With There Ever Be Another "Tight Money" Recession?

[AgAuMoney]

when the fed simply trades reserves for treasury bonds this is not money creation.

The fed does not trade reserves for treasury bonds.  The fed has no reserves.  The fed does hold bank reserves if a bank so desires.  Those reserves are under the control of the bank, not the fed.

The fed creates money to purchase treasury bonds.

The fed destroys money when it sells treasury bonds.

A bank may use its reserves (held at the fed or not) to purchase treasuries (held at the fed or not).  That is money supply neutral.

[stone]

when the fed simply trades reserves for treasury bonds this is not money creation.

The fed does not trade reserves for treasury bonds.  The fed has no reserves.  The fed does hold bank reserves if a bank so desires.  Those reserves are under the control of the bank, not the fed.

The fed creates money to purchase treasury bonds.

The fed destroys money when it sells treasury bonds.

A bank may use its reserves (held at the fed or not) to purchase treasuries (held at the fed or not).  That is money supply neutral.

AgAuMoney, I know that the bank reserves that the Fed trades for treasury bonds are freshly created bank reserves created expressly for that purpose out of thin air by the Fed. I still consider it an asset swap. The system (outside the Fed) has less treasuries and more bank reserves after QE. It is balance sheet expansion. The Fed balance sheet expands with assets matching liabilities. It is not creation of unmatched money. It may be cash for trash BUT it isn't cash for nothing.
http://www.federalreserve.gov/monetaryp ... lities.htm

The expansion of Federal Reserve assets that has resulted from the aggressive response to the current financial crisis has been matched by an expansion of the Federal Reserve's liabilities, particularly the deposits of depository institutions

[moda0306]

AgAu,

When the fed buys treasury bonds with money it increases the bank's reserves and decreases their bond portfolio, does it not?  Regardless of how we look at whether their reserve balances go up, cash and treasury bonds are both money, and pretty identical at that.  QE is not a helecopter drop.  It is an asset swap.

[stone]

Moda, can you remember that video clip where Ron Paul asks Bernancke whether gold is money and Bernanke replies, "would you say treasuries were money?". I guess what Benancke is getting at is the distinction between immediate liquidity and a store of value. When immediate liquidity is limited to a level below what people require, then it attains a scarcity above and beyond its "store of value" worth. When it is in excess (as now) then that is swamped.

[moda0306]

I didn't see that video.

I guess I don't see liquidity vs store-of-value being set-in-stone issues with gold and treasuries.  In the 1980's and 1990's ST treasuries were an excellent store of value, and gold wasn't.  As far as liquidity goes, neither will technically be accepted at the grocery store, though I still consider ST treasuries very, very similar to cash.  Maybe I'm misinterpreting the true meaning of liquidity, but if it's simply turnaround time on getting cash for your investment then both would be pretty fast, in modern markets, I'd assume.

With the vast majority of treasury bonds in issuance being on the short-end of the curve, I have trouble imagining that even a QE of ALL of the treasury debt in existence would cause hyperinflation.  People hold dollar-denominated treasury instruments because they are a relatively stable store of value (even if they lose 1%-3% real value in a given year, the fact that they're super-safe in nominal terms carries some value).  Whether these stores of wealth pay .3% interest or not isn't going to make the dollar collapse... at leats as far as I can tell.

[stone]

Moda, regarding the distinction between bank reserves and STT, I agree that with bank reserves, enough is enough. Once there are plenty of bank reserves in the system, such that all liquidity requirements are met, then having more won't do anything that wouldn't be done by STT (perhaps though commodity trading can in time scale up so as to make use of as much liquidity as there is). BUT if bank reserves are in short supply, then the scarcity can cause friction in the financial system and that friction is how restricting bank reserves creates short term interest rates (in a frictionless system short term interest rates fall to zero).

[moda0306]

This is one area MMR and MMT seem to feel that you are wrong (though I've tended to think you are right)... their point is that because the fed window can be accessed, reserves are irrelevant to lending.

But assuming they're wrong and STT's vs reserves actually DOES constrain lending (or speculating), then yes, QE might make things happen.  I tend to think, though, that we're way more constrained on the demand side of loans that supply, being in a deleveraging housing recession and all that.

Though you have pointed out that giving banks reserves may give them the opportunity to speculate more, etc... I still have to learn more about this stuff before I attempt challenging the folks at monetaryrealism.com (great site, btw) on their assertion that we are not at all reserve-constrained.

[stone]

This is one area MMR and MMT seem to feel that you are wrong (though I've tended to think you are right)... their point is that because the fed window can be accessed, reserves are irrelevant to lending.

But assuming they're wrong and STT's vs reserves actually DOES constrain lending (or speculating), then yes, QE might make things happen.  I tend to think, though, that we're way more constrained on the demand side of loans that supply, being in a deleveraging housing recession and all that.

Though you have pointed out that giving banks reserves may give them the opportunity to speculate more, etc... I still have to learn more about this stuff before I attempt challenging the folks at monetaryrealism.com (great site, btw) on their assertion that we are not at all reserve-constrained.

Moda, lending at the Fed discount window is normally at a "penalty rate". The UK bank Northern Rock went bust because it had a business model based on getting continuously rolled over short term inter-bank lending (originating from the Yen carry trade and the Japanese zero rate policy). When that dried up in 2008 they were still able to borrow at the Bank of England discount window but they were then borrowing at a higher (penalty) rate than they were receiving from the long term mortgage loans that they had made. That rapidly caused the bank to go bust. Obviously the low rate mortgages at 125% of house value were totally dependent on cheap money. It is plainly wrong to say that the whole process could have occurred with a business model based upon Northern Rock intentionally borrowing at the discount window penalty rate in order to make mortgage loans.

[moda0306]

So they were effectively reserve constrained due to high rates at the window.

But isn't this policy-dependent?  Couldn't a low window rate create an environment where we're effectively not reserve-constrained.

You should go to monetaryrealism.com and give them your points.  There's a lot of good conversation there but one problem I have with MMT and MMR is they're quick to say "banks are not reserve-constrained" without really diving into it.

[stone]

So they were effectively reserve constrained due to high rates at the window.

But isn't this policy-dependent?  Couldn't a low window rate create an environment where we're effectively not reserve-constrained.

You should go to monetaryrealism.com and give them your points.  There's a lot of good conversation there but one problem I have with MMT and MMR is they're quick to say "banks are not reserve-constrained" without really diving into it.

Moda there was a UK newspaper piece (in the Times so not free online) today about how  Bankers hate the Bank of England governor Mervyn King because he insisted on not having a near zero window rate in 2008. He (quite rightly in my view) made the point that doing so would have created a moral hazard that would have made banking a joke. I guess the point is, if it were possible to borrow at zero interest in unlimited amounts at the window, then what would limit the size of banks or credit fueled asset prices? That is why MMTers such as Bill Mitchel say that banks should not be able to make secured loans (ie no mortgages) only unsecured loans that they keep on their own balance sheet to maturity. I agree that IF that rule was in place, then banks perhaps would lend responsibly even if unlimited zero interest rate lending was available at the window. BUT obviously that rule isn't in place and is pretty far out. Anyway I think banks would mostly use such a liquidity provision simply for commodity speculation -as a way to use surging spikes and troughs in commodity prices to alternately hijack the earnings of producers and consumers.

[AgAuMoney]

but when the fed simply trades reserves for treasury bonds this is not money creation.

The fed has no reserves to trade.  It never trades reserves for treasury bonds.

[AgAuMoney]

I totally agree that the money for Fed loans and asset purchases is created out of thin air. That is also true for everyday bank loans too. If I get a bank loan to buy a car, that too is money created out of thin air. In both cases there is also a debt or asset attached. When the Fed makes a loan, the company that receives the loan owes the Fed money. They have not permanently received something for nothing, they are in debt to the Fed.

Entirely agree.

And the Fed is free to totally or partially forgive that debt with no consequence to either party.

[AgAuMoney]

A point of note is how whilst gold (silver) might be a long term preserver of purchase power, when people say that they're talking very long term. In the first of the above charts you can see how if your great great grandfather had bought some precious metals in 1875 neither your grandfather or father might have seen such purchase power hedging. Only at the 1980's highs and more recently had that become true.

Yup.  Whenever you read about preserving purchasing power, or any kind of asset return, ask yourself, "over what timeframe?"  Edit:  And then ask yourself, "how does that correlate with my needs?"

With gold or silver the numbers quoted are at best lifetime but more typically several lifetimes as you point out.

Looking at gold and silver prices over decades instead of centuries, it is easy to see how new discoveries (added supply) has caused disruption in price and hence purchasing power.  It is a bit harder to see how executive fiat (e.g. alloying coinage) has had the same effect, but the evidence is there.  In both cases the effect diminishes with time, but that may be time you do not have.

And that's where the permanent portfolio comes into its own.  With multiple asset classes, you don't depend on a single class behaving perfectly and perfectly in time.