Tuesday, February 21, 2012

The EU: Towards and ever closer Union

Over the weekend, a friend of mine argued that the founders of the Eurozone knew that a monetary union without a fiscal union would come undone. So they sowed the seeds of a fiscal crises into the EZ, gambling that the unavoidable pain would be enough to force fiscal union but not so much that the monetary union itself would crumble. At the heart of all of this would be to bind Germany and France together irrevocably.

The ECB continues to try and thread this needs with its latest bail out -- more money, more time, but more pain. If the pain ceased, the push for fiscal union would also cease.
Kicking the can down the road is normally considered idle procrastination. This is different. This is deliberate procrastination. If Greece falls today, nobody knows what kind of economic domino effect it will have on other debtors like Portugal, Italy, and Spain, or the rest of the Europe. Europe has selected the muddle-through and draw-random-recovery-lines option. The honest and inevitable choice -- a wild default or even Greece's departure from the EU -- is impossible for euro ministers to imagine suffering through, for today. Meanwhile, Greece suffers.
Not deliberate procrastination. An engineered application of political pressure. We'll see if it's been calibrated correctly.

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Saturday, February 18, 2012

MMT is not Monetarism

Interfluidity claims that monetarism shares more with MMT than we all think.
I think MMTers, market monetarists, and Keynesians have almost everything in common other than tribe and affiliation.
He then goes on to recommend a pro-cyclical inflation indexed government savings account. Crazy.

When seeing these hare-brained schemes, I always wonder just what problem SRW is trying to solve. There must be some policy reason I'm not seeing for complicated, rube-goldberg, counter-productive ideas. But let's review in detail:

SRW would give people a government backed, $200,000 max, inflation indexed savings account (real rate of zero). This is meant to help people with inflation.

Fine, so US has 300M people, so assume we have a 50% usage rate of this account, so a total of $3x10^13 is going to be in this thing. I don't even know what this number is.

Saudi decides to jack up oil prices. We get cost-push inflation of, say, 7%. In Steve's world, the Government would need to print an extra $2,100,000,000,000 and pump that into savings accounts. 12 zeroes makes that a US Trillion. The US National debt is $15T.

So, because of inflation, SRW is going to print $2T, an increase of over 10% of the national debt (not deficit).

What does everyone think is going to happen to inflation now? Instead of helping people during high-inflationary periods, this will trigger hyperinflation by design.

It gets worse in periods of negative growth -- account holders will need to take haircuts. So, you guessed it, when the economy is shrinking, the Government is going to start reducing the number in people's bank accounts. Nominal outstanding debt will stay the same, of course, so you'll get debt deflation the way we did in the Depression.

I can see the middle class singing Hosannas now.

If Steve claims MMT and monetarism are the same, maybe it's because he doesn't understand the differences.


Commenter Greg points me to this post: More on Savings and Investment
“It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more.

“People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitessimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit.

But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.
It seems similar to this same theme raised in Interfluidity (here and here). At any rate, I think they are all related.

Honestly, I'm having difficulty making head or tail of the discussion. I'm not sure what distinction they are making, and I don't know why the distinction I think they are making is important. It seems to be that, the usual sector de-composition is between the Government and non-Government sector, where Government is the currency issuer (consolidated Treasury and Federal Reserve function) and non-Government is everyone else (all currency users, includes foreign Governments). I think they are saying that within the non-Government sector, distinguishing the household from commercial sector is important, but I don't know why.

Anyone care to enlighten me?


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Wednesday, February 08, 2012

End the Money Market Fund

According to Megan McArdle, new rules may put money market funds out of business:
At last, the government is proposing new rules, which are supposed to make MMFs less risky. The funds would have to raise new capital, and some minor withdrawal limitations would be imposed on customers. They would also have to offer a floating net asset value instead of the current "guarantee" that if you deposit a dollar, you'll always get at least that dollar back...

...If passed as proposed, the rules would seemingly put the MMFs out of business. And perhaps that's the point--Paul Volcker, for one, has been an outspoken critic of money market funds, which originated as a way to dodge the interest rate caps on bank accounts during the inflationary 1970s."
There shouldn't be money market funds. There should be unlimited FDIC insurance on all bank accounts. It should be easy to "put a dollar in, get a dollar bank" (with no guarantee as to what that dollar will get you).