Mosler, the guru of MMT.
The Fed again deserves low marks for another year of being part of the problem rather than part of the answer.
Well I can certainly agree with that statement. The expansion of money and credit underwritten by the Federal Reserve, the whipping boy of Federal Government, via the massive expansion of credit via fractional reserve lending through commercial banks and the government entities led to the huge property bubble and financial over-leveraging that created this crisis. The Fed’s answer, more of the same.
For 2011 the Fed has again failed to address the interest income side of its policies.
Oh. That’s what you’re talking about. Well no. The ‘interest income’ is really a minor unimportant point in the scheme of things when talking about the Fed.
For example, the Fed turned over approximately $80 billion last year to the Treasury, and probably a lot more this year with its larger portfolio, with no mention that the same $80 billion would have otherwise added that much to the income of the rest of the economy.
That $80 billion is arrived at in this manner:
When the Federal Reserve monetizes the governments debt, and that includes government entities like Fannie Mae and Freddie Mac, the interest paid comes from the government, and is then simply returned to it as ‘profit’ via the Federal Reserve. Certainly the reduction of a ‘real interest cost’ is valuable to government, but they are only stealing it from you the taxpayer.
It would serve public purpose if the Fed made it clear that in today’s rate environment, what’s called ‘quantitative easing’ in fact removes interest income from the private sector, thereby functioning much like a tax and a source of what’s called fiscal drag, as it takes net dollars out of the economy as it reduces the federal deficit.
Partly true. It is a tax on the private sector. It does not however reduce net dollars in the economy, far from it, it expands the money supply, it is inherently inflationary, that’s why it is a tax on the private sector.
Furthermore, all the evidence so far indicates this source of fiscal drag may be at least offsetting any positive effects of lower interest rates on aggregate demand.
Mosler simply is ignorant of the difference between the market rate of interest and the natural rate of interest, which is driven by the time preferences of individuals. In an increasing tax environment, time preferences move higher, thus natural rates of interest rise, productivity falls. This is the current reality.
This brings up my second criticism with regards to the interest income channel. Lowering rates in general in the first instance merely shifts interest income from ‘savers’ to borrowers. And with the federal government a net payer of interest to the economy, lowering rates reduces interest income for the economy.
This is exactly the same criticism as the first, just worded a little differently. Essentially, holders of ‘Treasury debt’ are being paid zero or less in real terms on their Treasury paper. Thus the transfer of wealth from creditors to debtors. The government being the largest debtor in the economy. Government spending has run out of control, hence the requirement to arrogate ever increasing resources from the productive community. Government is a huge parasite living off of the productive capability of the free economy.
The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years.
I see Mosler is straying into a little Keynesian ‘aggregate’ and ‘propensity’ smokescreen. This is a pure nonsense when you consider that the market rate of interest is fixed by the largest ‘borrower’ of all, the government. For indeed, the governments propensity to consume far exceeds by many multiples the propensity to save. That is precisely why the government has to resort to the printing of money.
And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven’t fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.
Like Keynes, Mosler seems to couch his arguments in gobblegook. So lets translate this paragraph to English and see what is actually being said:
[i] interest income for ‘savers’ has fallen
[ii] the reason it fell is that interest rates were lowered by monetary policy
[iii] interest rate costs for ‘borrowers’ haven’t fallen
[iv] the ‘difference’ has gone to the margins of ‘lenders’.
[v] ‘lenders’ have close to zero propensity to consume
[vi] ‘savers’ have a high propensity to consume
[vii] has caused the rate reductions to be ‘contractionary and deflationary’.
So according to Mosler: the ‘savers’ now receive less income from their new savings at the reduced interest rates, while the costs of borrowing for new ‘borrowers’ hasn’t fallen. First off we have the lack of a definition with regard to timeframes. If I loaned money say 8yrs ago, on a 10yr Note, then the interest that I would receive would be that contracted rate, and in the interim, the capital value of the principal would have risen to reflect that higher rate in the current market rate for debt. Therefore we have to define the time period we are talking about. Mosler chooses not to.
Then we get some waffle about this alleged ‘difference’ flowing to the ‘lenders’ via margin expansion. Well the ‘lenders’ are the ‘savers’ unless of course we are talking about the Federal Reserve as the ‘lender’. Mosler fails to elucidate exactly who he is talking about when he refers to ‘lenders’ and ‘savers’, who of course are the same by definition, but could be very different when talking about specific entities.
‘Savers’ have a high propensity to consume. Do they? Who are they? Where is your data? If of course the ‘saver’ is the Federal Reserve, what is their propensity to ‘consume’? Salaries, perks, expenses and what else? As they are a government puppet, of course their propensity to consume is actually the government propensity to consume, which is of course unquenchable.
Then the contradiction: ‘lenders have close to zero propensity to consume’. ‘Savers and lenders’ are the same [by definition] and he has just stated that ‘savers’ have a high propensity to ‘consume’. Either Mosler is seriously confused, or simply trying to slip a big lie past readers, we have a serious contradiction here. Again if the ‘lender’ is the Federal Reserve, after costs, technically, the Federal Reserve doesn’t consume, they remit their ‘profits’ to government, who consume. But really it’s just all semantics. That is the problem with MMT, it’s all just semantics, intellectual wanking.
The Fed should know this. There is a very high quality research paper by DC Fed officer Seth Carpenter spelling outmuch of this in detail for the FOMC, as well as research papers from the NY Fed on the same subject.
Well if that is true, I guess he should lose his job. Of course he is simply a technocrat, providing, in the most mathematically obscure way possible, justification for the Federal Reserve to continue their expropriation of the taxpayer as governments pet poodle.
There is no question in my mind that the Fed has ample evidence to question their presumption that given today’s institutional structure lowering rates and quantitative easing may have been counter productive and made things worse as per the interest income channels.
Of course the Federal Reserve have in a secular time frame aggravated the situation. They have created a further credit expansion, which has further devalued the money system, which makes economic calculation, calculated in money terms, increasingly unreliable, thus leading to further malinvestments.
Yet they continue to unconditionally voice the opinion that they have been ‘easing’ with those ‘accommodative’ policies, to the point of promising more of same as additional tools to support aggregate demand.
Well Bernanke is a pet poodle, gutless, unethical and the entire Federal Reserve Central Banking system should be rolled up and ended.
(Read more from Mosler at MoslerEconomics.com. To find out more about Mosler’s background, click here.)
Warren Mosler is one of the founder fathers of Modern Monetary Theory, a heterodox school of economic thinking the breaks from both classical and standard Keynesian economics. This is the first of a three part series by Mosler looking at the Fed from an MMT perspective
Clown.
