite Big Booty Latinas").

If you agree tracing a drop of fuel through a jet is a valid exercise to understand reality, you cannot be against tracing a unit of currency through the financial system to understand reality--assuming you accept that money is at the core of our economic system <-- I presume you accept that premise. 

 

Edit: But yes, its fitting that a billionaire wants you to believe that money doesn't make him powerful.  Money has 'no power in and of itself'. Musk is powerless.  😄

 

Edited July 25, 2022 by Random Guy

[Random Guy]

38 minutes ago, nsplayr said:

My opinion is you’re either really quirky or you’re an AI chatbot. Either way, I don’t really wanna engage here. GL!

No worries dude, I can go it alone. @Lord Ratner?

[SurelySerious]

No worries dude, I can go it alone. [mention=14374]Lord Ratner[/mention]?

How noble to have to troll all by yourself.

[Random Guy]

6 minutes ago, SurelySerious said:

How noble to have to troll all by yourself.

I don't want to troll anyone. I'm sure you're a good dude in real life, as we all are. We're just talking economics and politics, we may be opinionated at times, and disagree, and there's nothing wrong with that.  

[Boomer6]

2 hours ago, Random Guy said:

I don't want to troll anyone.

Just what a bot would say..

[nsplayr]