Fed admits: Money is a spreadsheet

[Rajiv]

Fed admits: Money is a spreadsheet

NPR has a fluff piece from "All Thing Considered" [sic] on how two Flunkies For The Masters Of The Universe saved the world ZOMG!!! which includes this gem, hidden in plain sight:

In the face of the financial crisis, the Federal Reserve decided to buy $1.25 trillion of mortgage-backed bonds as part of its effort to prop up the economy. ....

[Julie Remache] and her team worked in a plain room with four small cubicles, [and] spent six weeks coming up with a plan of attack, and 15 months actually buying mortgage-backed bonds, all of which came with a government guarantee that they’d be paid back even if the borrowers defaulted.

The program’s intent was to keep interest rates low, and slow the decline in housing prices. The team ended up buying more than a fifth of all of the government-backed bonds on the market. ...

In the end, they came very, very close to their target: They told us they were just 61 cents short. (In other words, they bought $1,249,999,999,999.39 worth of mortgage-backed bonds.)

The Fed was able to spend so much money so quickly because it has a unique* power: It can create money out of thin air, whenever it decides to do so. So, [the New York Fed's Richard] Dzina explains, the mortgage team would decide to buy a bond, they’d push a button on the computer — "and voila, money is created."

"Voilà, money is created." Savor that. Not knowing what they said, they said it. Because you just saw the Fed validate one of MMT's (Modern Monetary Theory's) central claims: That, for a government that is sovereign in its own currency, spending is not operationally constrained by revenues.* When Julie Remache pushed the button on her computer, did a red light go on because money was going to run out? Did an alert pop up, saying "This transaction will cause the country to run out of money. Please OK or Cancel"? How about "Insufficient $$$: Abort, Retry, Fail"? Of course not!

In other words, Jamie Galbraith is 100% correct, and according to the Fed; modern money is a spreadsheet:

[M]odern money is a spreadsheet! It works by computer! When government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it shifts funds from a demand deposit (called a reserve account) to savings (called a securities account). And that for practical purposes is all there is. The money government spends doesn't come from anywhere, and it doesn't cost anything to produce. The government therefore cannot run out.

(So much, therefore, for the ideology underlying the Cat Food Commission, which is, in short form, that "We're running out of money ZOMG!" and so the MOTU, in order to continue to live the lifestyle to which they have become accustomed, must -- Must, I tell you! Must! -- strategically default on their obligations to elders under Social Security, and use that money for themselves.)
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[Rajiv]

Re: Fed admits: Money is a spreadsheet

See also - Modern Monetary Theory — A Primer on the Operational Realities of the Monetary System

By Scott Fullwiler, Associate Professor of Economics at Wartburg College
At its core, there are two parts to Modern Monetary Theory (MMT). The first is a description of how the monetary system actually works, mostly focusing upon interactions between the central bank, the treasury, and the financial system, though this part also requires a very thorough understanding of the Minskyan-related literature of many MMT’ers (I note this because so many critics of MMT ignore or not aware of the vast MMT literature on financial instability and reforming the financial system). The second is a set of policy proposals that arise from this description and is largely outside the scope of this particular post but which can be found in any number of MMT publications and blogposts (and, again, including the sizeable MMT literature on reforming the financial system).

Of critical importance to most of MMT’s description of the monetary system is its elaboration of the system’s operational realities, which for MMT’ers generally means three things:

First is the accounting logic of real-world transactions. Any relevant theory simply must be consistent with real-world accounting as a very basic criteria, and furthermore it is just this sort of base level understanding of accounting that is quite often absent from economic theories and how both the public and policymakers discuss and understand economics. In other words, our focus on accounting is anything but trivial in the current environment—it’s like the adage about being able to crawl before you walk, and as such it’s no wonder that the economics profession as a whole continues to trip over itself when it comes to understanding the monetary system.

Every transaction in a real-world economy affects financial statements of those engaged, and if an economic theory or a posited model is not consistent with how real-world financial statements are affected, then the theory is inapplicable. A typical example used by MMT’ers is a framework used in mainstream economics, the so-called loanable funds market. It posits a demand for loanable funds and a supply of loanable funds available for the macroeconomy, and contains classic supply-demand curve assumptions from goods markets, thaT higher prices (in this case interest rates) will elicit more “supply” (as in investors will divert more funds from other uses, such as risky venture investments, and make them available for lending). This model is simply inapplicable to our current monetary system in which empirical studies have demonstrated that banks create loans “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases. Similarly, there are macroeconomic accounting identities, such as the often-cited sector financial balances equation in which the domestic private sector’s net saving of financial assets is by definition equal to the government sector’s deficit and the current account balance (see here, here, and here for further discussion). MMT’ers understand very well that an accurate understanding of accounting is not in itself a theory.

The second part of operational realities is the tactical logic for operations necessary to achieve particular, fundamental ends given a particular monetary regime. Different monetary regimes have different operational realities—the currency issuer has a different operational reality from currency users; a central bank under a gold standard has different operational realities than a central bank under flexible exchange rates. The tactical logic of operations as employed by MMT’ers is (a) general, in the sense that the purpose is to consider a “pure” fiat system under flexible exchange rates, or a state government that is a currency user, and so forth—in a general sense, not specifically referring to any particular nation or state, and (b) particularly concerned with a hierarchy of authority and thus a hierarchy of “money”.

Regarding (a), for example, it is recognized that under a monetary regime other than gold standards or currency boards, the central bank is able to expand its balance sheet to enable smooth functioning of the retail and wholesale payments systems. Even in this case, though, the operational logic of interbank markets means that for the central bank to achieve its target rate in the absence of interest on reserves at the target rate, it must offset any changes occurring to its own balance sheet (i.e., an increase in currency that by accounting identity drains bank reserve accounts) that are inconsistent with banks’ desired reserve holdings at the central bank’s target rate. As for (b), it is recognized that different monetary regimes leave institutions occupying different spaces within the hierarchy of money—a currency-issuer government under flexible exchange rates sits at the top of the hierarchy, whereas under a gold standard or a currency union its place would be lower in the hierarchy.

The third aspect of operational realities is what is not possible given the accounting and the tactical logic. A good example here is the traditional money multiplier model that assumes central banks target reserve levels or the monetary base in order to target a monetary aggregate via a money multiplier. But the money multiplier gets both the accounting logic and the tactical logic of the monetary system wrong. For the former, as noted above, loans create deposits and the creation of more bank liabilities does not require that banks hold more reserve balances; banks do use reserve balances to settle payments and meet reserve requirements, but the quantity of reserve balances held for these purposes is mostly unrelated to growth in monetary aggregates. For the latter, absent interest on reserves at the target rate, a central bank would not be able to achieve its target rate if it employed the money multiplier model and tried to directly target reserves (and, by extension, the monetary base, as again according to tactical logic of the monetary system the currency component of the monetary base is set by the public’s portfolio preferences). Instead of the money multiplier, a proper understanding of the operational realities of the monetary system demonstrates that central banks—as monopoly suppliers of reserve balances to the banking system—must set an interest rate target (or, in the case of the Fed during 1979-1982, an operating range for the target rate) but can only directly target the quantity of reserves if the target rate is set equal to the central bank’s remuneration rate on reserves.

While there is over 20 years of MMT literature published in books, refereed journals, and in working papers available all over cyberspace (though most can be found at CFEPS, CofFEE, the Levy Institute, and MoslerEconomics) it’s only recently that we began blogging, and it is clear that many commenters on MMT-related posts are largely unaware that this extensive literature exists and serves as the basis for our blogposts that are by necessity less detailed. Indeed, over the past 10-15 years, I have personally waded through all of the publications from various official sources on the (relevant-to-MMT aspects of the) monetary system’s functioning that I could get my hands on and have found nothing that is inconsistent with how MMT describes it. We have had numerous conversations with individuals responsible for Fed operations, Treasury operations, and relevant parts of the financial system, and cannot recall any significant disagreements there, as well. It is interesting to note that an increasing number of neoclassical economists are publishing research describing the monetary system in a manner consistent with MMT (without appropriate attribution, usually), though these descriptions have yet to make their way into neoclassical models of the macroeconomy.
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[chr5648]

Re: Fed admits: Money is a spreadsheet

MMT may be an abstraction of the current system but, i would like to see what the people who run/are citizens of greece, iceland, russia (1998), mexico 90's, japan, and asian financial crisis of the late 1990's would say about this. The real world is alot different than what MMT infers.

[oddlots]

Re: Fed admits: Money is a spreadsheet

Which real world?

One of my favourite moments of extreme cognitive dissonance is the following: if you are an Argentinian and your government has run up massive deficits the result is a currency collapse, extreme austerity measures, seizing of pension funds, massive unemployment and public assets get sold off wholesale. If you are an American the result is ... the government sends you a stimulus cheque.

My point isn't that this is unjust or to vilify Americans or westerners but to ask, how is it that both of these results can be in our mind without causing extreme cognitive stress? They are mirror opposites of each other.

So when you say the real world is different from MMT I think you need to specify which real world you're talking about. MMT seems to quite accurately describe the world within a world that is made possible by the "exorbitant privilege."

Incidentally the Asian Financial Crisis seems like a funny point of reference, the joke being that the crisis was the result of not having "sufficient" foreign reserves. In the current situation the same countries roughly have huge foreign reserves that are now being devalued. It would appear you can't win in the "real" world.

[chr5648]

Re: Fed admits: Money is a spreadsheet

Which real world?
If you are an American the result is ... the government sends you a stimulus cheque.

Another cognitive dissonance was housing prices would go up forever. Maybe the idea of the government printing is another dissonance. EVENTUALLY, the actions of the government will come to backfire.

Until then enjoy some more hopenosis

[oddlots]

Re: Fed admits: Money is a spreadsheet

Agreed. If you ask the average westerner whether they believe housing should be affordable they will wholeheartedly agree... and then resume the conversation they were having about what their neighbour's house went for. (I live in Canada - we're a little backward, i.e., "developmentally" delayed.)

That is my second favourite moment of cognitive dissonance.

A rentier for every pot.

Easy pickings.

[gnk]

Re: Fed admits: Money is a spreadsheet

Which real world?

One of my favourite moments of extreme cognitive dissonance is the following: if you are an Argentinian and your government has run up massive deficits the result is a currency collapse, extreme austerity measures, seizing of pension funds, massive unemployment and public assets get sold off wholesale. If you are an American the result is ... the government sends you a stimulus cheque.

My point isn't that this is unjust or to vilify Americans or westerners but to ask, how is it that both of these results can be in our mind without causing extreme cognitive stress? They are mirror opposites of each other.

So when you say the real world is different from MMT I think you need to specify which real world you're talking about. MMT seems to quite accurately describe the world within a world that is made possible by the "exorbitant privilege."

Incidentally the Asian Financial Crisis seems like a funny point of reference, the joke being that the crisis was the result of not having "sufficient" foreign reserves. In the current situation the same countries roughly have huge foreign reserves that are now being devalued. It would appear you can't win in the "real" world.

Well said. I fear that people are underestimating the size and extent of the "exorbitant privilege." I was debating a European friend of mine about the the financial crisis recently. His point was that the US has the largest navy in the world - by far - and regardless of the crisis, the US can maintain its position.

I asked him how the US was able to finance such a large Navy and how to maintain such a costly endeavor. My point was that the exorbitant privivlege of having the world's currency financed it - that he financed it - that I, as an American, eat off his plate and he doesn't know it.

Makes me wonder what would happen to the US economy, particularly FIRE, should the dollar lose reserve status. The higher complexity an economy attains, the harder it falls, IMHO.

MMT'ers don't fully appreciate the exorbitant privilege. I think they take it for granted, and so there theory, while true, relies on the consumption of foreign economic output to work. Their theory truly is based on a free ride, whereas the Austrians are the complete opposite in that regard.