An old debate about "Net Financial Assets," a term used in by Modern Monetary Theory (MMT) was reopened by Steve Roth at Asymptosis.in the article "Where MMT Gets Its Accounting Wrong -- And Right." This generated a lot of comments, and a response by Steve Randy Waldman at interfluidity ("Translating Net Financial Assets"). This also generated discussion at Mike Norman Economics. I largely agree with Steve Waldman's view, but I just want to offer what I think is a more introductory version of what I understand to be the underlying issue. That is, does it make sense to "net out" equity?All you really need to know in a few paragraphs.
In my view, the take away lies in the flows rather than the stocks. Is there is difference between an increase in nongovernment net financial assets in aggregate owing to deficit spending and an equal amount of increase in the stock of financial claims on equity. Look to the flows involved.
Government spending and transfers, as well as interest payments, increase the purchasing power of nongovernment in the currency zone. The difference between central government revenue and expenditure is the fiscal balance, whether in balance, in surplus, or in deficit. In the case of a deficit, the amount exceeding revenue is matched by issuance of government bonds. The flow is from spending to government securities, but indirectly.
The spending itself doesn't go toward purchase of the securities directly, since few recipients of the spending use it to purchase government securities. In fact, the securities are purchased from the existing money stock. This implies that deficit spending flows through the economy where its effect is multiplied by velocity, being spent many time before being taxed away or saved longer term.
Nothing of the sort occurs in an increase in the value of net equity. The marginal price changes in markets, which is reflected as fictitious gains (and losses) in portfolios. Book value does not change correspondingly. Actual gains and losses are not booked until realized.
In the aftermath of the recent crisis, the Fed conducted policy intended to drive asset values higher than they would be otherwise in order to increase spending through the "wealth effect." Didn't happen.
On the other hand, substantial government deficits did have a positive outcome in stimulating demand and accommodating deleveraging with the flow being multiplied.
Bond Economics
Net Financial Assets And Equity
Brian Romanchuk
17 comments:
Tom, what's your take on this graph:
https://research.stlouisfed.org/fred2/graph/?g=n6C
"the Fed conducted policy intended to drive asset values higher "
Again I think this is a mistaken viewpoint.
In reality the Fed/Treasury ceased conducting policy that *suppresses* asset prices.
The whole point if interest rates and 'safe assets' issued by Treasury paying a high rate of interest and a term premium is to suppress asset prices.
Where was all the money to go?
When risk free (aka US Treasuries) went to near zero ,,,, et al.
The WS/London incentive was and is to churn the trillions of idle cash for fees .....
That much activity could do nothing other than drive Indexes higher ....... see China.
Movethoughlt,
Couldn’t see anything very surprising in that chart.
Neil,
I can see your point, however I suggest the effect of the Fed/Treasury on asset prices might be neutral, and for the following reason. Following standard MMT thinking, the state only needs to pay interest on state liabilities if the state supplies the private sector with more of those liabilities than the private sector wants to hold at a zero rate of interest. Supplying that excess stock of liabilities is stimulatory, and that’s negated by the state paying interest on those liabilities. Ergo – or so my theory goes – the net effect is neutral.
This is a nice way to put it from Brian:
"In other words, in order for one part of the private sector to increase its holdings of privately issued debt instruments, it requires another part of the private sector to be willing to increase its debt issuance."
those opposite us might say:
"in order for one part of the private sector to increase lending, it requires another part of the private sector to increase borrowing..."
Ralph-
There is no such thing as excess stock of Govt liabilities. People will hold as many Govt liabilities (private wealth) as the can get. Especially when the Govt is simply giving it away to them in many cases not selling them things.
There is no way to give someone an excess of Social Security payments. Nobody in history has ever returned free money to the govt. There is no way to give someone an excess of unemployment compensation. You can give the economy an excess of Govt liabilities only in terms of the amount of real things available to buy with those Govt liabilities, but never can you give an individual more money than they want.
Matt isn't pretty much the same? Borrowing comes before lending, you need a borrower to do the lending. The primary cause is the act of borrowing, not the act of lending, if you are willing to give me something without me asking then it's not lending, as I will only take it for free, you need me to borrow if you want to lend to me.
"increasing holdings of private issued debt instruments" means the action of borrowing, they are synonyms (and vice-versa for the act of lending).
Am I missing something?
Ignacio there is important nuance exhibited there imo...
It exemplifies a different "world view" of sorts...
Like many opposite us would say "the govt is borrowing money!" "the govt is going to default!" etc... maintaining this "lend/borrow" context or paradigm or whatever you want to call it...
Look at how all the rats are squealing about the low rate environment and want the Fed to raise... in truth, they want the govt to ISSUE so they can get the free interest... its not like they are going all around saying "we want to lend the govt more money!" or "govt needs to borrow more!"
rsp,
I see. Well higher rates means higher income from the same amount of financial capital invested in the same number of assets (issued by the govt, effectively). I think they believe they are entitled to higher risk-free income, maybe because in their absurd belief system they think the government should be paying higher for access to capital as the risk is high or 'debt' is already over the top.
But if the government would be at the mercy of capital markets then it would be reflected on the rates independently of what the central bank does, so it's a contradiction between the actual outcome and what theoretically (from their PoV) should happen.
Or it can simply be cynicism, because why would you invest in something if you truly believe it's going to default on obligations, it's stupid. They simply want higher return in an environment where high yield without high risk is hard to come by.
It's probably both: they think the government is borrowing too much, and hence the rates should be higher, and they want to buy those assets because they would buy those relatively risk-free high yield assets because the lack of elsewhere.
IMO a lot of them believe they are entitled to high yields, because the private sector cannot leverage any more wants the government to provide them with risk-free income. They probably think the government 'has printed too much money' and now they cannot get any decent income because 'money is worthless' and 'too much money chasing to few investment opportunities'. So they believe the government needs to enforce higher rates and 'repair the damage' they are suffering (they have 'saved a lot and deserve it'). (notice all the quotes)
@MoveThroughit
Could suggest that the pension funds pick up the bulk of federal debt but that would have to be determined by the actual distribution. Given trends in bank, foreign, and cb holdings that seems unlikely.
Well if you believe it is 'borrowing' then you are going to always want interest on the 'loan'...
I think you are correct and Mike has talked about this they think rates are "un-naturally" low...
imo, if the Fed were to immediately stop rolling over the balances into new QE securities to replace the ones that they lose to redemption, rates would PLUMMET.... but the Fed itself needs the interest too so they keep a lot of bonds in the portfolio so they can pay themselves and keep the lights on....
seems like we are at a cross-roads as far as rates... rsp,
The purpose of ZIRP and QE was to keep the policy rate and yield curve low to influence margin and mortgage costs, thereby supporting the housing market and driving up equity prices. The Fed was fairly successful at achieving those objectives, which did stop the housing correction and result in a bull market where a ferocious bear was in the making. If either or both had happened the crash would have been deeper. So I think that they probably think that they did OK even though not as well as some had hoped for.
In addition I think that some of BB's public statements can be read as telling Congress that the Fed had done its part and Congress needed to step and create income. He was muted in this since he did not want to be seen as lecturing Congress or interfering in fiscal for fear of risking cb independence.
They simply want higher return in an environment where high yield without high risk is hard to come by.
This is the crux of it.
There is actually an argument for it. Since safe assets are paying so little, the financial world is being driven into putting on risk to get the return it an live with. This is now creating fragility systematically, and the whole thing could implode. Some think this is already happening and playing it that way.
It acted through two channels: sustaining asset prices placing a floor on certain asset classes (MBS), and through expectations triggering herd risk on effect ("the CB's are printing money! everybody buy!") . We know that QE are asset swaps, not actual "printing money", but many people doesn't (including in market makers with certain degrees of trading authority).
Higher rates + sustaining asset prices of certain asset classes is difficult. As they change the portfolio composition to create an effect in one class or an other, without actual money printing. Probably a lot of banks feel they have already absorbed most of the housing bubble excesses beyond a risky position and can afford the govt relaxing on sustaining related assets. Instead they think that higher rates from govt assets will serve them better now as they are literally starving of yield.
The Japanification of the West is completing: zombie monstrous financial sector being subsidized by the State in one way or an other and not able to sustain itself other way. In a sense that the private sector cannot provide them anymore of upside (due to the lack of meaningful growth through leverage) and they need full assistance to keep functioning. That's why they need higher rates.
"This is now creating fragility systematically, and the whole thing could implode. "
If the system is fragile systemically and you have to stabilise it by direct government subsidies, why is it there?
If the system is fragile systemically and you have to stabilise it by direct government subsidies, why is it there?
You have identified the underlying problem with capitalism. Without government, which it is based on excluding, it implodes on itself. It should be called socialism for the ownership class rather than capitalism in the sense of economic liberalism.
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