Article: Europe's pain is coming America's way

[murphy_p_t]

Gumby, the comments from the man who runs the Desk (Brian Sack) at the NY Fed also challenge your statement. See http://www.bis.org/review/r110210c.pdf

"Implementing Treasury purchase operations

A good place to start is with the distinction between the roles of the FOMC and the Desk. The  FOMC  is  responsible  for  making  monetary  policy  decisions,  while  the  Desk  is responsible for implementing those policy actions on behalf of the FOMC. "

and

"... the Desk has been able to purchase large volumes of securities in a rapid  manner,  as  required  by  the  policy  decisions  made  by  the  FOMC.  Indeed,  over  the period since the FOMC’s decision to expand the SOMA portfolio, the Desk has purchased about $300 billion of Treasury securities"

These are the type of "primary source" information I was requesting of you.

[Gumby]

murphy_p_t,

None of the quotes you've presented contradict anything I've said. They are all correct.

[moda0306]

Please note that there is no mention of "swaps" to acquire these treasuries, but rather the statement clearly states that the Fed is to "purchase" these Treasuries.

Exactly. When the Fed purchases Treasuries, it exchanges them for dollars. That's a swap. The private sector is left with the exact same amount of wealth as it had before the transaction started.

I've been thinking about this, and I think it needs an asterisk... Think about it... if there is $14 Trillion of treasuries out there, and in doing QEII the fed purchases $800 Billion and makes that $14,000,000 in debt worth more (lowered rates on existing debt will raise value), doesn't that in-effect increase the nominal value of NFA's out there?  

[murphy_p_t]

murphy_p_t,

None of the quotes you've presented contradict anything I've said. They are all correct.

i went back and see i misinterpreted something you wrote....

[Gumby]

Please note that there is no mention of "swaps" to acquire these treasuries, but rather the statement clearly states that the Fed is to "purchase" these Treasuries.

Exactly. When the Fed purchases Treasuries, it exchanges them for dollars. That's a swap. The private sector is left with the exact same amount of wealth as it had before the transaction started.

I've been thinking about this, and I think it needs an asterisk... Think about it... if there is $14 Trillion of treasuries out there, and in doing QEII the fed purchases $800 Billion and makes that $14,000,000 in debt worth more (lowered rates on existing debt will raise value), doesn't that in-effect increase the nominal value of NFA's out there?  

Well, the amount of net financial assets in the private sector doesn't change. The Treasuries are worth more, yes, but you won't find additional net financial assets in the private sector to buy those Treasuries. You may however find more credit was created (or destroyed) by those actions, but that's what the Fed's actions are supposed to do.

[moda0306]

Gumby,

Ok... but technically, since we view treasuries as liquid, and not some kind of lock on our money... so shouldn't we see that peoples' nominal NFA purchasing power has gone up by XX%?

[MediumTex]

It's really amazing how the whole system seems to function as if there was a pile of gold at the bottom of it all backing up all of the paper promises.

The fact that there IS a pile of gold at the bottom of it all (sort of) just makes it that much harder to understand. 

Ultimately, perhaps governments and central banks own gold purely for psychological reasons, with some of these psychological reasons being their own inability to grasp that we really are in a post-gold standard world.  OTOH, maybe we aren't actually in a post-gold standard world--i.e., if we were truly in a post-gold standard world it would be absurd for governments and central banks to own ANY gold.

[moda0306]

MT,

MMR has gotten into some good conversation as money being a social construct.  MMT tends to insist the simple ability for the gov't to tax in a fiat currency and put a gun to your head to make you pay in that currency can result in a fiat currency holding value as long as the gov't holds that power.  That power is likely much more correlated to the quality of government and the peoples' trust in it than gold in a vault somewhere... though I do tend to think maybe there's still something more to it.

MMR claims that since we as a society control our government, that to illustrate it as someone holding a gun to our head is a misrepresentation, and that we tend to WANT our government to establish a stable, common, fiat currency, and we wouldn't accept the coercion of taxes unless we weren't relatively (as a society) happy with our government.

[Gumby]

Gumby,

Ok... but technically, since we view treasuries as liquid, and not some kind of lock on our money... so shouldn't we see that peoples' nominal NFA purchasing power has gone up by XX%?

Right, but wealth and money are two very different things. The point is that the Fed's actions are supposed to affect the way people view their own assets and credit. That's why the Fed moves assets around — to affect interest rates and how people perceive credit and their wealth.

[moda0306]

Gumby,

But you and I keep telling people "the fed doesn't change anyone's balance sheets... they just swap assets."  Maybe we're just arguing past each other, but if before QE I have $10 million in liabilities, and $20 Million in assets made up of treasuries, and AFTER QE those treasuries are now worth $22 Million, my balance sheet has changed... not just in composition but in actual Equity Balance.

I never really saw it as that before, and I agree that it works in the way you say... I think there's more to think about here, but maybe I'm just making something of nothing.

[Gumby]

I don't think we ever said that the Fed doesn't change anyone's personal balance sheets. At least I don't think I've ever said that. The Fed can only do asset swaps with Primary Dealers. That's how POMO and QE works. But, yes, those asset swaps can affect other people's balance sheets like you describe. And I'm saying that's what the Fed does!

It's no different than if the President gets on television and says something to make the markets rally. Stocks go up, but did the President create new net financial assets in the private sector?

[lazyboy]

It's really amazing how the whole system seems to function as if there was a pile of gold at the bottom of it all backing up all of the paper promises.

The fact that there IS a pile of gold at the bottom of it all (sort of) just makes it that much harder to understand.  

Ultimately, perhaps governments and central banks own gold purely for psychological reasons, with some of these psychological reasons being their own inability to grasp that we really are in a post-gold standard world.  OTOH, maybe we aren't actually in a post-gold standard world--i.e., if we were truly in a post-gold standard world it would be absurd for governments and central banks to own ANY gold.

I'm reading this fascinating discussion and I'm now in the camp that thinks that our money is created out of thin air- it makes the most sense. However, MT raises an interesting question about why governments hold gold. It could be partly psychological or partly because any one nation could demand gold similar to what France, under De Gaulle, did some years ago before we went off the gold standard. In other words, there is still some uncertainty as to what money really is to all people. That uncertainty seems to be what's fueling the rise in the price of gold over the last decade. Do we know how much gold is in Ft. Knox?

[Gumby]

It's really amazing how the whole system seems to function as if there was a pile of gold at the bottom of it all backing up all of the paper promises.

The fact that there IS a pile of gold at the bottom of it all (sort of) just makes it that much harder to understand.  

Ultimately, perhaps governments and central banks own gold purely for psychological reasons, with some of these psychological reasons being their own inability to grasp that we really are in a post-gold standard world.  OTOH, maybe we aren't actually in a post-gold standard world--i.e., if we were truly in a post-gold standard world it would be absurd for governments and central banks to own ANY gold.

MT,

I agree. I suppose a large pile of gold could be seen as a platform of wealth on which to legitimize a fiat currency.

However, GATA has uncovered some evidence to suggest that governments are still using gold behind the scenes — to manipulate the market price of gold against fiat currencies. If gold is seen as a hedge against tail risk (Bernanke's words, not mine), then perhaps governments are using their gold to affect how people view and trade those hedges.

[Gumby]

i went back and see i misinterpreted something you wrote....

Murphy, don't sweat it. We are all constantly learning here. Let us know if you have more questions and we'll try to help you see it from a different point of view.

I know you were looking for more official sources for some of what we are discussing here. Here is an article from PragCap that cites information from the Fed to explain how Treasury Bond auctions work:

PragCap: The N.Y. Fed Explains How The Government Spends First and Issues Bonds Later

What's important to take away from that article is that the Treasury and Fed are coordinating with Primary Dealers to wrangle up reserves and funnel them into Treasuries.

And then if you look at an actual Treasury Bond Auction result (sourced directly from the Treasury) you can see who is actually buying the bonds:

PragCap: Who Bought All Those Bonds?
PragCap: Breaking News: "Bankrupt" Nation's Bond Auction 3x Oversubscribed

The Primary Dealers always have enough money to more than take down the entire auction without any help from direct or indirect bidders. And you can see this on every single auction...

http://www.treasurydirect.gov/RI/OFGateway

...

But, honestly, I wouldn't try to learn all this in one night. It took me a few months to really digest all this in a way that I could understand it.

And to give you some perspective on just how complex this all is... About two years ago, Paul Krugman published the following blog post:

Legal Question

Does the Fed have the right to do a helicopter drop, i.e., just hand out cash? My guess is not: it’s empowered to buy assets, which is what it does in an open-market operation, but not just to give stuff away.

So to do the equivalent of a helicopter drop, the Fed would have to work with the Treasury: it would have to buy government debt, and the Treasury would then hand out the money.

But the Treasury can’t do this without enabling legislation.

And enabling legislation can’t pass without [Senator] Ben Nelson.

I think we have a problem here. There’s a hole in the bucket.

However, the Fed can change its inflation target any time it likes.
Source: http://krugman.blogs.nytimes.com/2010/0 ... -question/

So, here's Nobel prize winning economist, Paul Krugman, not entirely sure if he's correct about who has the authority to do helicopter drops. Krugman is correct, after all. But, he's almost unsure of himself! If a Nobel Prize winning economist finds himself confused about this (and I have more examples of him learning as he goes) then we can't expect anyone to fully understand the monetary system.

[MediumTex]

You might say that money today is a fantasy that is pegged to reality through governments taking whatever measures are needed to maintain the peg.

As most pegs eventually do, this will probably end badly, but for now it has that bizarre quality of a thing that is absurd and yet has been maintained long enough to begin to seem legitimate, sort of like Las Vegas or Communist Cuba.

Perhaps money today is just one more clever bit of government propaganda.  In many ways, it seems to work well enough, though I wonder whether it continuing to work depends upon most people not really understanding how it works.

[Gumby]

Perhaps money today is just one more clever bit of government propaganda.  In many ways, it seems to work well enough, though I wonder whether it continuing to work depends upon most people not really understanding how it works.

Yes. Money legitimizes a government. As Henry Ford once said...

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." — Henry Ford

...of course, Henry Ford was lobbying for debt-free fiat money (i.e. Greenbacks) when he said this.

[Bonafede]

Wow! There is a lot of great information posted here. Thanks for all the references. In for some very interesting reading!

[Gumby]

I want to make it clear that I do not think that our debt-based monetary system is a good thing. Ideally, the money would just be printed by the Treasury and distributed to the people without the need to issue debt. Having a huge pile of government debt just gives the big banks an enormous amount of risk-free assets on which to leverage huge amounts of credit off of.

See: http://youtu.be/gRE-IDYfi8Y

It would seem that the FIRE sector wants Treasuries in order to create more leverage.

The government could still provide a way for people to save in a risk-free manner, such as a non-marketable government CD, for instance (as Warren Mosler has recommended).

[murphy_p_t]

would this theory contradict MMT ideas?

The theory I put forward is that the size of the debt/deficit matter, perhaps not for technical reasons, but rather that the confidence in the whole system is undermined when the debt/deficit expands "excessively". This theory is based on mass psychology. If almost nobody, including those who follow markets closely, understands how the system "really" operates...doesn't the prevailing perception of how system works become the de-facto reality? For example, if 99.5% of market participants think debt/GDP ratio is a critical metric...won't it become important as participants vote by selling securities?

[MediumTex]

would this theory contradict MMT ideas?

The theory I put forward is that the size of the debt/deficit matter, perhaps not for technical reasons, but rather that the confidence in the whole system is undermined when the debt/deficit expands "excessively". This theory is based on mass psychology. If almost nobody, including those who follow markets closely, understands how the system "really" operates...doesn't the prevailing perception of how system works become the de-facto reality? For example, if 99.5% of market participants think debt/GDP ratio is a critical metric...won't it become important as participants vote by selling securities?

The problem is that this theory suggests that as the government's finances became more and more unstable interest rates would be expected to rise, when just the opposite has actually occurred.

When Reagan came unto office interest rates were in the double digits and the government debt and deficit were relatively small.  In the intervening years government debt and deficits have exploded, and the higher they have gone, the lower interest rates have gone.

It's bizarre, but that's what happened.  On what basis would we expect that to suddenly change?  It might change at some point in the future, but who knows when, and who knows what the trigger might be?

In other words, I see what you are saying should happen, but thus far it isn't what has happened, and thus I don't think it means that there is any inevitability that it is what will happen.

[Gumby]

would this theory contradict MMT ideas?

The theory I put forward is that the size of the debt/deficit matter, perhaps not for technical reasons, but rather that the confidence in the whole system is undermined when the debt/deficit expands "excessively". This theory is based on mass psychology. If almost nobody, including those who follow markets closely, understands how the system "really" operates...doesn't the prevailing perception of how system works become the de-facto reality? For example, if 99.5% of market participants think debt/GDP ratio is a critical metric...won't it become important as participants vote by selling securities?

Well, let's be clear. The Fed has total control of interest rates and the auctions should never fail. The Primary Dealers (with the Fed's assistance) can buy all of the future auctioned Treasuries if need be. The debt issue is not one of solvency.

See: http://pragcap.com/the-myth-of-the-great-bond-bubble

Other than the potential for inflation, the real problem we see (as explained in the Minsky video I just posted) is that the financial system becomes more unstable and fragile, over time, when banks gain more access to so much risk free federal debt — since big banks will just leverage it into the stratosphere and cause asset bubbles to form. But, even if 99% of the people are irrationally nervous about the government's own solvency, there is still no solvency issue.

Bill Gross ("The Bond King") made the same mistake that you're suggesting. He shorted Treasuries as the debt-ceiling debate wore on. He was certain that Treasuries would fail and that nobody would buy our debt because the debt was too large. He made the mistake of allowing his politics to cloud his judgement. And if you go back on this forum, you'll see that he made many people here nervous. So, here was Bill Gross making the entire market nervous about Treasuries, and it still made no difference — Treasuries did exactly what the Fed wanted them to do.

Gross has since learned a lot from that experience. He sucked it up and started hoarding Treasuries. He now believes that our nation will lose its appetite for debt. Perhaps he's right. Maybe we will all tire of the idea of debt and elect leaders that will reduce the debt levels. MMT/MMR suggests that reducing the debt while the economy is still fragile will likely trigger a recession. We shall see. Fascinating times!

[Gosso]

Interesting Info!

What about the relationship between "money printing" (or swapping ) and the value of the dollar.  I know that Japan has gotten away with it in the past, but isn't that because they were the only developed country with a low interest rate, which made their currency attractive to foreign banks/investors, ie the so called Yen Carry Trade?

[Gumby]

What about the relationship between "money printing" (or swapping ) and the value of the dollar.  I know that Japan has gotten away with it in the past, but isn't that because they were the only developed country with a low interest rate, which made their currency attractive to foreign banks/investors, ie the so called Yen Carry Trade?

Not sure I understand what you're saying. I'm pretty sure low interest rates make a currency less appealing — since one would get less return when interest rates are low. Isn't that why people would rather hold gold than a currency with such low real interest rates? And isn't Japan trying to weaken their currency? So, if the Fed conducts POMO or QE to lower interest rates, that makes a currency weaker — which is what the Fed wants to do anyhow. Every country is trying to weaken their currency right now.

[Gosso]

What about the relationship between "money printing" (or swapping ) and the value of the dollar.  I know that Japan has gotten away with it in the past, but isn't that because they were the only developed country with a low interest rate, which made their currency attractive to foreign banks/investors, ie the so called Yen Carry Trade?

Not sure I understand what you're saying. I'm pretty sure low interest rates make a currency less appealing — since one would get less return when interest rates are low. Isn't that why people would rather hold gold than a currency with such low real interest rates? And isn't Japan trying to weaken their currency? So, if the Fed conducts POMO or QE to lower interest rates, that makes a currency weaker — which is what the Fed wants to do anyhow. Every country is trying to weaken their currency right now.

I was always under the impression that if a country decides to "print" more money (increase the money supply) then this would result in a weaker currency, but not necessarily result in inflation.  Does this fit in with what was being discussed in this thread?  Or am I off in LaLa Land?

I'm seeing a few comments saying that deficits doesn't matter because it won't necessarily result in inflation, but won't it result in a decreased value of that countries currency?  There has to be some sort of restraint on the countries printing press (or adding zeros to bank accounts)...right?

[MediumTex]

Interesting Info!

What about the relationship between "money printing" (or swapping ) and the value of the dollar.  I know that Japan has gotten away with it in the past, but isn't that because they were the only developed country with a low interest rate, which made their currency attractive to foreign banks/investors, ie the so called Yen Carry Trade?

The U.S. does the same thing, except it's with military force rather than yen.