I wrote this (published) paper on 0 rates 15 years ago.

The trimmed Fed forecasts are confirming the ‘tax’ aspect of QE?

The $80+ billion the fed turns over to the tsy each year would have otherwise been earned by the economy.

It’s all confirming my suspicions that the Fed has been stepping on the brake when it thinks its stepping on the gas.

And when it ‘doesn’t work’ they just step on it that much harder.

Tragically, after all these years and with all the hard evidence in our face we continue to have both fiscal and monetary policy backwards.

22 Responses

  1. I am not sure how a forecast can be “confirming.” It is my suspicion that the cavalier attitude towards time as a linear entity is related to the fact that most economic predictions are more often wrong than right. I realize it is difficult to model a dynamic system. But it should be possible to understand that going backwards and forwards at random is a bad idea.
    Congress, it seems to me, has been doing its best to use the purse strings to strangle various sectors of the economy as they fail to be compliant to its will. And it’s been using the Fed and their minions on Wall Street as scullery maids to do their dirty work.
    Why? Because the power mavens on Capitol Hill are under siege — from the citizenry. Have been ever since the advent of universal suffrage and freedom of information wrote finis to their ability to reward supporters from the public treasury of natural resources and assets and punish minority populations selectively. “Sovereign immunity” came to an end formally in 1947 with the adoption of the Federal Tort Claims Act (and similar legislation in the several states), but it didn’t really hit home until the early eighties when it became apparent that office holders could be held individually accountable for perpetrating a tort.

  2. One thing I notice is that this new policy and the one previous upped the purchase of the Agency securities which I believe yield more than the USTs they may have otherwise purchased…

    So to increase their holdings of the Agency bonds increases these “tax” effects of QE as now EVEN MORE non-govt sector interest payments on mortgages is getting funneled back to Treasury via the Fed…

    Can ESM comment on this if you see this? What is the macro results of the Fed buying 40B/mo of MBS on these “tax” flows? Typical yield of 5% on MBS after 12 months this would represent a flow of $24B/mo. with a fiscal deficit now coming in at around $100B/ would represent a removal of almost 1/4th of the current desired deficit flow???

    And as all student loans are now govt loans, and this is the biggest area of “credit” growth, does this not also represent a “tax”, ie all new student loan debt is effectively a “tax” as the payments of P&I go back to the govt? How much does this represent?


  3. All the myths of QE continue. It is inflationary, it is money printing yadda yadda.

    Warren another myth that drives me crazy is that increasing taxes on the rich is redistributive. Mechanically it is not. Increasing taxes on the rich simply debits their checking account and the federal government simply issues less debt thus creating a lower deficit number. It drains net financial assets from the economy. It in no way directly changes how the budget is spent and what class of people it is spent on.

    In fact, if you increase taxes on the rich by ‘100’, the only way that gets redistributed is if you also increase the federal budget by ‘100’ AND that money is targeted to say the 98%. Maybe I am wrong on this, but would be a good topic for discussion on your blog.

    1. @Mcwop,
      It is redistributive because it gives Congress the cover to increase spending on entitlements. You’re correct in that it it not literally redistributive, but that is the end result. We take from one class and give to another.

      1. @Joyce,

        Certainly, it can effect it to the extent that congress-critters believe they are constrained by taxes. But in my experience it really does not seem to have a big effect on how they target and spend the money. Look at Clinton, hiked taxes, slowed spending and ran surpluses, which the government should only do if they are fighting inflation.

        Right now the discussion is tax increases and slowing spending, which is not redistributive.

    2. @Mcwop,

      Good point. Of course it all depends on whether and how the revenues are offset, propensities and multipliers, etc.

      IMO, estate taxes should be the focus of distribution policies. And given the federal tax mechanics you note, perhaps the bulk should go to state a/o local coffers (a Georgist concept if I’m not mistaken)?

  4. Warren, in ‘this’ http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF and mention in 7DIF,

    you write:

    “Note that if one pays taxes or buys government securities with actual
    cash, the government shreds it, clearly indicating operationally government has no use
    for revenue per se.”

    However in http://wfhummel.cnchost.com/governmentspending.html (which I find credible)

    Managing the Base Money Supply

    The Treasury pays the government’s bills out of its account at the Fed. Those payments inject new reserves of base money into the banking system. Since the increase in reserves would interfere with the Fed’s ability to implement monetary policy, the Treasury compensates as follows:

    (1) As the Treasury spends, it replenishes its Fed account with equal transfers from its commercial bank accounts where it deposits its receipts from taxes and bond sales. This removes the reserves of base money created by its spending. Aggregate reserves of the banking system therefore remain unchanged on average, thereby allowing the Fed to make small adjustments in reserves as needed to maintain control of the Fed funds rate.

    (2) The Treasury replenishes its commercial bank accounts with the receipts from taxes, and from the sale of bonds when there is a shortfall in tax revenues. If tax revenues exceed its spending, it removes the surplus by net redeeming its securities. In this way it minimizes disturbances to the aggregate bank deposits of the private sector.

    Which is correct? Shredding or collecting tax receipts in a commercial bank account?

    1. let me add that it’s about ‘minimizing disturbances’ rather than ‘Since the increase in reserves would interfere with the Fed’s ability to implement monetary policy,’

  5. The Fed is buying assets to keep rates low. The problem is on the fiscal side. The government should be spending the interest they’re getting from the Fed to get it back into the economy.

  6. Warren, I believe I’ve answered my own question, i.e. “Yes, they account for it, which means they keep track of what they do,”

    from: http://moslereconomics.com/2010/02/04/dallas-address/

    Yes, they account for it, which means they keep track of what they do, but they don’t actually get anything that they give to anyone. The man at the IRS simply changes numbers down in our bank accounts when he collects taxes. And, if you pay your taxes with actual cash, they give you a receipt, and then shred it. How does taking your cash and shredding it pay for anything? It doesn’t. Taxes don’t give the government anything to use to make payments.

    1. @wbridle, they may shred the physical money, but they add corresponding amount of it in the bank accounts, no?

      so it isn’t that cash disappears, it just gets converted from hard cash to digital cash and vice versa, no?

      1. @Ed, They add corresponding amount of it in the bank accounts – Which bank account? IRS’s ? or Treasury’s?

      2. @Nathan, yes, someone is keeping track of all the ins and outs…regardless of what physically happens to the money,which is meaningless.

  7. I get most of this, but I am still puzzled after reading you for 3 years now why you continue to say the government is “shredding cash”. The gov’t converts paper money to electronic money. The cash still exists in a different form. I’m sure you are making a finer point, but I have yet to understand what that point is. Can anybody help me?

  8. Warren,

    Understand that they remove interest income from the economy, however would not most of this income accrue to the rich? In that case it would not be deflationary?

    If I understand you correctly you would stop issuing government bonds. However, make sure that the deficit is big enough for full employment, which the JG would ensure.

    1. both valid points.
      the fed removes 80 billion with some unknown ‘multiplier’ regarding spending, but we know the ‘sign’

      The deficit needs to be large enough to ensusure the jg pool is small enough

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