Heavy Balance Sheet
Light Balance Sheet,
at the Fed
effects (in my mind--tell me my fault!)
With the light balance sheet, the Federal Reserve System doesn't have as much reserves ("reserves" are the formal dollars the private banks own or hold on behalf of their customers, to over simplify to a fault). Of course, due to daily clearinghouse common ledger interbank payments clearance cancelations, if the Federal Reserve Banking System were always perfectly balanced, no reserves would ever be necessary, as all interbank payments would cancel out. So if the banking system were fairly balanced, a, comparatively, small quantity of reserves could constantly be having an interest rate set and hard-lent by the banks amidst themselves. Bagehot's "lender of last resort," would be the, elected, government, via their central bank. [Argue as you like about the Fed, in another post, as you'll ruin my talking point: if the Fed were properly a National Bank, or an actual sub-agency of the Treasury with full oversight, we could speak of the hand of democracy at work in loans coming from a national bank or other, Republican, government department (e.g., the Treasury).]
So with the "heavy balance sheet" case, we, seem to, have an "abundant reserve" system. In this case, we imagine we hardly need a government national bank actively lending. [So the Fed feels free--bear with this armchair "expert"--to make collateral requirements for its "Discount Window" loans a little more difficult, raising its interest rate rapidly up and up, as recently it has been, and the like.] The interbank lending market in an abundant reserves system is expected to fill the role of the Fed in providing liquidity to member banks. The Fed, then cranks up the interest rates and so on, just to push interbank lending to apply some of the discipline the Fed would have been applying in the light balance sheet scenario (light balance sheet implies the Fed holds fewer Treasuries, and hence the economy holds more reserves(private banking sector-held/managed dollars). Yet, in reality, there probably *aren't* abundant reserves in a heavy balance sheet scenario because reserves are all concentrated, is it George Gammon that tells us so, or someone else, all mostly in a single bank: J.P. Morgan. So the Fed "heavy balance sheet" scenario doesn't necessarily imply more reserves in the banks, therefore greater ease of settlement, therefore a more expansive, and safely expansive credit economy and less chance of, sudden, catastrophic, financial collapse: because most banks might not actually own many reserves at all and the Fed's assumption it can let a bank like SVB just sit a few days while a difficult loan application is being prepared, because after all we are in a plentiful reserve scenario in which the resultant easy clearance (not much clearance necessary if after all we are dealing in plentiful hard cash) and interbank lending market take on the role of the Fed in providing basic liquidity--that assumption implies the plentiful reserve scenario is a tighter one than the light balance sheet scenario. The other point would be it's not the interbank market taking on the role of the supplier of the last unit of [bank money] supply, but J.P. Morgan that takes on the role of the Fed. George Gammon calls the coming CBDCs JPDCs, to show this isn't just my own idea.
Of course, I just came up with all this maybe yesterday--any unborrowed ideas that are here, that is--and I have absolutely no expertise and just am imagining possibilities and scenarios and implications, as a hobby or civic contribution here, like discussing politics over coffee (never over beer).
George Selgin, March 15, 2021
Ron Paul and Our Big, Fat Fed
By the time the Great Recession ended, the Fed’s balance sheet was more than four times as large as it was in mid‐2008. And now...it has doubled in size yet again, to just shy of $7.6 trillion.
And Ron Paul is partly responsible for it.
Every dollar the Treasury puts into the TGA reduces the banks’ combined reserve balances by one dollar. It follows that, whatever level of reserve balances the Fed considers necessary to keep its “abundant reserve” or floor system functioning smoothly and otherwise achieve its macroeconomic objectives, preserving that level requires a Fed balance sheet that’s X dollars bigger for every X dollars in the TGA account. So, when the Treasury stuffed $1.8 trillion into that account, the Fed had to compensate by arranging to add $1.8 trillion more to its portfolio than it might have added otherwise.
[Talking about old Eccles, long ago:]
Eccles went on to explain that the direct‐purchase authority was “in effect, merely an overdraft privilege with the Reserve banks—a line of available credit for use if needed,” without which “the Treasury would feel obliged to carry much larger cash balances.”
As The New York Times explained on March 31, 1979, a temporary debt ceiling of $798 billion was scheduled to revert, after midnight, to what had been its “permanent” level of just $400 billion. As part of its effort to avoid breaching the ceiling before Congress could raise the ceiling again, the Treasury took advantage of the Fed’s direct purchase authority to borrow $3 billion from the Fed. To do so, it
"first redeemed $3 billion of securities from the Exchange Stabilization Fund, which is utilized to buy foreign currencies to bolster the dollar. This lowered the national debt by that amount, enabling the Treasury to arrange a loan from the Federal Reserve. Such loans are included under the $798 billion ceiling."
One of the hawks who severely disapproved of this maneuver was Ron Paul...
[The "overdraft" expired for good two years later.]
Not Paul’s Fault
What Paul couldn’t have anticipated was the Fed’s October 2008 decision to begin paying interest on bank reserves. That decision once again made it profitable for the Treasury to favor TGA balances over TT&L balances.
My (Mac's) comments:
Selgin gives this, rather mercenary, reason for the Treasury stopping storing its money in private banks and banking once again primarily with the Fed. I had presumed the real reason was as a sort of balance to the Fed's excess reserves post 2008 system, or just as a result of that system that it didn't matter much and so they just did it that way, but either way, the result is as Selgin discusses it. But the withdrawal of the (in the scheme of things, small) "overdraft" direct purchase authority meant the Treasury was keeping extra ready cash--and due to the interest on reserves (the Treasury gets paid interest by the Fed?!?!!), Selgin claims, that extra cash went out of the economy and into to the traditional anti-bank account of the Federal Reserve System, the TGA. Now that the TGA acts as an anti-account, withdrawing, not adding money supply to the economy, it forces the interest rate obsessed Fed to do Open Market Ops, hoovering up Treasury Bonds (Selgin calls Treasury Bonds held by the Fed, "the Fed’s balance sheet.")in exchange for the plentiful reserves it was adding to the banking system.
(Now, the Treasury doesn't use it's Federal Reserve System so-called "account" the way the other account holders do. The other account holders loan their money out on the interbank lending market. The Treasury abstains from this, when "banking" with the Fed--so any money that goes into the Treasury General Account is money the banks no longer have access to until it is spent fiscally. So not just the Fed, but the Treasury, when so-called "banking" with the Fed acts as an "anti-bank.")
Weimar Republic Hyperinflation through a Modern Monetary Theory Lens
Phil Armstrong and Warren Mosler
"we identify the rise in the quantity of money and the printing of increasing quantities of banknotes as a consequence of the hyperinflation, rather than its cause."
"The presumption of a money supply fixed by the government, however, applies to a convertible, fixed exchange rate currency, such as existed under the gold standard. This relegates the applicability of the quantity theory of money to fixed exchange rate regimes and
makes it entirely inapplicable to today’s floating exchange rate regimes (as well as in the
Weimar Republic) where the government does not offer convertibility at a fixed rate."
"After a decades-long search for an ‘M’- a monetary aggregate that correlates to and leads to inflation- mainstream economics today has moved on to its current position of inflation expectations being the cause of inflation. ...Central banks have, in fact, developed intricate methodologies to
measure inflation expectations to guide policy, while their researchers have struggled to find evidence of the validity of the theory."
"The funds to pay taxes and net save come only from the government or its agents (Bell 1998); the currency itself is a public monopoly and therefore the price level, as a point of logic, is necessarily a function of prices paid by the government (Mosler 1993). Said another way, the value of the currency is a function of what economic agents must do in order to obtain it from the government and its designated agents, directly or indirectly. With the currency a public monopoly (imperfect competition) mainstream
quantity theory, inflation expectations theory and the neutrality of money are not applicable."
"The value of the currency is defined by what a given amount of it can buy. So, for example, if the government increases purchases at current prices, regardless of the quantity of money spent, that additional (price constrained) spending has not driven up prices, and the value of the currency has not been altered. However, if the government instead pays more for the same items purchased, the value of the currency, by definition, has become lower, as it takes more of it to buy the same quantity than was previously the case."
"Ormazabal (2008) recognizes that taxes would have to be raised to reduce German consumption so that
sufficient goods and services would be available to transfer to the Allies: ‘It is understood that
the Germans cease to consume because they part with money’ (Ormazabal 2008: 10). He
further reasons that if the need for German money to pay for the German exports equalled the
German currency the Agent General converted into foreign exchange, the transfer of German money for reparations to the Agent General would not destabilize the foreign exchange
markets. However, if taxes are not sufficient to reduce German consumption exports revenues
will not be sufficient, causing the exchange rate for the mark to fall. And a fall in the German
exchange rate would make it increasingly burdensome for Germany - via the Agent General - to obtain the required foreign currency to meet its reparation liabilities."
"We, in general, agree with this summation, enhanced further with MMT insights. Due to taxation being set at too low a level, payment of reparations resulted in higher levels of German
deficit spending. In addition, the higher interest rates implemented to fight the inflation further
increased the deficit (a point missed in orthodox narratives; see Appendix 2). We would also
point out that this deficit spending was not only for purchases of real goods and services and
payment of interest, but also for purchases of foreign exchange by the Agent General. Purchases of foreign exchange (and gold) are, functionally, deficit spending, even though they
are not accounted for as such but only as asset purchases by the central bank. Thus, we
argue that, as a practical matter, the stated accounts underestimate the size of deficits.
Importantly, with both insufficient tax liabilities and compliance, German purchases of foreign
exchange could only take place at continuously higher prices. MMT provides important insights here, namely that it was the higher prices paid that were the cause of the increase in
the price level, and only if real wages had been sufficiently lowered to the point of reducing domestic consumption and increasing exports could Germany have bought the required
foreign exchange without paying higher prices."
Um... I don't think we have a two hundred twenty-five billion dollar deficit. I think we have a two hundred twenty-five dollar private sector surplus.
Go to this "deficit-tracker" page and scroll down to "Tracking the Federal Deficit: June 2023": "$225 billon deficit...$421 billion in revenues."
But by now, we a must know that when the economy does well, revenues go up, and when the economy does less well, revenues decrease, and that any particular deficit as differentiated from other deficits is higher or lower in large part due to the return of revenues from the economy, although now with the number of Treasury Bonds out there that retirement funds and banks are required to soak up at paltry returns along with the reverse requirement that the Treasury similarly in-bulk auction them, another factor raising and lowering the deficit has come to the fore: the Federal Reserve, as it is they, and not Fitch that appear to set the interest rates.
Going back to this, "$225 billon deficit...$421 billion in revenues," one can see that if revenues had been higher (or interest rates at the Fed, lower--as those interest rates filter through the economy over to set also the rates at Treasury Auctions, and not, I think Fitch--you will point out that the Fed only actively sets short term rates, so this is your chance to discuss!), then the private sector surplus (the "deficit") would have been higher. Yet if we don't want to wait for the economy to do less well to increase this surplus, the solution (not suggesting this, except as a talking point, considering the concentration of wealth) is simple: lower tax rates. Lowering tax rates seems to me to prove my point, that as (in so far as) the so-called "deficit" is increased thereby, the quantity of hard currency dollars retained by the private sector increases. Whether private sector "dollars" are increased thereby, is another question, as stable growth in credit (said to be the bulk of "dollars") depends on the overall balance of the sectors and businesses that make up the economy.
No doubt I mixed something up in that mix, but that's the gist of this--this morning's new--idea.
What's in the Coin--Does it Matter?
My, new, thought for today is that there's no difference between the paper modern dollars are printed on and the gold the old ten dollar and twenty dollar coins were minted with. Whether one is printing or minting, one at base just needs some material to make it with. Making a coin with gold helps prevent counterfeiting, one assumes; that can be a discussion in itself--how does one know a gold coin is not lead inside, with the requisite ten percent copper to make it weigh the same as a coin, as gold is so soft it can be guilded as thin as one likes. This thinness capacity can also serve as a basis of the Goldbacks alternative currency discussed some time ago on Sovren.
Yet my thought today is that the base value of gold comes from its traditional use as currency and not its value as currency from the characteristics of gold, as congenial as they are to use as physical material for coinage and even for general commodity money-like exchange and use.
Gold is just one physical material among many--there is no alchemy to gold other than what cold fusion provides as to production thereof (note the, quiet, experiments by Mitsubishi Heavy Industries around the transmutation of elements). If any other material (silver, copper, oil) were chosen as currency, its value would, as with gold's begin to ride on its use as-currency rather than as at first its value as itself alone. Such value as currency comes from value-in-use and not, primarily, from factors inherent to die-ding-an-zicht, gold's resistance to rust, its shinynesd, its potential for thinness (useful in goldbacks), or its resistance to mining. Take mining as ensample: putting aside that the vast hoarding of gold by the United States Department of the Treasury, and by other governments is likely a major reason for the current ever-increasing price of gold, putting aside also that gold no longer has its price pegged to a real currency (hence perhaps the extremely unstable price of gold bullion); take just the example of rarity: The United States dollar coin itself was silver, not, Spanish, gold.