McConnell Economics, Chapter 13

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Jin+Guice
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McConnell Economics, Chapter 13

Post by Jin+Guice »

Discussion of the curriculum McConnell, Brue, Flynn Economics text, chapter 13.

Jin+Guice
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Re: McConnell Economics, Chapter 13

Post by Jin+Guice »

Chapter 13 discusses money and banking.

Money is defined as:

A medium of exchange
A unit of account
A store of value

There are 3 definitions of money
M1: Currency and “checkable deposits.”
M2: Savings deposits, <100,000 time deposits (CDs), Money Market accounts, M2 also includes M1
M3: M2 and >$100,000 time deposits.

In the U.S., money is “fiat money,” which has no intrinsic value. It gains it’s value from people’s faith in it’s purchasing power and the amount of money that exists in relation to the amount of goods/ economic activity in the current economy.

People hold money because of it’s transaction value and it’s store of value. The total demand for money is both of the total demand for these values added together.

Bond pricing: A drop in the supply of money will cause and greater demand for money. People will sell assets (can simplify to assume all assets are bonds) to get more money, but the supply of money is unchanged, so bond prices will drop.

Since bond yields are fixed the new price will cause a higher yield. EX: If a $100 bond yielding $5/ year (5% annually) drops to $50, the new yield is 10% annually.

New bonds must compete with old bonds and thus bond yields are driven up.




Not a lot of new info to me in this chapter, but it's got a lot of info for those with no familiarity of how money is created/ the fed works in the U.S.

ertyu
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Re: McConnell Economics, Chapter 13

Post by ertyu »

This is an interesting chapter to discuss because as I understand it, some of this has changed since the start of the QE era. I hope others will correct me if I'm wrong, but I believe since fairly recently, there's a new regulation of some sort or another that makes money in savings accounts more easily accessible and thus arguably kicks them into M1. Also, afaik, the *positive* part of MMT has given a twist to the story of money creation.

Can anyone recommend a good beginner level read on this? I am particularly interested in written material rather than podcasts because podcasts tend to be haphazard, including some things but not others. Ditto, the written material should ideally not be a blog (which tend to be narrowly focused on current events) or a paid substack. Basically, I am hoping for the updated version of this textbook chapter.

*Note: I believe it would be best if our discussion of MMT sticks to its positive aspects. Normative recommendations are outside of the scope here. Please stick to what is descriptive (this is how the system works) rather than what is proscriptive (this is what we should do/this is what our policy recommendations are). Thank you.

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Alphaville
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Re: McConnell Economics, Chapter 13

Post by Alphaville »

ertyu wrote:
Tue Apr 06, 2021 10:42 pm
Can anyone recommend a good beginner level read on this?
im not recommending it, but my approach would be to read stephanie keton's "the deficit myth" if it's accessible (you'll find it more accessible than us)

actually i haven't managed to read any macroeconomics due to both boredom and other needed tasks, but i'm interested in her anyway after reading some articles...

you couldmalso directly watch her youtubes/lectures (i havent) although thats not what you asked for. nevertheless...

i might try to enter the subject via her ideas instead of the old way....

ps there's a kindle version and just downloaded the free sample

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Alphaville
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Re: McConnell Economics, Chapter 13

Post by Alphaville »

o man! it's eminently readable and clear and illustrative! also, hugely non-boring. the sample i read anyway.

im adding it to my wish list.

https://www.amazon.com/Deficit-Myth-Mon ... B07RM72BT7

might see first if they have it at the library...

eta: yah. booked it. there's an audiobook. there's a waitlist! :lol:

anyway here is her original paper from 1998??

Can Taxes and Bonds Finance Government Spending?
by
Stephanie Bell*
Cambridge University Visiting Scholar, The Jerome Levy Economics Institute
July 1998

Abstract
This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.

http://www.levyinstitute.org/pubs/wp244.pdf

ertyu
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Re: McConnell Economics, Chapter 13

Post by ertyu »

Alphaville wrote:
Tue Apr 06, 2021 11:42 pm
stephanie keton's "the deficit myth"
haven't read it yet but from what i hear, it's very much prescriptive so i'm not sure i trust it to be objective. not that things that claim to be descriptive can't be massively biased and politically informed (see, oh, the entirety of mainstream eco). it's making the point, "here is why the gvt should spend more" not "here is how things work and how this impacts the macroeconomy and each subtype of your investments"

if it turns out that the deficit myth makes an argument deeper than, "we don't need to pay back debt denominated in our own currency thus as long as we have an output gap we can spend. when we get inflation we can stop spending and reign that in through taxes," pls let me know :lol:

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Alphaville
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Re: McConnell Economics, Chapter 13

Post by Alphaville »

ertyu wrote:
Wed Apr 07, 2021 2:32 am
haven't read it yet but from what i hear, it's very much prescriptive
i read it was descriptive not prescriptive actually? ie how government finance actually works?

but i'll let you know after i read. which might take a few weeks.

ertyu
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Re: McConnell Economics, Chapter 13

Post by ertyu »

Alright, sold. I'm reading it too :D

white belt
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Re: McConnell Economics, Chapter 13

Post by white belt »

@ertyu

As I understand it, the issue with monetary theory vs reality stems from the insulated worlds of academia and industry when it comes to economics. I think Jacob has touched on this in the past, but many economists focus on academia, which means they are quite naive towards many of the complex realities of the financial world. This is also why it may be difficult to find a textbook that talks about how the monetary system really functions in practice, rather than just in theory (along with the fact that textbooks are generally 10-20+ years behind industry research). This is also one of the reasons the Federal Reserve (made up mostly of economics PhD's) often seems like it doesn't understand the first and nth order real-world effects of its policy decisions.

One source I have found that is quite informative is the Eurodollar University 7-Part Series with Jeffrey Snider on MacroVoices. Yes, this is technically a podcast, but since you can read the transcripts and it includes a detailed chart deck, I think it is a good place to start to understand the EuroDollar and shadow banking dynamics that exist. It was also targeted for finance professionals who do not have much understanding of monetary theory beyond the basic textbook narrative. You can find it halfway down the page here: https://www.macrovoices.com/edu

I have not found a textbook that covers this information (please someone correct me on this if they know of writings that cover this more).

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Re: McConnell Economics, Chapter 13

Post by Alphaville »

white belt wrote:
Wed Apr 07, 2021 11:32 am
As I understand it, the issue with monetary theory vs reality stems from the insulated worlds of academia and industry when it comes to economics.
i don't know who said what to whom here, but modern monetary theory originated from warren mosler who was a hedge fund manager, automotive entrepreneour, etc, before going into academia

see: https://en.wikipedia.org/wiki/Warren_Mosler

read at least kelton's free sample intro. you might agree or disagree with her but it's interesting either way and she's great at illustrating concepts. and the concepts are mind blowing.

eg this bit which relates to your profession:
Take military spending. In 2019, the House and Senate passed legislation that increased the military budget, approving $716 billion, nearly $80 billion more than Congress had authorized in fiscal year 2018.15 There was no debate about how to pay for the spending. No one asked, Where will we get the extra $80 billion? Lawmakers didn’t raise taxes or go out and borrow an extra $80 billion from savers so that the government could afford to make the additional payments. Instead, Congress committed to spending money it did not have. It can do that because of its special power over the US dollar. Once Congress authorizes the spending, agencies like the Department of Defense are given permission to enter into contracts with companies like Boeing, Lockheed Martin, and so on. To provision itself with F-35 fighters, the US Treasury instructs its bank, the Federal Reserve, to carry out the payment on its behalf. The Fed does this by marking up the numbers in Lockheed’s bank account. Congress doesn’t need to “find the money” to spend it. It needs to find the votes! Once it has the votes, it can authorize the spending. The rest is just accounting.
i don't have the rest of the book so i can't comment on it yet but i look forward to reading it as soon as i can.

white belt
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Re: McConnell Economics, Chapter 13

Post by white belt »

@Alphaville

To clarify, I was using the term “monetary theory” to generally refer to the role of money and banking, as covered in the McConnell Chapter 13, not to refer to MMT.

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Alphaville
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Re: McConnell Economics, Chapter 13

Post by Alphaville »

i'll take that back a little bit, chartalism precedes moser and mmt:

https://en.wikipedia.org/wiki/Chartalism

per that approach, basically it's not "people's faith" but *state power* that gives money its value.

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Alphaville
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Re: McConnell Economics, Chapter 13

Post by Alphaville »

ertyu wrote:
Wed Apr 07, 2021 11:27 am
Alright, sold. I'm reading it too :D
hey! latest updates: i realized that instead of trying to read a dull book i already have, or waiting for an inaccessible holy grail priced out like a college textbook, i could just pony up to get the one macroeconomics book i can't get out of my mind.

seems as good a starting point on macroeconomics as anyone--perhaps better, even. and if not better, at least it will be an anchoring point, and it's bound to be a subject of debate for years to come. so it's officially part of my study library as of this morning,

i will start reading it this weekend. let's catch up on it soon.

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Re: McConnell Economics, Chapter 13

Post by chenda »

@alphaville - A question has always bothered me, if fiat money is all make believe, then our towering mountains of debt are all make believe. They don't really exist except in our imagination. In which case we could...imagine them all away ? :o

All that really matters is the productivity of our fields, factories and the knowledge of our workforce.

Maybe I should read the book too :D

ertyu
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Re: McConnell Economics, Chapter 13

Post by ertyu »

We could imagine them all away except for the part where one person's debt is another person's asset. So if you want to imagine away the fact that the US gvt ows money, you are also imagining away the treasuries people own -- and the income stream these treasuries entitle them to claim.

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Re: McConnell Economics, Chapter 13

Post by 7Wannabe5 »

Inflation will erode the value of the income stream from Treasuries. Pretty much wiped the slate of the European oligarchy* early in the 20th century.

*The characters in earlier novels might ask “How many pounds does he have?” inquiring about yearly income from treasuries, because the values/yields were very steady. So, net worth invested in treasuries equaled income equaled standard of living, so these concepts came to be thought of as equivalent. Same danger somewhat applies to applying SWR as guarantee.

ertyu
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Re: McConnell Economics, Chapter 13

Post by ertyu »

Yes exactly - inflation will erode the value of the treasuries and the associated income stream. thus you can think of inflation as imagining the debt away slowly vs. imagining it away all at once (jubilee).

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Re: McConnell Economics, Chapter 13

Post by chenda »

Right, because make believe money entitles people to claim real goods and services. Too much money chasing too few goods and services (usually) leads to inflation.

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Alphaville
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Re: McConnell Economics, Chapter 13

Post by Alphaville »

all money is make-believe though. just as all languages. when you say "car" a car doesn't magically appear. language is systematic social hallucination :D

ps- this is not an idea from the book. im just about to start the book...

--

eta: according to this fund manager the language idea was formulated by david hume in modern times
https://www.philosophyofmoney.net/money-and-language/

(though im sure some stoner conceived it long before ha ha)

--

eta 2: ofc we don't want to get to the point where our words are worthless/meaningless

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Re: McConnell Economics, Chapter 13

Post by chenda »

@alphaville - Oh I agree, I'm not against fiat money :)

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