How does the fed add liquidity to the economy?

[piezoe]

So typical of todays world.

If you say so, I won't spend any more time.

My sincere apology. Ha ha ha . I was terribly rude, because this Morganist character is such a pain in the butt, he has exhausted my patience. I thought I was responding to Morganist, who is entirely hopeless. You don't need to read all that stuff, but Morganist does because he is trying to pass himself off as an economist.. He knows, it would appear, absolutely nothing but misinformation .

I can highly recommend to you either Wray's books on MMT or Mitchell's as these are acknowledged as the real experts. It's an area on economics that goes back to at least Abba Lerner in the 1940's, was influenced by Minsky and then picked up a head of steam in the late 20th Century.

MMT is by no means limited to only the domestic economy it concerns modern open economies in the global market place.

Again, my sincere apology for being so rude. I was driven mad by this character, "Morganist", but that's no excuse for my acting like an idiot.

 

[morganist]

My sincere apology. Ha ha ha . I was terribly rude, because this Morganist character is such a pain in the butt, he has exhausted my patience. I thought I was responding to Morganist, who is entirely hopeless. You don't need to read all that stuff, but Morganist does because he is trying to pass himself off as an economist.. He knows, it would appear, absolutely nothing but misinformation .

I can highly recommend to you either Wray's books on MMT or Mitchell's as these are acknowledged as the real experts. It's an area on economics that goes back to at least Abba Lerner in the 1940's, was influenced by Minsky and then picked up a head of steam in the late 20th Century.

MMT is by no means limited to only the domestic economy it concerns modern open economies in the global market place.

Again, my sincere apology for being so rude. I was driven mad by this character, "Morganist", but that's no excuse for my acting like an idiot.

MMT was massively expensive to the government. My school of economic thought has found another way of control inflation and economic growth without the cost and other consequences of interest rate alterations. Since pension saving economic control has been used in the United Kingdom from 2010 to 2019, until the Coronavirus hit, the economic targets have been hit closer than any other time I am aware of. The real GDP growth rate for the period had a mean average of 1.91%, the target was 2%. The inflation rate for the period had a mean over of 2.25%, the target was 2%.

An increase in the interest rate of 1% costs the Treasury £15 billion a year in increased government debt interest payments. An increase in inflation of 1% costs the Treasury £5 billion a year in increases government debt interest payments. By increasing the pension saving rate the interest rate was kept at reasonable levels and inflation was also kept within acceptable boundaries. This saved the British government billions every year, that does not include the treasury cost efficiencies the pension saving optimisation process made when pension saving needed to be temporarily reduced to stimulate economic growth and reduce unemployment. My work hits economic targets and makes massive Treasury cost savings.

That is a massive success!

 

[longshort]

Savings are an interesting thing because when it is determined that the people should save more, the government must run a deficit to provide the additional money for increased savings. If you think about this a while you will see that this is correct. It can be understood this way: The government spends money into the economy and removes it via taxation, or temporarily via bond sales. When the government sells bonds, money that was in the private sector is transferred to the central bank and a treasury liability, i.e, the bond sold, replaces the money that was in the private sector. If the government budget is perfectly balanced the government will remove from the economy, via taxation, exactly what it spends into the economy. There will be no net change in the amount of outside money in the economy.

I don't think that's correct. Suppose your monthly income is $6000 and you eat caviar and lobster each day for $200. You spent all money you earned. Now you're redirecting your expenditures: You eat rice and beans for $5 and spend the other $195 on canned food, durable goods, guns, ammo, and silver coins. In real terms, you clearly created savings as evidenced by the stockpile of valuable resources that you can draw from in the future.

You dispute savings were created in the above case on a nominal bookkeeping argument. However, saving as such has nothing to do with nominal money. It's the amount of final consumer goods produced in excess of present consumption (Frank Shostak).

On the other hand, the government increasing its size, be it from taxation or inflation, diverts actual resources from the economy and wastes them on bureaucracy and misallocation, like propping up zombie companies or enabling asset bubbles.

 

[morganist]

I don't think that's correct. Suppose your monthly income is $6000 and you eat caviar and lobster each day for $200. You spent all money you earned. Now you're redirecting your expenditures: You eat rice and beans for $5 and spend the other $195 on canned food, durable goods, guns, ammo, and silver coins. In real terms, you clearly created savings as evidenced by the stockpile of valuable resources that you can draw from in the future.

You dispute savings were created in the above case on a nominal bookkeeping argument. However, saving as such has nothing to do with nominal money. It's the amount of final consumer goods produced in excess of present consumption (Frank Shostak).

On the other hand, the government increasing its size, be it from taxation or inflation, diverts actual resources from the economy and wastes them on bureaucracy and misallocation, like propping up zombie companies or enabling asset bubbles.

Yes MMR seems like a left wing movement when they have already decided that the money made in the free market is assets they own that they can borrow against using the FED as a tool to do it. You would be much better with a pension saving economic control mechanism that makes pension saving higher instead of increasing the interest rate and that optimises the pension saving process instead of reducing the interest rate. Although the risk free rate of borrowing should all ways be low.

 

[piezoe]

I don't think that's correct. Suppose your monthly income is $6000 and you eat caviar and lobster each day for $200. You spent all money you earned. Now you're redirecting your expenditures: You eat rice and beans for $5 and spend the other $195 on canned food, durable goods, guns, ammo, and silver coins. In real terms, you clearly created savings as evidenced by the stockpile of valuable resources that you can draw from in the future.



You dispute savings were created in the above case on a nominal bookkeeping argument. However, saving as such has nothing to do with nominal money. It's the amount of final consumer goods produced in excess of present consumption (Frank Shostak).



On the other hand, the government increasing its size, be it from taxation or inflation, diverts actual resources from the economy and wastes them on bureaucracy and misallocation, like propping up zombie companies or enabling asset bubbles.

This is good thinking, but there is a problem. We are only concerned with what happens in aggregate. As a given, lets assume the government runs an exactly balanced budget, so no new outside money comes into the economy (outside money is the money the government spends into the economy). For every purchase there is a counter party making a profit. When you cut back on your caviar consumption you cut back on someone else's profit. You increased your own savings, but the poor fellow who didn't get to sell you caviar had to reduce his. The aggregate effect is stable savings.* Unless the source of money, i.e., the government, spends additional money into the economy their is no additional money to increase aggregate savings. What this reminds us of is the necessity of considering what happens on both sides of a transaction if we are interested in aggregate effects.

Of course I simplified a bit, because I left mention of investment and consideration of a foreign sector out. In a country with net exports, i.e., a positive trade balance, it is possible for private sector savings to increase without running a deficit. A more complete open economy relationship would be: aggregate savings flow = deficit + investment + net exports. We can see that in a nation with a trade surplus, it is possible for aggregate savings flow to increase without increasing the deficit.

The interesting thing to me is that not only can deficits be too large, they can also be too small. Too large causes inflationary pressure -- to traders it means, there is upward pressure on the market; too small causes deflationary pressure -- to traders it means there is downward pressure on the market. Curiously, in both cases according to theory, nominal income adjusts until desired savings equals actual savings.

I can't comment on the Shostak's remark other than to say, I believe he is what's termed an Austrian economist, and I often find myself at odds with the views of these economists when it comes to modern economies with fiat currency. Perhaps his definition of savings is unconventional or he could be working with different premises.

Your last paragraph is also something I can't comment on.

__________________
* I've simplified, because this ET, but for a more complete picture see "the paradox of thrift."

 

[longshort]

This is good thinking, but there is a problem. We are only concerned with what happens in aggregate. As a given, lets assume the government runs an exactly balanced budget, so no new outside money comes into the economy (outside money is the money the government spends into the economy). For every purchase there is a counter party making a profit. When you cut back on your caviar consumption you cut back on someone else's profit. You increased your own savings, but the poor fellow who didn't get to sell you caviar had to reduce his. The aggregate effect is stable savings.* Unless the source of money, i.e., the government, spends additional money into the economy their is no additional money to increase aggregate savings.

That's the beauty of the example:

1. Spending $200 on caviar/lobster equals the spending of $5 on rice/beans plus $195 on durable goods, silver coins etc. The sales revenue of $200/day is exactly offset by $5 + $195 a day. We can assume profits are the same, and for simplicity the same company makes and sells all mentioned goods. To the monetarist/Keynesian, nothing happens in aggregate as their view doesn't capture what happens.

2. Yet in reality, a stockpile of valuable resources is created by the redirection of expenditures and changes in consumption. Because in my example, the caviar is consumed immediately and gone, whereas the other goods aren't and retain value for future use. That's the essence of saving and consistent with the Austrian definition provided by Frank Shostak, PhD.

It's possible to save more, both in real terms and even in a narrow technical sense. The MMT accounting fallacy that the private sector can't "save" without the government running a deficit has been refuted by Robert Murphy, PhD in economics. He showed that it's also possible for everyone to acquire financial assets at the same time:
https://mises.org/wire/keynesian-fallacies-are-not-just-wrong-dangerous

 

[morganist]

That's the beauty of the example:

1. Spending $200 on caviar/lobster equals the spending of $5 on rice/beans plus $195 on durable goods, silver coins etc. The sales revenue of $200/day is exactly offset by $5 + $195 a day. We can assume profits are the same, and for simplicity the same company makes and sells all mentioned goods. To the monetarist/Keynesian, nothing happens in aggregate as their view doesn't capture what happens.

2. Yet in reality, a stockpile of valuable resources is created by the redirection of expenditures and changes in consumption. Because in my example, the caviar is consumed immediately and gone, whereas the other goods aren't and retain value for future use. That's the essence of saving and consistent with the Austrian definition provided by Frank Shostak, PhD.

It's possible to save more, both in real terms and even in a narrow technical sense. The MMT accounting fallacy that the private sector can't "save" without the government running a deficit has been refuted by Robert Murphy, PhD in economics. He showed that it's also possible for everyone to acquire financial assets at the same time:
https://mises.org/wire/keynesian-fallacies-are-not-just-wrong-dangerous

MMT seems to miss the international aspect of money transfers, it seems to be only a domestic model. I also feel it ignores the effect of the velocity of money within an economy and how this can increase GDP.

 

[piezoe]

That's the beauty of the example:

1. Spending $200 on caviar/lobster equals the spending of $5 on rice/beans plus $195 on durable goods, silver coins etc. The sales revenue of $200/day is exactly offset by $5 + $195 a day. We can assume profits are the same, and for simplicity the same company makes and sells all mentioned goods. To the monetarist/Keynesian, nothing happens in aggregate as their view doesn't capture what happens.

2. Yet in reality, a stockpile of valuable resources is created by the redirection of expenditures and changes in consumption. Because in my example, the caviar is consumed immediately and gone, whereas the other goods aren't and retain value for future use. That's the essence of saving and consistent with the Austrian definition provided by Frank Shostak, PhD.

It's possible to save more, both in real terms and even in a narrow technical sense. The MMT accounting fallacy that the private sector can't "save" without the government running a deficit has been refuted by Robert Murphy, PhD in economics. He showed that it's also possible for everyone to acquire financial assets at the same time:
https://mises.org/wire/keynesian-fallacies-are-not-just-wrong-dangerous

 

[ElectricSavant]

These are just numbers in a spreadsheet.....

 

[piezoe]

That's the beauty of the example:

1. Spending $200 on caviar/lobster equals the spending of $5 on rice/beans plus $195 on durable goods, silver coins etc. The sales revenue of $200/day is exactly offset by $5 + $195 a day. We can assume profits are the same, and for simplicity the same company makes and sells all mentioned goods. To the monetarist/Keynesian, nothing happens in aggregate as their view doesn't capture what happens.

2. Yet in reality, a stockpile of valuable resources is created by the redirection of expenditures and changes in consumption. Because in my example, the caviar is consumed immediately and gone, whereas the other goods aren't and retain value for future use. That's the essence of saving and consistent with the Austrian definition provided by Frank Shostak, PhD.

It's possible to save more, both in real terms and even in a narrow technical sense. The MMT accounting fallacy that the private sector can't "save" without the government running a deficit has been refuted by Robert Murphy, PhD in economics. He showed that it's also possible for everyone to acquire financial assets at the same time:
https://mises.org/wire/keynesian-fallacies-are-not-just-wrong-dangerous

Ha ha ha, Murphy commits the same error by not considering the net affect on all parties to transactions in aggregate. The new renter you snagged with your 10K/savings/investment, has two counter parties: you, who are now 5K up on the transaction, and their former landlord, who is now 5K down.

Yes, it is possible for all parties to save more simultaneously, but not of course with out reducing aggregate incomes equivalently. If your income remains constant and you increase savings by spending x fewer dollars, in aggregate, incomes elsewhere are reduced by the amount of your increased savings. Of course those whose income has been reduced by your increased savings can also save more, just by spending less. The aggregate result, if everyone tries this, is increased unemployment. decreased in money velocity and a recession.

This is why when it is desirable that households save more without causing a recession, the government will spend more into the economy with, or without, reducing taxes, or reduce taxes without reducing spending equivalently. These fiscal measures will increase the amount of outside money in the private sector economy. In addition the Central bank will adjust monetary policy to beef up bank reserves by buying Treasuries, which depresses lending rates, and may be reflected in a lower dollar value vis-à-vis other currencies. (There are other consequences typical of deficits too. One is increased corporate earnings. If interested in this, see the Levy Equation, due I believe to the businessman who endowed the Levy Institute at Bard College.)

If in the face of a recession the government were to do the opposite, the recession would worsen and could ultimately become a depression. An equivalent result would be achieved if everyone tries to save more at the same time without increasing the amount of outside money in the economy.. the German Finance minister during the great recession had Austrian school leanings and disagreements with Draghi. Draghi found ways to work round these disagreements and is now credited with saving the Euro. He had a more difficult time both because of Wolfgang Schäuble's -- and probably Steinbruck before that-- objections to ECB policy and because the EU monetary union is not a complete monetary union; it lacks a common bond. But Draghi found workarounds.