>   (email exchange)
>   On Fri, Oct 8, 2010 at 9:28 AM, Eileen wrote:
>   Greenspan comments from last night. Of course, he hasn’t said that loans create deposits,
>   but he’s finally acknowledging excess reserves. Reported by BBG TV:
>   “If you add to excess reserves and they just sit there, you’ve merely gone through an
>   interesting bookkeeping calculation. It has no, I mean zero, economic effect. You need
>   commercial bank A to lend to steel company B.”

very good!

45 Responses

  1. I’m afraid he hasn’t read it at all, or anything like it.

    Here’s the full quote:

    – Should the Fed increase “excess reserves and they just sit there on the asset side of commercial banks’ balance sheets NOT BEING RELENT, you’ve merely gone through an interesting bookkeeping exercise,” Greenspan said. “You’ve got to break that psychology that prevents that current trillion” in reserves from being relent, he said. –

    1. Dave,

      Couldnt help myself I had to post this again!

      If I only had 130,000 pounds soft or hard currency!


      1. Ive read that D. Kohn is now part time at Brookings since he left the Fed in June.

        Based on his March speech statements reported in the Seth Carpenter paper questioning the multiplier and quantity theory, maybe MMT has ‘A Friendly’ at Brookings…Resp,

  2. Not likely. The rest of his interview was deficit fear mongering. It’s amazing that this man ran the central bank for so long and never connected the dots….

  3. Remarkable article:

    The Tapeworm Economics


    Freitag, 8. Oktober 2010 21:23
    von Catherine Austin Fitts

    Let’s return once again to the question: How did we actually entered the financial crisis?, and get the perspective of Catherine Austin Fitts in the United States, who has worked both on Wall Street and in the U.S. Government. In her view, a large portion of our problems is the result of “the strategy used by a tapeworm to prosper.”

    The following essay by Catherine Austin Fitts was published under the headline “A Tapeworm’s Triumph” in April 2003 on her website “Solari“ (www.solari.com). Despite the fact that this essay is quite old, we present it because:

    a) none of the problems addressed here are solved,


    b) it’s never wrong to take a step back – just like a painter, who distances himself from the picture, on which he works, in order to recognize some of the things on the canvas a bit better.

    In addition, we recommend to read also her article “Financial Coup d’Etat,” which can be found here:


    and the interview “Behind the Wheel,” that chaostheorien.de published under this link:


  4. http://counterpunch.org/hudson10112010.html

    “Who Needs an Army When You Can Obtain the Usual Objective (Monetary Wealth and Asset Appropriation) Simply by Financial Means?”
    Why the U.S. has Launched a New Financial World War — And How the the Rest of the World Will Fight Back


    “Coming events cast their shadows forward.”

    – Goethe

    What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost? This is the game that is being played today.

    Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy’s banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources. The key is to persuade foreign central banks to accept this electronic credit.

    1. There are two points I picked up that MMT’ers would quibble over. First, Hudson talks about the need to “finance” US deficits with tsy’s. That, of course, contradicts the MMT operational description of what takes place in tsy issuance. Secondly, and related to the first, Hudson describes the gold convertibility fixed rate system as asset-based and the nonconvertible floating rate system as based on tsy issuance, therefore, “debt-based.” MMT would not describe it operationally in this way either. The same criticism applies to Henry C. K. Liu’s analysis of dollar hegemony, which is similar to Hudson’s take.

      I am not qualified to comment on Hudson’s analysis, Oliver, although it makes sense to me based on what I know. Hudson’s point is that there is virtually unlimited low-interest lending in US dollars for global financial arbitrage and that this is leading to instability. This seems well-taken in light of the complaints of other countries, like Brazil, that are calling for capital controls.

      As far as I can see this is how funds are flowing in the closed global economy among the open national economies. It seem that a global macro to address this is lacking. Moreover, there is no central authority to impose order, or even an effective international structure to implement it. So the cracks are widening, and the present system is ceasing to work well for everyone concerned. So far the developed countries led by the US have had the clout to get their way, but that may be ending. The GFC has greatly undermined confidence in the US and its economic paradigm.

      1. Tom,

        Ramanan posted this at BillyBlog to explain the accounting of these currency deals as I interpreted it:

        “Banks are big in fx markets and create money endogenously. Suppose an economic “agent” purchases foreign currency, the bank debits his account and credits his foreign account. (The bank may have to report “Due to Foreign Offices” to the Federal Reserve for its H.8, but lets avoid the complication). The agent may then purchase foreign assets.”

        So all of this looks like it has to run thru bank balance sheets which is probably limiting. And then there is the risk that the exchange rate moves against you and you could probably get called..

        So when he writes: “What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards ” Would this not have to create a $50T bank liability somewhere?

        It just doesnt seem that easy to do to me, but I could not be in full understanding…


      2. Matt, Hudson is talking about two things converging, as far as I can tell.

        1. QE creates excess reserves through purchase of bonds, driving down LT yields. The very low prevailing rates encourage arbitrage. (If someone want to arbitrate leveraged dollars for some other currency or asset, then that has to be settled in the interbank market and accounts at the Fed have to change. This has to show up somewhere.)

        2. Hudson is also saying that tsy’s, which he calls US “debt” and MMT regards as a time account paying interest, are the new gold in that international trade is now settled in dollars instead of transfers of gold. Surplus countries now get dollars instead of gold, since the dollar is the global reserve currency. Countries don’t want to hold dollars as reserves in their deposit accounts at the Fed, so they hold tsy’s instead to get some interest. Hudson claims that the process is like being on the gold standard with the US owing the only gold mine, a mine of unlimited resources. The problem here is that the gold is not really free to the US since it has to borrow from other countries to mine it. The interest is sort of like the recovery cost of mining, I guess.

        Hudson then seems to combine 1 & 2. The tsy’s that countries hold get depreciated as the US depreciates the dollar, e.g., through large deficits and QE, so the US is actually buying its imports more cheaply than the nominal sales price since the proceeds of the sales are declining in real value. And the arbitrageurs get to borrow dollars in the cheap to play the rise in fx against the dollar. Then they take the gains in other currencies and buy up the assets of these other counties. Moreover, with a fall in the dollar, US exports drive out others in the export market. Brazil has been yelling about this, for example. Theoretically, there is almost no limit on the leverage that can be created for arbitrage this way.

        Hudson seems to be saying that this can go on forever unless other countries wise up and end the game with controls or a new monetary arrangement altogether, and now they are wising up.

      3. Tom, Thanks…even tho Hudson is a bit out of paradigm with MMT, I continue to read him and believe Im getting some unique perspective.

        Right now the US is running about a 40-50B/mo. CAD. This is right about the same high levels (600B/yr) reached at the previous commodity top a few years ago now, so commodities are perking up a bit just like back then, only the banks probably dont have as much to let the specs play with so hopefully the old highs will not be seen for the real people who will suffer the high prices.

        CAD at the margin is Petro imports (20B+/mo) and China (20B+/mo) so net of China and Petro, US may be in CA surplus or close.

        As far as the Petro/OPEC people, I dont care if their USD is depreciating as I think they should feel lucky that we let them get a away with $75/BBL in the first place. And as for China, they maintain a peg which forces reduced terms of trade for their own people so their USD assets are not falling by definition as much as they are purposefully suppressing the standard of living of their own people…that’s their own problem, and unjustly our US Labor’s problem.

        The one thing both of the governments of these two situations have in common is they are perhaps the most unstable of the economically meaningful world governments. The top OPEC people could be in exile at their dachas in Switzerland in three hours, and believe it or not I think the PRC people would probably seek asylum in the US if the govt fell violently….and we would probably give it to them. Facing the potential fall of their govts like this, it may be no wonder they bank with US.


      4. even tho Hudson is a bit out of paradigm with MMT, I continue to read him and believe Im getting some unique perspective.

        I suspect that Michael Hudson (being at UMKC) and Henry C. K. Liu (from things he has written) both understand operations from the MMT perspective. But they are writing in the normal paradigm instead of trying to throw in the entire MMT perspective, which is not their bailiwick. They both have their own agenda.

        Both of them understand history and also global economics. I’m not savvy enough about this to assess their work, but from what I can tell it’s close to the mark, a lot closer than the mainstream, and I don’t know of any MMT’ers that have written specifically on these matters.

        I’m still trying to get up to speed on this currency/trade thang. The conclusion I have come to is that there is a global economy, and it is a closed economy in which everything affects everything else, so trade and currency are very big deals, affecting not only national economies but the global economy as a whole. I haven’t found a comprehensive approach to global economics, and since there is no global currency or global monetary authority, the MMT’ers haven’t said to much about it as far as I know.

      5. ‘Hudson’s point is that there is virtually unlimited low-interest lending in US dollars for global financial arbitrage’

        Same with yen for going on 20 years?

        and with today’s futures market you can short any commodity you want. Including gold which is in contango.

    2. To me, his position and (and that of fellow MMTer Auerback for that matter: http://www.nakedcapitalism.com/2010/10/auerback-you-can-thank-ben-bernanke-for-higher-food-prices.html) somehow contradict the position that QE (and monetary policy in general, I guess) does nothing much more than change interest rates which in turn has little to no effect on the (real?) economy. If QE is indeed wreaking havoc on the currency markets, surely that must pass as some kind of ‘effect’, even if it’s negative to the non-financial economy.

      1. When the Fed purchases bond using QE, this just increases reserves so no big deal for the domestic economy since net financial assets remains the same. According to MMT, there is no causality between bank lending and reserves. However, the composition of assets changes and this can make a big difference in the price of other assets, domestic and foreign.

        Some of the people selling the bonds are doing so because they see than can get a better return through arbitrage, selling dollar assets and buying Brazilian real to switching from US bonds to Brazilian bonds, whose return is much higher. With a falling dollar money can be made not only from interest but also currency appreciation. Some of the money from bonds sales also gets leveraged and put into commodity and equities markets.

        There are three results of QE that are objectives of the Fed: 1) Flatten the yield curve to support housing with low LT rates and 2) pump up equities. Both prevent further asset declines and also increase the wealth effect as asset prices recover. 3) Depreciate the dollar to make imports more expensive and exports less expensive, thereby improving the US nominal trade balance and increasing unemployment, even though the US is the loser in real terms of trade.

        This is why Hudson is screaming that the US needs to tax economic rent to order to preserve stability both domestically and internationally. Otherwise 1) asset values get overblown relative to incomes domestically, extending the long financial cycle, and 2) global asymmetry increases, risking a currency and/or trade war. Since commodities are now treated as asset classes, food prices soar and the underdeveloped world starves.

      2. Tom:

        I would add a 4th result/objective of QE: to support the value of high-interest, high-risk junk sitting on bank balance sheets. If the long-term interest expectations are driven low, then the high-interest junk can stay on the books that much longer. It’s just buying time and a recipe for stagnation, but I think it’s a conscious decision.

      3. Your points 2) and 3) are basically saying the same thing – just wanted to draw attention to the need for low rates as a defensive move to avoid collapse.

        There was a reason the Fed wanted a Great Depression scholar (such as he is) in the driver’s seat (understanding that the driver can be chauffeur).

      4. Except qe doesn’t depreciate the dollar per se.

        the euro is going back up for its own reasons discussed elsewhere on this site. (austerity, etc)

        the yen is going up for pretty much the same reason the euro is. the goes up unless there is intervention, which is beginning. if they intervene for real the yen will go down

        higher crude oil prices for whatever reason cause dollars to be ‘easer to get’ in the world due to US purchases, which is a force that weakens the dollar.

        yes, lots of cross currents as well

      5. So Hudson, Auerback, Whitney etc. are claiming that QE is creating unnatural opportunities for arbitrage (?) and thus depressing the $ and raising other currencies whereas you, Warren, are claiming that QE has no such effect and any rise in Yen, Euro, Real, etc. is purely a function of austerity measures / export strategies and other ‘currents’? Hmm, confused is I still.

      6. in the short term traders do indeed respond to qe by selling dollars, etc. etc. The question is whether the fundamental flows/forces will sustain those initial moves or work against them and the resulting supply/demand overwhelm and reverse the initial trading reactions.

        The austerity measures in europe create flows/forces that work towards a stronger euro- smaller govt deficits = fewer financial assets for the non govt sectors which makes euro financial assets ‘harder to get’ and ‘scarcer’ than otherwise, etc. I’m suggesting this fundamental move towards ‘scarcity’ of euros has been and will continue to overwhelm the traders/portfolios who might want to sell euros.

      7. thanks for your collective replies! i’m still digesting them, so i might be back with more questions later.

    3. Hudson confuses three fundamentally different financial operations:

      a) QE
      b) The capital account surplus that is the definitional and functional offset to the current account deficit
      c) Gross international financial flows

      QE is equivalent to duration transformation within the G/CB liability base (reserves, currency/debt). It shortens the duration of government assets held by the public. In doing so it lowers long term interest rates at the margin. That has marginal implications for aggregate demand. That’s the direct effect. There is no direct quantitative effect of any import. We know the bank reserves are useless and the M1 effect is useless unless and until velocity picks up. QE is mislabelled – it’s really “duration easing” more than anything. Hudson also writes about QE as if it has a direct liquidity effect on money flowing out of the US. It doesn’t. All effects in that regard are via interest rates and interest rate expectations and associated risk taking.

      The current account deficit supplies dollars overseas and the capital account surplus absorbs them back. It’s an accounting identity. Central banks buy bonds to switch the form of money – as noted by W. Mosler many times in the “checking account, savings account” analogy.

      Much of Hudson’s rant has to do with gross international financial flows, which again have nothing to do with QE directly. The US international gross flows consist of:

      1. The capital account surplus inflow that is the offset to the current account deficit

      2. Gross outflows on capital account that must be offset by gross inflows by accounting identity, in order for the international balance sheet to balance according to the current account deficit

      The gross outflows are the area that includes the type of “arbitrage” Hudson is talking about – except that a great deal of it is outright risk taking rather than arbitrage.

      From a technical perspective, Hudson ignores the required counterbalancing of gross outflows with inflows, seemingly writing about them as if they were net outflows. They are not. That is a quantitative type error in his analysis. The financial effect is all driven by pricing and interest rates and risk taking. And it has nothing to do directly with QE.

      A lot of confusion in the presentation, but I think his basic message is that US monetary policy is inducing a lot of global financial risk taking with dollars (although most of it is via gross outflows). He just presents it as if it’s a direct Q effect, when it’s really a P effect to the degree its true.


      On the other issue mentioned above, commercial banks do not run huge open FX positions; they are constrained by FX limits and FX risk capital requirements

      1. Michael Hudson to me
        show details 9:34 AM (4 minutes ago)
        Thanks, Warren,
        I’ll have to think about this.

        On 10/13/10 9:06 AM, “Warren Mosler” wrote:

        Hi Michael,

        You might be interested in this well thought out response by JKH.


      2. There is a bit of technicality here JKH.

        For example your point “Gross outflows on capital account that must be offset by gross inflows by accounting identity, in order for the international balance sheet to balance according to the current account deficit”

        All transactions automatically make sure accounting identities are satisfied. If you see the UK’s Pink Book 2010 page 13,


        you may see big numbers in “currency and deposits” (item 4).

        As for capital and risk management for banks, there is a sector which has players with zero capital requirements to trade with – the huge financial sector. The combined entity does not suffer from capital constraints.

        In the Brit style – “you know what I mean” 🙂 Normally we say that current account must be balanced by capital inflows. However it is automatic. However, the non-banking sector is doing all kinds of transaction and these inflows are usually said to be financing the current account.

  5. The demise of the dollar

    In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

    By Robert Fisk

    Tuesday, 6 October 2009

    In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.


    1. what matters is what price the saudis set for their oil. they post prices to refiners and then let them order all they want at the posted prices.

      on any given day that would include/imply a dollar price at then current exchange rates. so if the dollar price the saudis demand goes up for any reason it goes up. etc.

  6. on any given day that would include/imply a dollar price at then current exchange rates. so if the dollar price the saudis demand goes up for any reason it goes up. etc.

    “it goes up.”

    What does “it” stand for here?

    Sounds like this was written on the fly 🙂 Is this really all that can essentially be said regarding the article?

    1. sorry, the dollar price will go up if the dollar price the saudis demand goes up.

      so if they demand the same euro price but the dollar has gone down vs the euro, the dollar price of oil will go up.
      and doing that is the same as the saudis raising the dollar price. that’s how it is for a monopolist (at the margin)

  7. Warren, do you know whether Hudson has thought about JKH’s remarks, and if so, where he might write them for our edification and delight?

    It would be good to get a clear unravelling of this complex question. In particular, is Hudson “out of paradigm” in virtue of “his own agenda,” or is it owing to an alternative theoretical framework? If the latter, and if JKH is right, how valid is it?

  8. More on the tension between US and China:

    China as Collateral Damage
    Bernanke’s Biggest Problem


    Bernanke’s biggest problem is China. China was America’s darling when it was loading up on Treasuries and fueling a historic consumption binge that filled Wall Street’s coffers. But now that the purchase of US debt is preventing the Fed from implementing its monetary policy, Bernanke wants a change. Unfortunately, China is not cooperating. It’s piling up foreign exchange reserves at record pace to maintain the dollar peg which is widening the current account deficit to precrisis levels. The yawning trade imbalance is pushing the world towards another crisis, which is why Bernanke and Co. are determined to persuade China to let its currency to appreciate to narrow the gap. (China’s foreign exchange reserves surged to $2.65tr in the 3rd quarter)

    Bottom line: The Fed cannot jump-start the domestic economy if the trade deficit continues to grow. It’s impossible. The stimulus just gets flushed down the plughole. China is soaking up the lion’s share of global demand by underbidding the US on everything under the sun. That’s the real effect of the dollar peg, it gives China an unfair advantage over its competitors. A free-floating currency helps to level the playing field (even if US labor is competing with some of the world’s worst paid workers) Bernanke’s announcement last Friday, is just the first shot fired over Beijing’s bow. There will be more to come. This weekend’s meeting of the G-20 provides Treasury Secretary Timothy Geithner with the perfect opportunity to put the spotlight on China and to rail against currency manipulation. Many expect him to make a strong statement demanding changes to the policy.

    An update by Reuters on Wednesday confirms the US position. Here’s a blurp:

    “The United States wants Group of 20 finance chiefs to commit to allowing market forces to set currency values and will discuss using targets for trade to measure progress, a senior U.S. Treasury Department official said on Wednesday.

    Ahead of weekend G20 meetings in Gyeongju, South Korea, the U.S. official made clear Washington wants currency levels to be a focal point of the meetings and sees current account surpluses and deficits a vital part of the discussion….

    From our perspective we believe these issues are fundamentally, inherently linked and that it is important for the G20 to be able to undertake cooperative action facilitating orderly adjustment of imbalances and also ensuring more effective adjustment of exchange rates in line with economic fundamentals,” the official said.” (“U.S. wants G20 commitment to allow currency rises”, Reuters)

    Neither the Obama administration nor the Fed want a full-blown trade war with China. They’d rather see China “assume its position in the global system”. (as US diplomats aver) But that means that China will have to compromise on, what it considers to be, a matter of national sovereignty. And, there’s the rub. China is a proud nation and doesn’t want to be told what to do. But that’s not how the system works.

    Behind the facade of free markets and international institutions, lies an imperial system ruled from Washington. That leaves Beijing with two options; they can either bow to US pressure and fall in line or shrug off Washington’s demands and continue on the same path. If they choose to resist, relations with the US will grow more acrimonious and the probability of conflict will rise.

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