There is no real difference between interest paying reserves and short term government bonds.

My point was that if interest rates can be targetted in this way regardless of the quantity of excess reserves, then those excess reserves have no real meaning as money (as opposed to credit, broad money), which is the role people normally is filled by base money.

hi scepticus and all,

it was my impression that the way you neutralise a reserve excess is by offering interest baring securities for sale for those non interest baring reserves. open market ops in other words.

it was also my impression that in a interest rate targeting environment, fed neutralising activity is primarilly defensive in nature. the fed doesnt know the scarcity of money until after the fact. i thought in their infinite wisdom the central bank comes to some cocomamy conlusion of what the price should be and then tries to manipulate quantity after the fact. the central bank cant help but react to scarecity or excess. its unavoidable given ccurrent accounting arrangements and the relatively illiquid nature of bank assetts

Another question if I may. I’ve so far understood the NFA concept to be in a domestic scenario but is it necessarily so?
I’m unclear as to whether say investors holdings in overseas balances (Euros?) are included. If they are, does that mean the govt sector in the concept is to be understood as including all soverign currency issuing governments?

The point is that government gives value to the currency by requiring it for tax settlement. If the US govt declared tomorrow that it would no longer accept $US denominated balances for settlement of taxes, but instead would only accept Euro denominated balances, there’d be a lot of switching to Euro balances almost immediately, and the use of $US in exchange would perhaps go away in short order (can’t account for everyone wanting to use it, but largely this would be true). So it’s not necessarily about “facilitating” the private sector.

Don’t know if you were referring to this or not, but the issue of NFA is not necessarily related to this. The point about NFA is that if the non-govt sector desires to save in the aggregate (that is, for the sector to end up with an increase in its net savings), then the only way this can occur by logic of accounting is for some other sector–namely the govt–to leverage. Again, though, this isn’t the same as the payment settlement issue, so facilitating NFA of the non-govt sector and which currency is used to settle payments aren’t the same issue.

Regarding foreign exchange, they are settling payments using currencies that already are accepted for tax settlement in respective nations. Who would want to be holding $US as the US govt made the announcement it would only accept Euros in my example above? Further, you generally settle (as opposed to clear, which is what you were referring to) the different sides of the trade separately in FX transactions . . . for instance, most trades involving $US have the $US side of the trade settled on CHIPS in the US.

Best,
Scott

MMT seems to me to suggest that you need an overarching govt fiat money to encompass and faciliate the private sector.

Foreign Exchange does not need a world central bank and essentially clears by private particpants using mutually agreed conventions – is that right (I’m really naive on how this works)?

If so, those two above concepts seem at odds in my poor brain, am I confusing apples and oranges and if so why is one apples and the other oranges?

#440 “… one wonders what the point and relevance of base money is”

Isn’t in it the govt’s ability to make good on the claims against it and therefore it higher acceptance to other financial claims? [Somewhat like your reply to Alan in #445]

#440 “… I’m trying to get to the nub of how a pure credit economy would operate and whether in fact it is any different in principle to what we already have.”

Me too. I view base money as credit on the govt and cash as a physical token represention of that same credit so we appear to be already in a credit economy (I’m persuaded by Innes: http://moslereconomics.com/mandatory-readings/what-is-money/).

However the dynamics of the more constrained private credit vs the apparently rather less constrained govt base money has me intrigued. The MMT vertical/horizontal framework says that base money really is different, but I wonder. I’m also concerned whether there are more constraints on govt base money than MMT seems to suggest.

“If you move from that point and then assume that there is also a zero cumulative government deficit, the zero net position becomes comprehensive.”

I was envisaging a situation that oscillates about the net zero position.

Aggregate demand management can equally well be achieved by ensuring that when demand falls due to sectoral imbalances (whether between the gov/no-gov sectors), or between different sections of the private sector, by effecting a market driven transfer (via interest rates) of wealth from the net surplus sector to the net deficit sector.

This is the same thing chartalism/MMT aims to achieve via targetted taxation and unconstrained public spending. Both when done right would have the same general effect of transferring wealth from net surplus sectors to net deficit sectors.

Alan – a government can in theory prevent the creation of token money by:

a) not providing any (a sin of omission)

b) ensuring that the electronic money retains higher liquidity than any token monies. This can be achieved if the government is providing services which people want, or if they enforce taxation. In either case, people aim to collect the specie which the government requires in return for providing critical services or to extinguish tax liabilities. There would be nothin to stop trading in other tokens like gold but I suggest that the government mandated medium of exchange would be more liquid and thus would be generally preferred by the population.

“The only thing remaining then is to delete the concept of paper cash and we’re done.”

@JHK 429

“You then go the further step of eliminating currency and privatizing the central bank, etc., which sort of galvanizes the zero net condition, but is not really necessary to achieve it.”

When we talk about pure credit economy, are we talking a electronic currency?

I and many other people would like to keep our token money as units of exchange. Particular business in the Netherlands and Germany may use either implanted RFID chips or credit cards as a form of exchange but this is very Orwellian for my liking.

Anyway not all forms of exchange should be taxed, like pocket money for children or my buying something from a garage sale.

Governments can stop the transfer of credit money (electronic money) but can not stop the transfer of token money. Those who control the money can control all people. Something like a ‘Brave New World’ or ’1984′.

That is so useful that I’m going to write a post about it.

Fabulous resource…

http://www.economist.com/displaystory.cfm?story_id=14438245