Neofiscalism

So the Fed created debt to meet a Federal government obligation, yes? Why would that not be an increase to the money supply?

I don’t know that any of what I’m about to write is true/valid, I’m trying to learn.

The fed wrote an IOU to someone, in exchange for money, to do something the gov’t is obligated to do. The only increase in the money supply would be based on the interest that the fed is going to pay in exchange for the money, correct? The IOU didn’t create the money that was exchanged, the money that needs to be paid back. That money already existed. The money that the IOU creates is the interest required. Retiring the IOU means less interest will be paid, but printing money to retire the IOU seems like it would be increasing the monetary supply, because now the gov’t isn’t paying the IOU (the original money amount, or the interest) with revenues, but creating money out of thin air.

Please ELI5 where I’m wrong/misunderstanding. This is interesting, and I won’t get my feelings hurt if you rip it to shreds and say I’m wrong everywhere.

That may be exactly right according to MMT, I don’t think it’s right according to generally accepted economic theory though. If the Fed creates debt to meet the government obligation of buying lots of expensive warplanes… well money changed hands. Those defense contractors paid workers who bought gifts for their kids for Christmas, etc etc. That money was newly created by the debt created to meet that obligation.

That’s it.

It is the spending, authorized by Congress and then executed by the Fed, that increases the money supply. Conversely, any taxes collected reduce the money supply. The insight here is that federal deficits increase the money supply, but the issuance of bonds does not have any effect. Those are just moving one form of money to another.

And the interest on the issued bills & notes flows through to the calculation of the deficit.

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If I just change “by the debt” to “by the deficit spending” we would be in complete harmony

Haha glad we’re so nearly in alignment, but while it feels a bit pedantic I suppose my issue would be that the deficit spending hasn’t really happened until the funds are created by the debt. Certainly funds are created then spent, not spent then created?

I think the funds are created first. Once authorized, the Fed just taps a keyboard and credits a bank account. For weapons, if Raytheon wins the contract, and it calls for a $50million first payment…then , $50m goes to their account.

The issuance of new bonds is on a schedule. The process is truly arcane, with primary dealers and sealed bids. How much to issue is based on what the market will bear with an eye to keeping the rates " on target", whatever that means.

So I see the spending and the financing as two distinct things.

Hm, yeah I do see your point. But certainly the issuing of the bonds is linked to the crediting of the account otherwise why bother?

FTR: I have never attended a Fed Reserve meeting, I don’t know anyone who has. All my information is at best 3rd hand.

The bond sales are the Feds way of affecting the economy…through interest rate “manipulation”. Need lower rates? Issue fewer bonds, driving up the price and lowering rates. Hopefully, this influences investments in the private sector. It’s awkward, and slow for stimulating the economy. Has a pretty immediate impact on asset prices.

Today, we need more than the Fed can deliver. Stimulating the economy is going to take fiscal stimulus-spending by Congress. Even the Fed chair is pleading for this help.

Oh yeah I’m completely onboard with you there, I think monetary policy is generally better focused on the longer run. Short term shocks and recessions seem far more effectively fought with fiscal policy, were it not for certain key members of the Senate…

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Yes, we just need to service the debt. In 2019, net interest on the federal debt was about 10% of total federal revenue. That’s at an interest rate of 2.2%. What happens if the amount of debt doubles and the interest rate triples?

The standard explanation of the disconnect between money and inflation is that financial institutions are looking to “strengthen the balance sheet”, they aren’t all that anxious to lend.

I don’t know if that is true.

What’s the clear MMT explanation?

Suppose the Treasury said that I no longer have an interest bearing bond, but I now have non-interest bearing currency. I think that would change my behavior, I’d be looking for someplace I could put my money where I get interest.

If a gov’t borrows gold and promises gold in return, the lender does not worry that the actions of the borrower will make the gold less valuable. The gov’t has to worry that it won’t be able to find enough gold to pay off the debt.

OTOH, if a gov’t borrows in it’s own fiat currency, it can always find more fiat currency to pay off the debt. But now the lender takes the risk that the borrower will create the money and hence reduce the value of the nominal currency it will get in return.

Couple of key points here. Let’s be clear about our language because it matters. I see the Fed being credited with things they do not do.

The Federal Reserve Bank has nothing to do with government spending, government debt, or paying for government services. The Federal Reserve is the central bank of our economy. They serve as a manager of the monetary system in the United States. They set Federal mandates for the banking system of the United States and they also serve as the regulating body of that banking system. They have the power to create currency through open market transactions by creating money to buy securities.

The US Treasury is the body in charge of issuing money to pay for the operations of the US Government. They also issue US Treasuries (debt) to finance spending in excess of tax collection. I am in agreement that the US Debt should be viewed as excess money supply created by government spending. The US Treasury has no power whatsoever to create money supply unlike the Fed. They only execute spending authorized by Congress and signed into law by the President.

These may seem pedantic but they are important distinctions in the conversation we are having. The Fed can create money but only to buy securities on the open market and put that on the balance sheet of the Fed. They can remove money only by selling those same securities off of their balance sheet. They do this indpendant of Congress or the President. Congress is the other money creator. They create money by passing legislation authorizing spending and they remove money by passing legislation authorizing taxation.

I appreciate the attempt to put the basics in writing. I want to clarify the language in the second paragraph.

The US Treasury is the body in charge of issuing money
The US Treasury has no power whatsoever to create money supply

The second sentence makes sense to me, but it seems to contradict the first.
I learned OFMT - The US Treasury spends money and collects taxes. When the first exceeds the second, it makes up the difference by issuing Treasury bonds. Treasury bonds are not “money”. The Fed converts some bonds into money by buying the bonds with newly created money.

Sorry it is a bit confusing. They do issue money, but they cannot do it because they want to. Congress must direct them to do it through the legislative process. Basically they act at the discretion of the legislature, whereas the Fed can do whatever they see fit as long as it meets the criteria of their mandate from Congress to manage inflation and employment.

I know it seems pedantic…the Treasury collects taxes and prints the currency…those coins and Federal Reserve notes in your wallet. It also “Creates” the notes and bonds. Those are interesting bearing certificates backed by “the full faith and credit” ( basically the taxes we all pay).

Let’s focus on the US mint. It’s part of the Treasury Dept. that’s why counterfeiting is monitored and investigated by the Feds. So imagine they set the printing presses rolling and churn out $10 million of $100 bills. Bundle them and…what next?

Mostly it gets sent to banks. They take those newly minted dollars and…they have to pay for them. The Treasury doesn’t just go around stuffing stockings, right? So it amounts to an exchange. New bills for old ones. Or maybe New bills and an electronic transfer. But it isn’t just spread out without payment.

So while the US mint does indeed print money, it doesn’t end up creating any “new money” in an aggregate supply sense.

Same goes for those notes and bills. To get one, you have to turn over $s in exchange. The net effect is to replace some existing form of money with another.

That’s why I’d rather not think of the US treasury as adding to the money supply. Congress is the one that approves the spending, and they are the true source of any increases to the money supply.

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The “they” is the Treasury Dept? I go with EG. The Treasury owns and operates the printing presses. But, the stuff they print isn’t “money” until the Fed uses it to buy Treasury Bills/Bonds on the secondary market. Then, it appears it gets shipped to bank vaults who sold the Treasuries and it becomes “money”.

The Fed could own the printing presses and the economic effect would be the same.