Tuesday, 13 September 2016

A debate on whether an interest rate increase equals helecoptering.

Mike Norman says yes. His actual words:

“I'm busy finishing up this week's issue of MMT Trader, however, I just had to stop to write this because it is so glaringly obvious yet nobody gets it.

All the idiot "geniuses" who were saying that central banks had no other option, but to engage in "Helicopter Money" (central banks dropping money into the economy) don't even recognize that rate hikes ARE helicopter money!!

When the Fed raises rates it literally requires itself to give money to people. That's money out of thin air.

Maybe it's not shared equally, but neither are the tax cuts that people scream for all the time either. And when those happen they are generally deemed "good."

Yet people are selling stocks like crazy.

If the Fed were to announce that it is about to start sending money out to people--no matter how much the amount--you would see crazy buying of stocks and gold and selling of the dollar, yet that's exactly what the Fed is announcing and people are doing the exact opposite.

This will be the biggest fakeout in history.

Buy gold. Buy stocks. Sell the dollar. Sell Treasuries.”


My response:

“Debatable. First, the Fed takes money FROM the private sector in that it sells Treasuries to the people. That’s in effect “reverse QE”. So the private sector has less money.

People gain money in that they get more by way of interest, but against that, the money for that interest comes out of taxes. To that extent, more money flows out of the private sector’s right hand pocket and back into its left hand pocket.

On balance, the effect is deflationary, as per conventional wisdom, far as I can see.”



"way of interest, but against that, the money for that interest comes out of taxes."

Nope. It is paid by crediting bank accounts like ALL spending.

"So the private sector has less money."

Why would swapping one "bank vault" with any other matter. It is SPENDING that matters.”




“Re your claim that interest on Treasuries comes from "crediting bank accounts", that would be one way of doing it. But that's not actually how it's done is it? I.e. the Treasury / government cannot just print money: only the Fed can do that.”




http://heteconomist.com/exercising-currency-sovereignty-under-self-imposed-constraints/ “   



That’s an interesting article by Heteconomist which I think I’ve absorbed (???).

The central point the article makes is that if the Treasury wants to spend more and fund that via more borrowing, and if the Fed “…is targeting a positive short-term interest rate”, then the Fed must supply the market with new reserves to enable the latter borrowing (else interest rates will rise).

But the situation we’re discussing is where the Fed DOES WANT interest rates to rise.

So…back to the initial question, i.e. does an interest rate rise equal helicoptering? My answer is that the extra interest rate payments COULD BE funded from freshly issued reserves, but the Fed just won’t do that to any great extent precisely because it wants to impose a deflationary effect. I.e. the Fed will say to the Treasury, “extra money you need to pay interest on extra borrowing, or rolled over Treasuries will just have to come from tax”.


More relevant comments, if they appear on Mike Norman’s site, will be re-produced here!

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