Friday, 4 October 2013

Scott Sumner thinks that where money earns interest, it’s no longer money.

Sumner made the bizarre claim recently that Laurence Kotlikoff is wrong to claim that QE involves printing money. Sumner’s reason is that because the Fed currently pays interest on reserves, those reserves are somehow no longer money. As Sumner puts it in relation to QE:
“The Fed is merely exchanging interest-bearing reserves, which are liability of the federal government, for Treasury securities, which are different liability of the federal government. The Fed is not monetizing the debt.”
Well now, suppose the Fed paid 0.1% on reserves (much less than it currently pays). Would those reserves suddenly become money? Or if they paid 0.001% with those reserves become money? This is a farce, isn't it?
The farce stems from Sumner’s claim that because interest is paid on money, it’s no longer money.

Do I or don’t I get money when I sell Treasuries?
Let’s say I have $X of government debt - Treasuries. I sell them to the Fed (say as part of the QE operation). I then get a check from the Fed for $X. What’s that if it’s not money?  Ideas anyone?
The fact that my commercial bank gets a small amount of interest from the Fed when whey my bank’s account at the Fed is credited by $X (as it would be) is immaterial.

Technical point on QE and PSNNFA.
There is of course the point that QE does not involve money printing in the sense of bringing about an increase in “private sector nominal net financial assets” (PSNNFA). That is, QE consists of an asset swap rather than the government / central bank machine (to put it figuratively) simply printing £ or $ bills and spending them.
Plus government debt (certainly short term debt) could be argued to be money. So in that sense, QE does not involve money printing. But that’s not what Sumner is saying.

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