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Response to jeff47 (Reply #19)

Tue May 8, 2012, 06:49 PM

20. Your post is totally off base.

Last edited Tue May 8, 2012, 09:47 PM - Edit history (1)

Goldbug? Paulite? That's pretty funny.

Have you really never heard of Minsky? Galbraith? Chartalism? Post-Keynesianism? Lerner? Modern Monetary Theory? L. Randall Wray? Bill Mitchell? This is not right-wing fantasy land. This is real word, 21st century economics.

If you want to talk economics with me, you need to get beyond this level of absolute ignorance. Take some time to try and actually comprehend the things that I've told you, rather than simply lashing out with outlandish accusations that I'm a goldbug or a Ron Paul supporter.

By the way, you're the one who threw out the "Weimar Republic" analogy, which is a classic goldbug, Paulite canard.

Literally? It was printed by the Fed or coined by the Mint. Then banks received money by withdrawing it from their account at the Fed, or using one of the various ways the Fed loans money to banks. One of the more "famous" ones is the "Overnight Funds window".


You're still missing quite a bit. Just stop and think about it for a minute. If the only way to get dollars into the economy was through banks borrowing from the Fed ("using one of the various ways the Fed loans money to banks", what would our money supply look like? Explain how this would work, operationally. How could enough money exist in the economy for our government to even collect taxes or issue bonds? What do you think would happen if bank lending declined, the way it has since 2008? Use some basic logic.

In reality our sovereign government is the sole issuer of our currency, which it creates by spending. The government spends by crediting bank accounts. Banks can only create credit, they cannot create net new financial assets. The government purchases goods and services (or makes transfer payments such as social security and welfare) by crediting the bank accounts of the recipients. This also leads to a credit (not a debit, as you suggest) to the bank’s reserve account at the Central Bank. Honestly... this is how it works. I'm not making this stuff up, Jeff. Go study!

So, in your universe, the debt ceiling crisis last year didn't happen?


The debt crisis was a political crisis, not a fiscal crisis. There is no actual risk of our nation defaulting on its debts, except by choice. Obama could have easily avoided this political trap, but he lacked the courage.

Interest rates on sovereign debt is set on the open market. The treasury says "we'd like to sell $10M in bonds." and purchasers bid on what interest rate will be on those bonds. The central bank can not control that rate, because they have to find somebody willing to buy.


It's interesting to me that you are so convinced you are right, and yet you keep getting it so wrong.

I'll let Edward Harrison explain to to you since he is more erudite than I am in this subject:

  • The Federal Reserve is a monopolist. The US government, as monopoly issuer of its own currency, has given the Fed monopoly power in the market for base money. The Fed exercises this monopoly power by targeting the overnight rate for money, the fed funds rate.
  • Any monopolist can only control either price or quantity, not both. And the Fed wants to target rates i.e. price. It can’t do that unless it supplies banks with the reserves they desire to make loans at that rate. That means that they must be committed to supplying as many reserves as banks want/need in accordance with the lending that they do subject to their capital constraints. Failure to supply the reserves means failure to hit the Fed funds rate target.
  • Markets know, therefore, that the Fed, as a monopolist, will always be able to hit its Fed funds target now and in the future. Therefore, future overnight rates reflect only future Fed Funds target rates as set by the Federal Reserve. This means that future expected overnight rates reflect only market-determined median expectations of future Fed Funds target rates as set by the Federal Reserve (plus a risk premium).
  • Long-term interest rates are a series of future short-term rates. All I need to do to mathematically represent any long-term interest rate is smash together a series of short-term interest-rates over the long-term period. For example, I wrote in May 2010 about the five-year bond: “Bootstrapping the yield curve is simply the math used to translate these three-month zero-coupon prices into a series of expected future 3-month interest rates. Doing this would mean we have a full term structure of interest rates every three-months out to five years.”


Now you know how the Central Bank manages (short, and subsequently long) rates. The Fed just showed you though quantitative easing that they are ready and willing to be the buyer of last resort. No bond trader would be successful if he or she didn't understand these concepts.

Perhaps you could explain exactly how the central bank could force people to loan them money at below-market rates? I'm sure the central banks of Ireland, Spain and Greece would love to know. (And it should be noted their issues are caused by not being able to inflate their currency)


I think I've explained this to you a few times now. Ireland, Spain and Greece are Euro member nations. They are not sovereign in their debts, which are denominated in Euro. Their sovereign currencies are tied to the Euro at a fixed exchange rate. What's more, the ECB has never functioned as a true central bank the way our Federal Reserve does. We are not Greece. We are not Spain. We have a sovereign flexible rate currency and a strong central bank.

Increasing the money supply is always inflationary. It may or may not change headline inflation based on other pressures.


Right, it's always inflationary. Except when it isn't.

And again, you are utterly missing the political bonus of Democrats proposing very popular tax increases and Republicans proposing very unpopular spending cuts.


Tax hikes may or may not be popular, but it would be economically risky and, as I've mentioned, a waste of progressives' time and energy. The time to raise taxes and thereby remove money from the private sector is not in the midst of a balance sheet recession.

It took me many years of reading every economics book, article, blog and lecture I could get my hands on to get to the point where I am extremely comfortable with this subject. I shared a lot of this journey with fellow DUers. I am certain that if you made the effort to learn, rather than simply espousing these neoclassical and neoliberal cliches, you would be better able to devise cogent arguments. You do seem pretty interested in the subject.

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Stinky The Clown May 2012 OP
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