Good to see someone telling it like it is!

Was Quantitative Easing a Tax?

By John Carney

March 29 (CNBC) — In the last of his four lectures to students at George Washington University, Ben Bernanke explained how the Fed’s quantitative easing programs worked. As it turns out, they were akin to a tax hike.

This aspect of government asset purchase-and-resale-for-profit programs is not well understood. I explained it in terms of a Treasury program last week.

A tax takes dollars out of the private sector, leaving households and businesses with fewer dollars and the government with more dollars. When the government buys something for $10 and sells it back to the private sector for $12, the net effect is the same as if the government had taxed away those $2.

Bernanke doesn’t come out and call quantitative easing a tax. But he comes close.

“The Fed’s asset purchases are not government spending, because the assets the Fed acquired will ultimately be sold back into the market. Indeed, the Fed has made money on its purchases so far, transferring about $200 billion to the Treasury from 2009 through 2011, money that benefited taxpayers by reducing the federal deficit,” he explains in one of the prepared slides.

Here’s a good rule of thumb. If something reduces the federal deficit, it is either the equivalent of a spending cut or a tax hike.

27 Responses

  1. Of course, Bernanke knows how to do one thing…Print money which devalues existing dollars, a hidden tax. This is the way the govt is going to “solve” all it’s financial problems. The $100trillion hole approaching can ONLY be funded by printing. Hold on…

  2. Based on an MMT understanding of our monetary system; is it true to say that Federal Deficit spending is the only real form of money printing?

    I understand that you could ask 10 different people this question and get 10 different definitions of moeny printing, but I would atleast like to nail down the MMT definition.

    1. @Steve, government spending is “money” printing. Deficit spending is just net new “money” creation/printing.

      Additionally, when the FED pays a premium on a financial asset it too is creating net new financial assets (“printing money”) – but only on that premium part which is chump change in the grand scheme of things.

      1. @Adam1,

        From a definitional perspective…

        The federal government (FED & Treasury working together) spends “money” or financial assets (reserves specifically) into existence. This is Vertical Money Creation. The collection of taxes is the removal of financial assets from the non-government sector. Bond sales by the treasury are really the conversion of one type of financial asset (reserves) into another type (bond).

      2. @Adam1, How would you call it when the cb on day 1 lends money to the private domestic sector, let’s say to a bank?

      3. @Walter,

        To the best of my knowledge the CB never lends without collateral, which means its really a swap – no new net financial assets are placed into the non-government sector.

      4. right, it goes back to ‘real bills’ discussions a couple of hundred years ago or so.

        if the govt lends unsecured and non recourse it risks hyper inflation.
        that’s why i say the price level is a function of prices paid by govt when it spends and/or collateral demanded when it lends

      5. @Adam1, Yes the bank would give collateral. But this collateral is not in the currency yet, because we talk day 1. The economy is already there, but the currency not. So the collateral is for example in foreign currency or gold or real estate.
        Doesn’t this mean that the currency is lent into existence?
        Doesn’t this mean that the money that we buy govt bonds and pay taxes with comes from govt lending instead of govt spending?

      6. deficit spending sits as currency+ reserves+ tsy secs.

        if there is no deficit spending it has to come from lending.
        but as a practical matter on day 1 there is deficit spending.

      7. @Walter,

        A CB typically only takes high grade financial assets like government bonds or foreign currency. They are already financial assets (the money was already created via horizontal or vertical means). If a CB took real estate or gold onto its books its not really a loan, though I wouldn’t doubt they’d call it one – it’s really a purchase which means its really a fiscal action and yes in those cases it would create a new financial asset.

        “Doesn’t this mean that the money that we buy govt bonds and pay taxes with comes from govt lending instead of govt spending?”

        I’m not 100% sure what you’re getting at, may be its just symantic, but I can explain the actual operations and maybe that will clear it up for you…

        The FED’s primary job, as is that of any CB, is to ensure the stability of the payment system that supports the financial system. How does it do that? It sets a target interest rate that is tied to reserves (the money used to clear and settle inter-bank payments) – the Federal Funds Rate in the US. Any time the FFR tries to deviate the FED performs an open market operation to increase or decrease the reserve level in the Federal Funds Market to maintain its target interest rate. The US Treasury’s primary account is with the FED. This means that only reserves can be used to settle tax payments or to buy US Treasury bonds. In order for the FED to MAINTAIN it’s target interest rate the FED must ensure there are sufficient reserves in existence prior to the bond sale. This is why a bond sale is always coordinated between the FED and the Treasury. If there are not sufficient excess reserves in the banking system the FED must perform an open market operation to add them. This operation does not itself create net new financial assets but just swaps existing bonds for reserves. The government then swaps/sells those reserves for bonds that it then spends back into existence.

        This sounds a@@ backwards but we haven’t updated our operational rules since leaving the gold standard. If we wanted to issue bonds under a fiat regime, the more transparent operations would be for the FED to create the reserves for the Treasury and then as they built up in the banking system we could issue bonds after the fact.

      8. @Adam1, Warren, I think this point is important.
        We discussed it partly before on Feb 22nd 2012 on this blog at the post about Greece.
        I just try to get the mainstream view versus the mmt view clear.
        Mainstream applies the following restrictions, also on day 1:
        1. No debt monetization – cb cannot buy bonds directly from tsy
        2. No negative equity for cb – cb cannot ‘give’ the currency to tsy
        3. No overdraft rule for tsy – tsy cannot do deficit spending to start with.
        You are then left with the cb lending not to tsy, but to the non-govt.
        And only after that the tsy can borrow from or tax the non-govt to get its first money (the new currency that the cb issued). And then the tsy starts spending.

        In the mmt view this does not play because you see cb and tsy consolidated and just start with deficit spending and value comes from taxation.

        As I mentioned on Feb 22nd this whole issue of day 1 and how does the tsy gets its first fiat money is not really actual in most countries because their fiat money system evolved from a previous system with the same named currency. In Europe though many countries had to deal with this after the collapse of the USSR and later Yugoslavia.

        Each time when I hear or read the ‘German’ view / doctrine for instance I get the feeling they have a serious problem with deficit spending and money not being backed by anything, created out of thin air. It looks to me that that view supports then that money is and should be lent into existence. How else they get their first own fiat money to the tsy?

        I regularly have read as one of the points against MMT that just taxation does not cover where fiat money gets its value from. It’s for sure that we hold much more fiat money than what we need for taxes. If money would be lent into existence by the cb to the non-govt and the cb always requires collateral then that would indeed point at some form of backing.
        It is also in line with the idea that the economy is always there already before the fiat money is introduced.
        Isn’ t this also the “german’ idea behind growth. Extra money should come into the system not via deficits, but via real extra output that (indirectly) will serve as collateral for more fiat money lent into existence.

        As mentioned I just try to get clear how in mainstream they claim the tsy gets its first own fiat money.

      9. greece isn’t the issuer of the currency so you ‘can’t’ combine the greek tsy with the bank of greece which is part of the ecb system

        i’m not sure what the ‘unified’ german idea is anymore

      10. @Walter,
        Day 1: April 5, 1933. Presidential Order 6102 orders the delivery of all gold coin, bullion, and certificates to the US Treasury, on or before May 1st, in exchange for fiat currency. While it was a forced exchange it was in effect a purchase of gold with fiat currency. It was spent into existence.

      11. @Adam1, Warren, I am not suggesting any combined ( cb+tsy) view for Greece. The discussion on Feb 22nd just happened to be on the post about Greece.

        I am, like you, also not so sure about what the ‘unified’ german idea is nowadays. And in whole mainstream there are many sub-streams. I referred to germany because we often hear the deficit and debt phobia from that corner.

        My point is just that if we want to convince the world of MMT then the best is to refute other opinions by force of logic (as you mentioned in your Soft Currency Economics). So, if we claim that the overall model should be deficit spending then we must be able to explain that cb lending backed by collateral cannot be the overall picture.

      12. @Adam1, Adam, April 5 1933 was not the transition date to fiat money as we know it today. That transition date was on Aug 15 (?), 1971.

        All people we need to convince would say that then (after 1933) there was at least some backing of the money via the gold the govt had obtained.

    2. @Steve,’Money printing’ is a term that belongs to the system of the gold standard and its derivatives. In those systems the cb had to defend a fixed ratio between the the gold reserves or foreign exchange reserves as collateral and the issued money (paper claims). If the govt wanted to spend more than what was backed then it had to finance via borrowing (debt based) or tax (tax based) or it could issue more money AKA ‘money printing’ (money based). In the case of printing the above mentioned ratio went down.
      In the fiat money system as we know it since 1971 there is no such ratio and hence the term ‘money printing’ is totally inapplicable.
      There is no such distinction as ‘money printing’ in the fiat money system. The govt spends or lends.
      We could agree to redefine of course and say that all spending can be called ‘money printing’ and all taxing can be called ‘money unprinting’.

    3. first you have to define ‘money’ or, better still, don’t use the word.

      mmt tells us the only source of dollar net financial assets for the non govt sector is govt deficit spending

  3. Prof Mosler, What does Mr. Goodman not know about Fed operations? Monetization is monetization and not a burden to the Treasury or the budget. What’s his problem?

    Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.

    “The U.S. government is growing increasingly more dependent on borrowing to finance itself, with net issuance of Treasury securities hitting 8.6 percent of gross domestic product (GDP) on average per annum, more than double levels before the crisis.

    Fed intervention in the government debt market makes demand for Treasury bonds appear higher than it really is, as foreign creditors and other investors have fled U.S. government debt instruments and are looking elsewhere until the government makes serious attempts to curb spending and narrow its gaping deficits.”

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