Any old number should do then.
How does the fed add liquidity to the economy?
- Thread starter RGLD
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I realized, after I posted my response to your post above, a source of confusion. When I point out that the private sector savings can not increase without the Government increasing the amount of money in the economy, that assumes that nominal incomes will not be reduced and that the economy will not be pushed into recession. Although this would not happen, it is, of course, theoretically possible for everyone to increase their savings at the same time without the government supplying additional money to the economy. But in this case there would be an aggregate decline in incomes and the economy would be pushed into recession. And rather rapidly I would think, as those with falling incomes attempting to both spend less and save more will very soon find themselves in desperate straits. The money for the additional savings for everyone must come from somewhere. It can't come out of the economy itself, as that would cause a recession. The only place it can come from, without causing a recession, is the government. The government can create money "out of thin air," which it regularly does.
Currently the U.S. is experiencing depression level unemployment. Rational people would think we should be experiencing a depression. Why aren't we then? It is because the government is creating trillions out of thin air, spending it into the economy via social assistance programs, and of course running massive deficits. If The Government hadn't done this, rest assured we would, by now, be experiencing a deep, deep, recession.
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morganist
What about increasing the velocity of money? Your comments assume the government is increasing the monetary base, the monetary units that are in existence used to make transactions. The money supply is a bit different it is the money used to make transactions actively and cumulatively, if you use those monetary units multiple times it can increase the GDP. Effectively increasing the money supply increases the amount monetary units are allowed to be spent to increase the number of transactions in an economy at a given period of time. As opposed to increasing the monetary base, which increases the monetary units that exist that can then be used to increase the number of transactions in an economy.
If the velocity of money is increased the same number of monetary units can be used to make more transactions without the need to increase the monetary base. The FED is not needed in this circumstance although it can perform this function effectively through Qualitative Easing, when riskier assets are taken on to the central bank's balance sheet in exchange for cash commercial banks can lend out which is performed through Open Market Operations. There are other methods that can be used to increase the velocity of transactions. One example I will give you is the alteration of who pays tax to increase the rates of consumption by allocating more income to individuals with a higher propensity to spend. I explain this below.
http://morganisteconomics.blogspot....aking-taxation.html?q=the+taxation+flip+trick
There are other ways of increasing the velocity of money or the speed of transactions too, especially in pension funds. For example pension fund investments can be altered to become more liquid or more ready to consume. The money invested in pension funds is lent out or invested into funds that actively spend the money with the obligation to pay it back at a later date. The speed at which the money is spent can vary from one investment to another and can lead to an increase in the velocity of money and increase the overall level of transactions in an economy, leading to an increase in GDP. This is something that has been neglected until I brought up the possibility of 'Pension Fund Easing', using this technique to increase growth.
http://morganisteconomics.blogspot.com/2020/08/letter-to-prime-minister-regarding_25.html
Rather than an error, there's two different things going on here:
1. In the example you mentioned, Murphy showed that real savings can be increased without a decrease in total money expenditure. We seemingly agree on that part. The redirection of expenses created an apartment, i.e. real wealth, that wasn't there before, with zero net or aggregate monetary effect. So far, so good.
2. It's another question how the newly created actual wealth is being utilized. (You don't seem to dispute that it's there, though.) If it's rented to someone who was renting before, $5K/year increased income on your side is offset by $5K/year reduced income on the former landlord's side. Monetary net effect again zero, yet the point is that the real economy grew by an additional dwelling.
One way to distribute the increased wealth is to use it yourself, e.g. if you enlarged or remodeled your own space (rather than creating an apartment). Another way is deflation: Housing gets cheaper and everybody can have more living space. Another way is additional products: The former landlord is freed to do something else productive. He could come up with new/enhanced goods/services and sell them to you. After all, you have $5K/year increased monetary income available that the former landlord can earn back. Remember the majority of the labor force was in agriculture a few hundred years ago; today it's less than 5% in developed countries.
In any case, that's how actual wealth is created and society advances. Now the Keynesian way: Government runs a $10K/year deficit and gives it to someone. While technically "savings" in fiat money may hence increase, nothing needs to happen in the real world. If the recipient puts it away, it may not cause harm. However, the actual wealth of the economy remains unchanged (fiat money is nothing). If the recipient spends it, it causes inflation or inhibits deflation, and inhibits the incentive for the recipient to even be productive (not to mention it amounts to something for nothing or redistribution).
The above line of reasoning is key to Austrian economics and Irwin Schiff went as far as illustrating it with a comic:
https://mises.org/library/how-saving-grows-economy
We are largely talking past each other. I kept mentioning that I was concerned with aggregate effects, and you gave micro examples. But we both recognize investment creates savings. In fact, in a closed economy without a government, aggregate savings will exactly equal aggregate investment once equilibrium is reached. If in this closed economy people want to save more than investors want to invest, deflationary forces will arise, incomes will fall, and savings will be forced to fall until they are again equal to investment. (This is the idea behind the 'paradox of thrift'.) Another way to look at this is that in this artificial closed economy aggregate savings can't increase by attempting to save more, but only by investing more, which raises income and thus saving.
The link between saving and investment is incorporated in the statement I posted earlier that for an open economy with a government, aggregate saving is equal to investment, plus the government's deficit, plus net exports. What I regret not making very clear is that when people want to save more, beyond investment, than it is the government's deficit spending that allows this.* Without deficit spending aggregate savings is limited to investment plus net exports. That was the intended meaning behind my statement that deficits were needed if it was desirable that the people save more. (I had assumed without explicitly stating it, that aggregate savings was already at the maximum level that aggregate investment would allow for.)
The real world application of this stuff comes into play when you have a recession and people begin cutting back on expenditures and start hoarding cash, bank reserves build up, and investment is slowing. This is a time when there is typically an increase in the desired level of net nominal savings . If the government at the same time were to reduce spending and/or raise taxes it could induce an unstable deflationary spiral that could make it impossible to restore equilibrium between actual and desired net nominal savings. (Think early part of the great depression.) What's needed, we have learned, is counter-cyclical growth in government deficits. This is usually supplied by a combination of tax reductions and spending increases.
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*Savings less investment is usually termed net nominal saving. I use the term savings to mean either the desired level of saving or net nominal saving according to context, but I now realize how confusing this could be. I have been studying this crap since about 2005 and sometimes I forget to be explicit as I should be, if I am trying to communicate.
To be sure, we are not living in Calvin Coolidge's time! (My ultra conservative Grandfather's favorite President.) I am one to think that deficits can be easily too large and that there will be undesirable consequences from the accumulated effects.. I say that, though i'm not at all certain about what these effects will be. I have some ideas, but they're not ready for prime time. The current rescue packages seem quite necessary to me however.
To be fair, you suggested a government deficit was needed for the private sector to save without a decline in incomes. It's logical for me to make a counter-example, because one is enough to show otherwise. And there was no aggregate effects problem in my example. There was one in your reply: Pointed out the caviar seller lost revenue but missed the gained revenue in other goods. That suggests you didn't fully recognize the significance of the investment at first.
It would be a fallacy to assume a government's deficit spending is as good as a private sector investment. The former may nominally increase "savings" but actually doesn't: There's nothing that has been saved. The latter is real and increases actual wealth: Private sector saving through investments (which is what typically happens) is backed by the creation of the investment which has real-world utility.
In that sense, MMT accounting tautologies don't mean what their proponents think they mean. The Fed has nothing of value to lend and the government has nothing to spend that it doesn't take (money printing is a veiled tax) from the private sector.
Enter a system of sound money and all of a sudden it was possible for Andrew Jackson to pay off the debt, entirely. The people still had money, savings, and price stability. GDP grew at a higher rate before 1913 than after. And there was no Great Depression either, which was Fed-enabled.
I recognize that I have failed to communicate. It is not a matter of the relative "goodness" of deficits versus investment. It is simply a fact that if we define net nominal savings as that part of aggregate savings that exceeds aggregate investment, then, in the absence of net positive exports, net nominal savings is not possible without the government running a deficit. Aggregate savings flow is identically equal to investment plus the government's deficit plus net exports. You may have to be an economist to fully grasp this. I am neither qualified to teach this, nor inclined to go into much more detail than I have already.
By the way your nice chart of debt to GDP is missing a couple of relevant labels: the bank panics before the 1913 fed. , two very serious ones, 1893 and and 1907 (many before that also) then the over 10K bank failures in the depression that led to the banking acts of the 1930s and the modern embodiment of the Federal Reserve Bank system. Nowadays you need not worry if your bank is solvent or not, your check will always clear so long as you've deposited finds to cover it, and your deposits are insured..
That up blip in debt between ~38 and 1941 (we did not enter the war until Dec 7 of '41) is due to Roosevelt's much delayed application of Keynesian economics starting ~1935 and hitting full stride by 1938 which lifted the U.S. economy from the depths of the great depression. Many incorrectly state WWII as the catalyst that got us out of the depression, but in fact the growth rate just continued at the pace already established by the time we entered the War --the lowest unemployment ever wasn't under Trump!. The big debt is war debt, of course. We paid it back after WWI with consequent damage to the economy, but not after WWII with a consequent boom substantially aided by other factors too.
You might also want to look at living standards coincident with your debt chart before you decide if it would be a good idea to role back the debt to say the early 1800s when, child labor abounded and factory workers ate at the bench and put in 86 hour weeks.
This statement below is what troubles me most it belies a deep misunderstanding of money and a deep mistrust of the governments role:
In that sense, MMT accounting tautologies don't mean what their proponents think they mean. The Fed has nothing of value to lend and the government has nothing to spend that it doesn't take (money printing is a veiled tax) from the private sector.
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morganist
Going back to the original question of the thread the FED uses Open Market Operations to buy assets from commercial banks in exchange for liquid cash. The FED holds the assets it purchased on its balance sheet and the commercial bank can either lend out the cash it has or use it to invest in company shares. The increase in liquidity arises from the exchange of illiquid assets held by the commercial bank and liquid cash funds the FED pays for obtaining the assets.
I think this is the answer to the question you asked?