https://www.youtube.com/watch?v=PeHlelQWoEA#t=14m30s
I have a doubt on the QE asset swap not creating cash.
I am not an accountant but this the way I see it.
Before QE
Bond Holder Treasury
$100 bond $100 cash
After QE
Bond Holder Treasury Fed
$100 cash $100 cash $100 bond
Now if this cash isn't being used to buy anything then I can see why it wouldn't cause inflation.
Are the banks growing their reserves to prepare themselves for loan defaults? Are they not allowed to spend/invest the reserves?
Cullen Roche interview
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whatchamacallit
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Re: Cullen Roche interview
I can't. I just can't tonight. Gumby?
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
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whatchamacallit
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Re: Cullen Roche interview
Haha, sorry.moda0306 wrote: I can't. I just can't tonight. Gumby?
I feel this article is more accurate than the way Cullen is describing it.
http://www.forbes.com/sites/nathanlewis ... -reserves/When the Federal Reserve creates new base money by buying Treasury bonds, via its QE3 program, the exact process works something like this: the Fed buys a bond from a private market participant. The Fed pays for the bond by crediting the seller’s bank with the payment, in the form of a deposit at the Fed, known as “bank reserves.”? From the point of view of the payee bank, it is no different than any other transaction. However, there was no payer bank whose account was debited. Thus, the total amount of base money increases.
It goes on to say that there isn't demand for loans from banks which goes along with what I have seen from Cullen but I feel the "just an asset swap" is misleading.
Re: Cullen Roche interview
whatchamacallit,
The QE transaction only takes place between "Primary Dealers" (specially appointed banks) and the Fed. No individual in the private sector gets any money. Nobody is any richer after the QE transaction.
The accountant-friendly balance sheet explanation is found here:
http://brown-blog-5.blogspot.com/2013/0 ... asing.html
As you can see, the bank receiving cash, in exchange for a bond, does nothing to increase the size of the bank's balance sheet. The bank is no richer or poorer after the QE transaction.
In fact, the bank would rather have the Treasury Bond than the cash because the bank will have a very difficult time growing their reserves since cash only receives a teeny tiny return via the Federal Funds Rate or Interest on Reserves. With a Treasury Bond, they can get a much longer duration and would receive a higher coupon rate.
What QE does do is inflate the price of financial assets. Since the bank has all this useless cash in their virtual vault, they will use it to bid up the price of financial assets in an attempt to make up for the lost bond income. The market anticipates this and tries to front-run the whole process. This causes markets to rise without any change in underlying fundamentals.
Interestingly, with all this extra cash in bank reserves, there is virtually no demand for reserves in terms of interbank loaning. So, the Federal Funds Rate falls to ZERO when demand for reserves is virtually nonexistent. So, the Fed pays Interest on Reserves (IOR) to effectively RAISE the Federal Funds Rate (FFR) from zero. In other words, IOR is now the de facto FFR, which is ~0.25%. Not exactly an ideal return for bank reserves when the bank previously could have stuck it in a 3% long bond and traded that bond at will.
2013 Nobel Prize Winning Economist Eugene Fama explains:
(bold emphasis is mine)
The QE transaction only takes place between "Primary Dealers" (specially appointed banks) and the Fed. No individual in the private sector gets any money. Nobody is any richer after the QE transaction.
The accountant-friendly balance sheet explanation is found here:
http://brown-blog-5.blogspot.com/2013/0 ... asing.html
As you can see, the bank receiving cash, in exchange for a bond, does nothing to increase the size of the bank's balance sheet. The bank is no richer or poorer after the QE transaction.
In fact, the bank would rather have the Treasury Bond than the cash because the bank will have a very difficult time growing their reserves since cash only receives a teeny tiny return via the Federal Funds Rate or Interest on Reserves. With a Treasury Bond, they can get a much longer duration and would receive a higher coupon rate.
What QE does do is inflate the price of financial assets. Since the bank has all this useless cash in their virtual vault, they will use it to bid up the price of financial assets in an attempt to make up for the lost bond income. The market anticipates this and tries to front-run the whole process. This causes markets to rise without any change in underlying fundamentals.
Interestingly, with all this extra cash in bank reserves, there is virtually no demand for reserves in terms of interbank loaning. So, the Federal Funds Rate falls to ZERO when demand for reserves is virtually nonexistent. So, the Fed pays Interest on Reserves (IOR) to effectively RAISE the Federal Funds Rate (FFR) from zero. In other words, IOR is now the de facto FFR, which is ~0.25%. Not exactly an ideal return for bank reserves when the bank previously could have stuck it in a 3% long bond and traded that bond at will.
2013 Nobel Prize Winning Economist Eugene Fama explains:
(bold emphasis is mine)
CNBC: The Santelli Exchange wrote:Santelli: As a noted economist, as you look at the QE programs as we embark on a Fed meeting, can you tell me your observations about the current program and what you see as potential issues when we get to a point when we have to reverse the interest rate subsidies now imbedded in our markets?
Fama: Sure. Actually, I've been doing research on that very question for the last six months. I think that what they are doing is — the effects of it are greatly inflated by the accounts. So what has the fed been doing? Well, in 2008, they changed the game they were playing and they started paying interest on reserves. And they're paying interest on reserves currently, at slightly above market rates. Now, what that means is reserves are now basically just short-term debt. So what they've been doing is issuing a lot of short-term debt, $85 billion a month, and using it to buy back long-term debt — with the goal of lowering the interest rate on long-term debt. Now, they take credit for the low interest rates on short-term debt, but, in fact, what they've been doing should have raised the interest rate on short-term debt, not lower it. Because you can't do both. If you're issuing interest-bearing securities to buy other interest-bearing securities, you're pushing up one rate and pushing down the other rate. But, what happened? Actually, the short rate fell during that whole period. So...
Santelli: Well, when I — you know, professor — when I talk to people that are buying cars, when I talk to financing — financing homes — and, of course, we saw the run-up that started in May in interest rates, all of that was called in to question. I guess a simple question at this point would be — what we've seen in terms of interest rate volatility, and then the Fed pulling back on tapering, is Janet Yellen going to ever find the right time, sir? You know, I know your market-efficient work has many issues with it, like "irrational exuberance." Are we going to have an irrational interest rate market dur to the inputs of the Fed?
Fama: No. Because I think they are basically neutral events. I don't think they do very much. They just...
Santelli: So, Www WW wWWW WW When the balance sheet reaches $4 trillion, professor, I guess my question is, in the economy down the road, both globally and domestically starts to pick up, they want to start to control the velocity. Wouldn't it be the normal course of action that they would sell securities to pull some of that capital back in, isn't that normal operating procedure for a central bank?
Fama: Sure. But this...
Santelli: So, what happens $4 trillion of those securities, that you start putting back out there to take the money, isn't that going to poison the well in terms of interest rates moving up dramatically!?!
Fama: Ok. So can I answer?
Santelli: Yeah.
Fama: Ok. So they have $4 trillion on one side of the balance sheet, they have $4 trillion on the other. So, all they’ll do is get rid of one side, retire the reserves, and that will lower the balance of the securities that they hold. It’s basically a neutral event. It maybe has a little effect on the shape of the term structure, but it’s no big deal. It’s not like it was in the old days…
Santelli: So, Professor… Professor, let me interrupt again. So, if it’s no big deal, then why don’t all central banks just do this to the nth degree and make it a constant, day-to-day, week-to-week event, where they purchase what’s issued, keep interest rates low, and just target a low rate forever? Why won’t that work there? Why don’t we embark on that as a neocentral banking policy?
Fama: Well… There’s so much confusion in what you said, it’s difficult to answer. Ha! They haven’t been lowering the short rate. They’ve been putting upward pressure and it’s gone down despite them. So, they don’t have that much effect on these rates. That’s my whole point. And what they’re doing now in just issuing short debt to buy long debt…That’s kind of a nothing activity.
Source: http://video.cnbc.com/gallery/?video=3000211021
Last edited by Gumby on Tue Jan 14, 2014 9:32 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Cullen Roche interview
There are at least two vocal camps on this forum that disagree strongly with what the effects of QE are.
I'll try to summaraize one of the positions.
QE adds additional dollars to the money supply. It does this via a swap for either Mortgage-backed securities or T-bills/notes/bonds. The increase is likely permanent because the FED must roll over the debt when the principle is due to prevent rates from rising and bond prices from falling.
This expands M1, M2 & M3 directly, and since M2 & M3 are a function of M1 it exapands them by a greater total amount than just the amount printed.
This devalues the USD and causes prices to be higher than they otherwise would, absent the money-printing. The first stop for the price increases is bonds, followed by stocks and other financial assets, followed by virtually all prices after a few years and the money works through the economy.
The higher bond prices make interest rates lower. This encourages more borrowing for consumption and also pushes up home prices....funneling resources incorrectly to that sector.
The distruption to interest rates and prices creates incentives for people to use resources and produce goods and services that depend on the continued and increased disruption. If the disruption is stalled or ends, recession will ensue because the economy has become dependant on inflation. If they never stop increasing the inflation though eventually this will end in hyperinflation. Few think it will come to this and that they will stop and permit the recession if and when the dollar starts falling rapidly.
QE effectively allows the government to borrow and spend interest free since the FED is simultaneously lowering all rates and remitting the interest back to the treasury. Therefore, hundreds of billions the government would have to spend on interest is not needing. They can now borrow more and spend more. This hurts our economy because the government spending is basically the government directing where resources could go. It cannot do this as effectively as the marketplace.
In summary:
QE makes the prices of all assets higher than they otherwise would be since it adds to the money supply.
QE distorts the economy in a negative way by sending incorrect price signals to producers and borrowers.
QE must end at some point or the currency will be destroyed.
When QE ends, recession will be inevitable as all the mallinvestment that was encouraged by QE is shown to be a failure.
QE enables the government to spend and grow more than if it had to tax and borrow legitimately.
I'll try to summaraize one of the positions.
QE adds additional dollars to the money supply. It does this via a swap for either Mortgage-backed securities or T-bills/notes/bonds. The increase is likely permanent because the FED must roll over the debt when the principle is due to prevent rates from rising and bond prices from falling.
This expands M1, M2 & M3 directly, and since M2 & M3 are a function of M1 it exapands them by a greater total amount than just the amount printed.
This devalues the USD and causes prices to be higher than they otherwise would, absent the money-printing. The first stop for the price increases is bonds, followed by stocks and other financial assets, followed by virtually all prices after a few years and the money works through the economy.
The higher bond prices make interest rates lower. This encourages more borrowing for consumption and also pushes up home prices....funneling resources incorrectly to that sector.
The distruption to interest rates and prices creates incentives for people to use resources and produce goods and services that depend on the continued and increased disruption. If the disruption is stalled or ends, recession will ensue because the economy has become dependant on inflation. If they never stop increasing the inflation though eventually this will end in hyperinflation. Few think it will come to this and that they will stop and permit the recession if and when the dollar starts falling rapidly.
QE effectively allows the government to borrow and spend interest free since the FED is simultaneously lowering all rates and remitting the interest back to the treasury. Therefore, hundreds of billions the government would have to spend on interest is not needing. They can now borrow more and spend more. This hurts our economy because the government spending is basically the government directing where resources could go. It cannot do this as effectively as the marketplace.
In summary:
QE makes the prices of all assets higher than they otherwise would be since it adds to the money supply.
QE distorts the economy in a negative way by sending incorrect price signals to producers and borrowers.
QE must end at some point or the currency will be destroyed.
When QE ends, recession will be inevitable as all the mallinvestment that was encouraged by QE is shown to be a failure.
QE enables the government to spend and grow more than if it had to tax and borrow legitimately.
Re: Cullen Roche interview
I will leave it to Gumby, Moda, TennPa & anyone else to summarize what they think the effects of QE are.
Often the discussion focuses on mechanics. That's fine for some. I personally am only interested in the effects. There are those that feel the effects are minimal, if any. I disagree but you'll probably benefit from hearing that argument and deciding for yourself what makes sense. Perhaps it's one viewpoint or the other, perhaps it's a combination or perhaps something entirely different.
BTW whatchamacallit was and is my all-time favorite candy bar, followed by 5th Avenue.
Often the discussion focuses on mechanics. That's fine for some. I personally am only interested in the effects. There are those that feel the effects are minimal, if any. I disagree but you'll probably benefit from hearing that argument and deciding for yourself what makes sense. Perhaps it's one viewpoint or the other, perhaps it's a combination or perhaps something entirely different.
BTW whatchamacallit was and is my all-time favorite candy bar, followed by 5th Avenue.
Re: Cullen Roche interview
As I'll show here, KShartle's opinions aren't supported by the facts:
[align=center]
[/align]
Yep. It's dead alright. It's actually less than 1 now. (Any number multiplied times a number less than 1 equals a smaller final number.) Furthermore, banks aren't reserve constrained and they don't lend out their reserves, so there is no reason for an increase in M0 to cause an increase in M2 or M3:
Standard & Poors: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
As Standard & Poor's explains:
The Fed no longer publishes M3, and publishes MZM instead. MZM is widely recognized as one of the broadest published measures of the money supply. I don't see anything extraordinary about the changes in MZM over the past few years despite all this "money printing" KShartle refers to:
[align=center]
[/align]
As we can see, the broad money supply has not grown any more than it did before QE.
Therefore, we can easily see that KShartle is forming political opinions that aren't supported by the facts. The broad money supply has not increased by the multiplier "function" that KShartle says it should have with all this money printing (he believes it should have skyrocketed). And the reason why it hasn't is because the overwhelming majority of the broad money supply is nothing but private credit, which can dry up much more quickly than any acceptable level of government spending can counteract.
Leave it to KShartle to instantly turn this conversation from Monetary Policy to the "problems of government" spiel.
...and it simultaneously takes away financial assets from the private sector. Bank balance sheets do not become richer from this process.Kshartle wrote: QE adds additional dollars to the money supply.
KShartle's logic is based on a flawed theory that rates can never rise. However, if the economy were to ever surge (not saying it will) the Fed would be called upon to raise rates to prevent the economy from overheating. So, to say that the Fed will never raise rates is to ignore the fact that the Fed must raise rates if the economy should ever overheat.Kshartle wrote:It does this via a swap for either Mortgage-backed securities or T-bills/notes/bonds. The increase is likely permanent because the FED must roll over the debt when the principle is due to prevent rates from rising and bond prices from falling.
False. KShartle is referring to the money multiplier, which is a myth. Research from the Federal Reserve refutes the textbook money multiplier effect that we were all taught in school...Kshartle wrote:This expands M1, M2 & M3 directly, and since M2 & M3 are a function of M1 it exapands them by a greater total amount than just the amount printed.
The Fed's own research concludes that the Money Multiplier doesn't exist. And Japan's own experience showed the exact same thing almost a decade earlier. The Fed still attempts to calculate the M1 money multiplier, and here's what it looks like these days...Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. wrote:“Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.”?
Source: http://www.federalreserve.gov/pubs/feds ... 041pap.pdf
[align=center]
[/align]Yep. It's dead alright. It's actually less than 1 now. (Any number multiplied times a number less than 1 equals a smaller final number.) Furthermore, banks aren't reserve constrained and they don't lend out their reserves, so there is no reason for an increase in M0 to cause an increase in M2 or M3:
Standard & Poors: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
As Standard & Poor's explains:
So, when KShartle says, "This expands M1, M2 & M3 directly, and since M2 & M3 are a function of M1 it exapands them by a greater total amount than just the amount printed" he is referring to a mythical money multiplier, which happens to be less than 1.Standard & Poor's wrote:...The money multiplier has not collapsed because it was never there in a meaningful sense to begin with.
Standard & Poors: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
The Fed no longer publishes M3, and publishes MZM instead. MZM is widely recognized as one of the broadest published measures of the money supply. I don't see anything extraordinary about the changes in MZM over the past few years despite all this "money printing" KShartle refers to:
[align=center]
[/align]As we can see, the broad money supply has not grown any more than it did before QE.
Therefore, we can easily see that KShartle is forming political opinions that aren't supported by the facts. The broad money supply has not increased by the multiplier "function" that KShartle says it should have with all this money printing (he believes it should have skyrocketed). And the reason why it hasn't is because the overwhelming majority of the broad money supply is nothing but private credit, which can dry up much more quickly than any acceptable level of government spending can counteract.
I've already explained, above, why QE inflates financial assets.Kshartle wrote:The first stop for the price increases is bonds, followed by stocks and other financial assets
Well, it's been more than "a few years" and all prices have not risen the way KShartle imagines it would.Kshartle wrote:followed by virtually all prices after a few years and the money works through the economy.
Evidence?. That was the stated goal of the Fed. But, did it succeed with flying colors?Kshartle wrote:This encourages more borrowing for consumption and also pushes up home prices....funneling resources incorrectly to that sector.
Here we go again.Kshartle wrote:The distruption to interest rates and prices creates incentives for people to use resources and produce goods and services that depend on the continued and increased disruption. If the disruption is stalled or ends, recession will ensue because the economy has become dependant on inflation.
Leave it to KShartle to instantly turn this conversation from Monetary Policy to the "problems of government" spiel.Half a decade of QE has gone by — with hardly any inflation. Evidence of hyperinflation or even high inflation? Nada.Kshartle wrote:If they never stop increasing the inflation though eventually this will end in hyperinflation.
A fiat government doesn't need to worry about the interest rate of debt denominated in its own currency. Congress doesn't call up the Fed and ask them to adjust interest rates so that they can spend more. That would be like a stadium worrying about how many points it can award to a team. The government raises and lowers interest rates to affect the enormous private credit market to prevent the economy from stalling or overheating. The government can't run out of money unless it chooses to run out of money.Kshartle wrote:QE effectively allows the government to borrow and spend interest free since the FED is simultaneously lowering all rates and remitting the interest back to the treasury.
Huh? The government would love to give the private sector more interest payments. You can't complain about government spending too much money — as it attempts to "stimulate" — and then imagine they are somehow worried about private sector interest payments in the next breath. They are both forms of spending!Kshartle wrote:Therefore, hundreds of billions the government would have to spend on interest is not needing.
A fiat government is never reserve constrained. How do you not see that?Kshartle wrote:They can now borrow more and spend more.
Last edited by Gumby on Tue Jan 14, 2014 12:27 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Cullen Roche interview
Who do they owe the liability to though?TennPaGa wrote:A quibble (from the link to Tom Brown's blog that Gumby provided):whatchamacallit wrote: https://www.youtube.com/watch?v=PeHlelQWoEA#t=14m30s
Before QE
Bond Holder Treasury
$100 bond $100 cash
After QE
Bond Holder Treasury Fed
$100 cash $100 cash $100 bond
After QE, the Fed, in addition to holding the asset of the $100 bond, also has a $100 liability for the cash held by the former bond holder.
My point in the past has been that this is just an accounting entry. The liability doesn't have an impact on anything because it's just a journal entry. The money "printed" is actually out in the economy now affecting prices and causing reallocations of resources. They never have to extinguish the liability or "pay it off" like a real liability that a person or a company has.
So even though the debits match the credits, the reality is where there was once $100 and a $100 bond....there is now $200 and a $100 bond. The offsetting negative "liability" doesn't really exert any influence.
Re: Cullen Roche interview
False. It's not "out in the economy". The cash that is deposited into a bank's reserve account never leaves the Fed. All it does is change the composition of the bank's balance sheet.Kshartle wrote:The money "printed" is actually out in the economy now affecting prices and causing reallocations of resources.
As Bernanke explains...
Federal Reserve Chairman Ben Bernanke wrote:“What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities... On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed.
Source: http://www.c-spanvideo.org/program/296446-1
Last edited by Gumby on Tue Jan 14, 2014 12:36 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Re: Cullen Roche interview
You somehow think all the laws of economics have been repealed, as if the government has the ability to do this. As evidence you post charts and statements from the government. You are ignoring tons of other factors that are modifying the effects of the distortions.Gumby wrote: As I'll show here, KShartle's opinions aren't supported by the facts:
...and it simultaneously takes away financial assets from the private sector. Banks do not become richer from this process. No one said they were. You're changing the subject.Kshartle wrote: QE adds additional dollars to the money supply.
KShartle's logic is based on a flawed theory that rates can never rise. Of course rates can rise. What theory states that rates can never rise?However, if the economy were to ever surge (not saying it will) the Fed would be called upon to raise rates to prevent the economy from overheating. So, to say that the Fed will never raise rates is to ignore the fact that the Fed must raise rates if the economy should ever overheat. If rates rise from here the economy will crash. You are missing the point completely.Kshartle wrote:It does this via a swap for either Mortgage-backed securities or T-bills/notes/bonds. The increase is likely permanent because the FED must roll over the debt when the principle is due to prevent rates from rising and bond prices from falling.
False. KShartle is referring to the money multiplier, which is a myth. Research from the Federal Reserve refutes the textbook money multiplier effect that we were all taught in school...Kshartle wrote:This expands M1, M2 & M3 directly, and since M2 & M3 are a function of M1 it exapands them by a greater total amount than just the amount printed.
The Fed's own research concludes that the Money Multiplier doesn't exist. And Japan's own experience showed the exact same thing almost a decade earlier. The Fed still attempts to calculate the M1 money multiplier, and here's what it looks like these days...Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. wrote:“Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.”?
Source: http://www.federalreserve.gov/pubs/feds ... 041pap.pdf
[align=center][img width=630 height=378]http://research.stlouisfed.org/fredgraph.png?g=n4Q[/img][/align]
Yep. It's dead alright. It's actually less than 1 now. Any number multiplied times a number less than 1 equals a smaller final number.) Furthermore, banks aren't reserve constrained and they don't lend out their reserves, so there is no reason for the money multiplier to cause an increase in M2 or M3:
Standard & Poors: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
As Standard & Poor's explains:
So, when KShartle says, "This expands M1, M2 & M3 directly, and since M2 & M3 are a function of M1 it exapands them by a greater total amount than just the amount printed" he is referring to a mythical money multiplier, which happens to be less than 1.Standard & Poor's wrote:...The money multiplier has not collapsed because it was never there in a meaningful sense to begin with.
Standard & Poors: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
If M1 were extinguished, what do you think would happen to M2? If 2 trillion in M1 went away, do you think M2 would only drop by 2 trillion? What about 3 trillion?
The Fed no longer publishes M3, and publishes MZM instead. MZM is widely recognized as one of the broadest published measures of the money supply. I don't see anything extraordinary about the changes in MZM over the past few years despite all this "money printing" KShartle refers to:
[align=center][img width=630 height=378]http://research.stlouisfed.org/fredgraph.png?g=qse[/img][/align]
As we can see, the broad money supply has not grown any more than it did before QE. You are changing the subject again and ignoring what I said. The money supply is higher than it otherwise would be. Do you think that without the trillions in QE over the past 5 years the broad money supply would be the same as it is today? Try to not change the subject because you're claiming to disagree with something I didn't say. That's called a strawman, as we are all familiar with.
Therefore, we can easily see that KShartle is forming opinions that aren't supported by the facts. The broad money supply has not increased by the multiplier "function" that KShartle says it should have with all this money printing (he believes it should have skyrocketed). And the reason why it hasn't is because the overwhelming majority of the broad money supply is nothing but private credit, which can dry up much more quickly than any acceptable level of government spending can counteract. More subject changes. We are talking about the effects of QE, not all the possibilites of what might happen in the economy. It's like I say a car will help you travel faster and you say I'm wrong because the car might be broke down or you might be out of gas.
I've already explained, above, why QE inflates financial assets.Kshartle wrote:The first stop for the price increases is bonds, followed by stocks and other financial assets
Well, it's been more than "a few years" and all prices have not risen the way KShartle imagines it would. You think the price of food, housing, education, health care, energy and virtually everything else wouldn't be lower without the QE? Do you remember 2009 when prices were falling rapidly? Do you not think the FED printing trillions has contributed to the arrest of this movement? Are you kidding me? What do you think eventually happens to all that cash used to bid up the price of financial assets?Kshartle wrote:followed by virtually all prices after a few years as the money works through the economy.
Evidence?. That was the stated goal of the Fed. But, did it succeed with flying colors? Evidence that lower interest rates encourage borrowing and home buying? Please. If you don't understand that basic premise you should not venture into a discussion of it.Kshartle wrote:This encourages more borrowing for consumption and also pushes up home prices....funneling resources incorrectly to that sector.
Here we go again.Kshartle wrote:The distruption to interest rates and prices creates incentives for people to use resources and produce goods and services that depend on the continued and increased disruption. If the disruption is stalled or ends, recession will ensue because the economy has become dependant on inflation.
Half a decade of QE has gone by — with hardly any inflation. Evidence of hyperinflation or even high inflation? Nada.Kshartle wrote:If they never stop increasing the inflation though eventually this will end in hyperinflation.
A fiat government doesn't need to worry about the interest rate of debt denominated in its own currency. Higher interest rates make borrowing more expensive. That makes the deficits bigger. That means the government needs to tax, print, or borrow more to cover the interest. Borrowing more puts more pressure on interest rates as it increases the supply of debt outstanding. Supply up = price down = rates up. I suppose if you think printing money doesn't affect prices or taxing people doesn't affect productivity then you can believe in the fantasy that interest rates aren't a concern to the fiat government. This is rubbish though and hopefully others don't believe it. That would be like a stadium worrying about how many points it can award to a team. The government raises and lowers interest rates to affect the enormous private credit market. It can't run out of money unless it chooses to run out of money.Kshartle wrote:QE effectively allows the government to borrow and spend interest free since the FED is simultaneously lowering all rates and remitting the interest back to the treasury.
Huh? The government would love to give the private sector more interest payments. You can't seriously believe this right? You can't complain about government spending too much money — as it attempts to "stimulate" — and then imagine they are somehow worried about private sector interest payments in the next breath. They are both forms of spending! It's not about them being worried....it's about the negative consequences to them of bigger deficits. Of course this is one the crux's of our dissagreements, the belief that the government running a deficit being destructive to the economy vs. constructive.Kshartle wrote:Therefore, hundreds of billions the government would have to spend on interest is not needed.
A fiat government is never reserve constrained. How do you not see that? We've gone over this so many times. You still believing there is no spending constraint after all the conversations is truly a miracle.Kshartle wrote:They can now borrow more and spend more.
For example.....If 1 trillion additional dollars are added to the money supply this will affect prices over time. If 600 billion are sent out of the country and held in foreign vaults and they send us real goods and services......we will only feel the affect of 400 billion additional dollars chasing goods and services here. By saying that a 1 trillion dollar addition only has the impact of 400 billion....you are assuming the 600 billion dollar deficit will contine and ignoring how things would be different without the 1 trillion. The reality is without the 1 trillion additional, there would 600 billion fewer dollars here chasing goods and services.......lowering prices.
Re: Cullen Roche interview
To these points (for whatcha's sake)...
First off, we should probably qualify what QE actually is... it's a fed program to buy Long-term debt (where it usually plays in the short-term debt markets, and lets the long-term market float with expectations of its future rate-setting).
We probably should clarify the difference between these two statements, as they both could theoretically be true, and both get thrown around:
- The fed controls interest rates because it pulls financial assets out of the private sector.
- The fed controls interest rates by "giving banks more money to lend for cheap."
All I can say is that the former is true (but only within reason), and the latter is a false statement based on a misunderstanding of how the asset swap actually helps banks. The money multiplier simply works way, way different then it did before, and being awash in reserves doesn't really accomplish much.
It's also interesting to add that Austrians love to simultaneously say that "Americans are having their savings eroded" by inflation (caused by monetization), and that the government is "bidding up (in real terms) the price of other long-term assets AND "adding artificial protection to our savings" via the FDIC and monetization. Quite the feat indeed to simultaneously destroy and build the same thing!
But if we're going to talk about QE, which is a specific program that uniquely has 1) targeted long-term debt, and 2) done so with a LOT of reserves, historically, maybe we should FIRST focus on Standard Operating Procedure... the fed buying short-term treasury debt...
Short-term treasury debt is almost like cash to a bank. It is super liquid and pays a tiny bit of interest. If short-term rates are at 0.1%, the fed really can't accomplish much by swapping those bonds out of the market for reserves (that they pay the bank .25% interest on, mind you). This literally accomplishes almost nothing.
Now traditionally, long-term treasury rates (as well as all non-treasury bond rates) are established based on the expectation of what the fed will set as future short rates at. There simply couldn't be any other way for the market to really set long-term bond rates... Why would anyone invest in a 10-year bond at 4% if they thought the average short-term bond rate over the next 10 years would be significantly higher? See what I mean?
But now the fed has enacted QE, in hopes that not just lots of reserves, but all those reserves targeting the LONG end of the rate curve will do some more leg-work. And certainly, when the fed is buying non-treasury assets, it's doing something it doesn't usually do so the market sees what it's trying to do and the mortgage bond market stays much safer... but the problem with the fed targeting the LONG end of the curve is that it's SO hard for the market to break its expectation pricing mechanism. The more the fed tries to stimulate, the more likely a recovery (and/or inflation) are, so this is going to have the effect of significantly raising long-term rate expectations, thereby being a Catch 22 from what the fed was initially trying to do (lower long-term rates to stimulate the economy).
So I think the fed does FAR MORE to lower long-term rate expectations by little statements like (we're thinking of doing a taper) or (we are thinking of raising target inflation) than it could ever do by bajillions of QE... so if you're asking me "moda, do you think QE significantly lowers long-term rates), I really don't, directly (though QE indicates that the fed is still wanting to keep rates low, which means they're more likely than they were yesterday to CONTINUE to want to keep rates low (does that make any sense).
For instance, if the fed were to simultaneously enact a whole new round of QE, but then say, "in 5 years we are going to enact a policy of a flat-7% rate on all treasury debt," rates would go UP on long-term debt... not down. Long-term bonds just have too many macroeconomic future predictions going into their pricing for it to work much of any other way.
But to go back to if, in-general, trading reserves into the economy for t-bills, does much for inflation? Well, not if rates aren't being pulled down much from where they otherwise would be, so I guess that's the real question...
What is a "natural" rate of interest WITHOUT QE?
I'll preface this by saying that it's a bit ridiculous to speak of a "natural" price that the goverment charge itself to borrow in a currency it issues. This ain't gold. It would have been like the "nuclear experimentation" department of the U.S. military trying to decide how much they were going to sell the world's first nuclear bomb.
However, there are still clues that the economy tries to tell us if things are out of wack. If people can borrow at "artificially low rates," you get inflation. I'd also say that long-term rates being so low are a pretty good clue that interest rates in general aren't manipulated to asininely low levels, but to agree with me here, you'd have to agree that 1) the fed manipulates long-rates only through expectations of short rates, and 2) the fed will raise rates if inflation kicks in.
But let's peel back the onion to just what an "interest rate" is.... it's a price... no different than anything else in some ways (except it's a price representing lending of money, which itself (money) is simultaneously causes amazing efficiency and self-fulfilling recessions). Any price is a function of supply and demand... now the supply side is kind of goofy because it's a function of an equation that the fed calculates looking at price-level and employment, but for now let's at least assume that it is fixed. However, because we were in a recession after the financial crisis, DEMAND for loanable funds went WAY down.
So if Supply stays constant, but Demand goes way down, what happens to Price?
Now the fed did, in one measure (an incomplete one IMO), raise supply as well, but it didn't have to for the function to still yield a REDUCTION in price... by the very simple definition of supply and demand, lowered Demand for Loanable Funds alone would result in a significant decrease in interest rates.
But none of this matters (final onion layer, I promise), if we don't understand the true nature of business cycles and recessions and one very, very important piece to them... that a MONETIZED economy, while extremely efficient in some ways, has certain rigidities built into it that exacerbate "mistakes" into other areas. When only one, unproductive, quasi-intangible item acts as medium of exchange and you develop a system of debts around that medium, you're going to have problems... and to prove that, let's remove money from the equation altogether.
----- Barter Economy Example-----
Let's say an economy exists that is purely barter. Some things act as an efficient medium of exchange at times, but for the most part, people are trading goods and services for other goods and services, as well as IOU's for goods and services. Some people are going to come to a point where they malinvest, or certain systems breakdown, or the economy misprices some stuff, but, luckily, they can just work harder to pay of people they owe. If my debt is denominated in hours of production of my skill, while I might run the risk of having to work my butt off to make up for a malinvestment, I have very reasonable opportunity to do so.
What is initially thought of as a disadvantage to a barter economy (services and goods acting a messy form of medium of exchange) actually serves as a pretty robust correction mechanism for those who make mistakes.
----- Monetized economy Examle ------
Now if you have an economy where everything is denominated (and owed) in currency rather than skills, things are probably much more efficient on the surface, but you can get in a situation where you have DEBTS to pay someone, but have to earn the money from someone else with your skill. Now if enough people in an economy make some economic mistakes, or we suffer from a financial crisis, people will be very reluctant to give up the thing that pays their bills. But this results in tons of human capital going to waste, as an accountant can't afford to hire a plumber because nobody wants their taxes done, a plumber can't afford to have his shoddy deck rebuilt because nobody is calling him to get plumbing done, and the handy-man can't afford to get his taxes done because nobody can afford his help.
They all have skills and could create wealth for each other, and oddly enough, if they're comfortable with barter they just might. But they are "tightening their belts" so they can all pay their mortgage with dollars.
The economy is simply not very easily able to adjust its level of debts in a healthy way. Everyone ends up in a Mexican Standoff because there is only ONE THING they can pay others for their services (or their debts) with in any reasonable manner.
This is how we can have an economy with "excess capacity," where even low interest rates and deficit spending don't induce inflation. Businesses completely outside the realm of the infected area may be bankrupted because everyone is "tightening their belts." This is what creates the seemingly impossible phenomenon of "unemployment" in many cases. Someone who has skills and wants to work literally can't find it... this can only exist if the economy is living under some kind of artificial constraint... and while some people think it's just "minimum wage," I think "monetization" is the main contributor.
And if you look at history, money, even in gold form, was a very state-backed enterprise. So "free money" is kind of an oxymoron historically... it COULD work going forward, but still would likely require our government (unless it abolishes itself) to "pick the winner" of the currency game by dictating what gets to be used to pay taxes. Debts were a common socio-economic tool, but usually in much looser terms of repayment, and for a long time without the terms of that repayment HAVING to be little chunks of yellow metal or green pieces of paper... If I could give you half a cow or fix your roof that was good enough.
And, Scene!
First off, we should probably qualify what QE actually is... it's a fed program to buy Long-term debt (where it usually plays in the short-term debt markets, and lets the long-term market float with expectations of its future rate-setting).
We probably should clarify the difference between these two statements, as they both could theoretically be true, and both get thrown around:
- The fed controls interest rates because it pulls financial assets out of the private sector.
- The fed controls interest rates by "giving banks more money to lend for cheap."
All I can say is that the former is true (but only within reason), and the latter is a false statement based on a misunderstanding of how the asset swap actually helps banks. The money multiplier simply works way, way different then it did before, and being awash in reserves doesn't really accomplish much.
It's also interesting to add that Austrians love to simultaneously say that "Americans are having their savings eroded" by inflation (caused by monetization), and that the government is "bidding up (in real terms) the price of other long-term assets AND "adding artificial protection to our savings" via the FDIC and monetization. Quite the feat indeed to simultaneously destroy and build the same thing!
But if we're going to talk about QE, which is a specific program that uniquely has 1) targeted long-term debt, and 2) done so with a LOT of reserves, historically, maybe we should FIRST focus on Standard Operating Procedure... the fed buying short-term treasury debt...
Short-term treasury debt is almost like cash to a bank. It is super liquid and pays a tiny bit of interest. If short-term rates are at 0.1%, the fed really can't accomplish much by swapping those bonds out of the market for reserves (that they pay the bank .25% interest on, mind you). This literally accomplishes almost nothing.
Now traditionally, long-term treasury rates (as well as all non-treasury bond rates) are established based on the expectation of what the fed will set as future short rates at. There simply couldn't be any other way for the market to really set long-term bond rates... Why would anyone invest in a 10-year bond at 4% if they thought the average short-term bond rate over the next 10 years would be significantly higher? See what I mean?
But now the fed has enacted QE, in hopes that not just lots of reserves, but all those reserves targeting the LONG end of the rate curve will do some more leg-work. And certainly, when the fed is buying non-treasury assets, it's doing something it doesn't usually do so the market sees what it's trying to do and the mortgage bond market stays much safer... but the problem with the fed targeting the LONG end of the curve is that it's SO hard for the market to break its expectation pricing mechanism. The more the fed tries to stimulate, the more likely a recovery (and/or inflation) are, so this is going to have the effect of significantly raising long-term rate expectations, thereby being a Catch 22 from what the fed was initially trying to do (lower long-term rates to stimulate the economy).
So I think the fed does FAR MORE to lower long-term rate expectations by little statements like (we're thinking of doing a taper) or (we are thinking of raising target inflation) than it could ever do by bajillions of QE... so if you're asking me "moda, do you think QE significantly lowers long-term rates), I really don't, directly (though QE indicates that the fed is still wanting to keep rates low, which means they're more likely than they were yesterday to CONTINUE to want to keep rates low (does that make any sense).
For instance, if the fed were to simultaneously enact a whole new round of QE, but then say, "in 5 years we are going to enact a policy of a flat-7% rate on all treasury debt," rates would go UP on long-term debt... not down. Long-term bonds just have too many macroeconomic future predictions going into their pricing for it to work much of any other way.
But to go back to if, in-general, trading reserves into the economy for t-bills, does much for inflation? Well, not if rates aren't being pulled down much from where they otherwise would be, so I guess that's the real question...
What is a "natural" rate of interest WITHOUT QE?
I'll preface this by saying that it's a bit ridiculous to speak of a "natural" price that the goverment charge itself to borrow in a currency it issues. This ain't gold. It would have been like the "nuclear experimentation" department of the U.S. military trying to decide how much they were going to sell the world's first nuclear bomb.
However, there are still clues that the economy tries to tell us if things are out of wack. If people can borrow at "artificially low rates," you get inflation. I'd also say that long-term rates being so low are a pretty good clue that interest rates in general aren't manipulated to asininely low levels, but to agree with me here, you'd have to agree that 1) the fed manipulates long-rates only through expectations of short rates, and 2) the fed will raise rates if inflation kicks in.
But let's peel back the onion to just what an "interest rate" is.... it's a price... no different than anything else in some ways (except it's a price representing lending of money, which itself (money) is simultaneously causes amazing efficiency and self-fulfilling recessions). Any price is a function of supply and demand... now the supply side is kind of goofy because it's a function of an equation that the fed calculates looking at price-level and employment, but for now let's at least assume that it is fixed. However, because we were in a recession after the financial crisis, DEMAND for loanable funds went WAY down.
So if Supply stays constant, but Demand goes way down, what happens to Price?
Now the fed did, in one measure (an incomplete one IMO), raise supply as well, but it didn't have to for the function to still yield a REDUCTION in price... by the very simple definition of supply and demand, lowered Demand for Loanable Funds alone would result in a significant decrease in interest rates.
But none of this matters (final onion layer, I promise), if we don't understand the true nature of business cycles and recessions and one very, very important piece to them... that a MONETIZED economy, while extremely efficient in some ways, has certain rigidities built into it that exacerbate "mistakes" into other areas. When only one, unproductive, quasi-intangible item acts as medium of exchange and you develop a system of debts around that medium, you're going to have problems... and to prove that, let's remove money from the equation altogether.
----- Barter Economy Example-----
Let's say an economy exists that is purely barter. Some things act as an efficient medium of exchange at times, but for the most part, people are trading goods and services for other goods and services, as well as IOU's for goods and services. Some people are going to come to a point where they malinvest, or certain systems breakdown, or the economy misprices some stuff, but, luckily, they can just work harder to pay of people they owe. If my debt is denominated in hours of production of my skill, while I might run the risk of having to work my butt off to make up for a malinvestment, I have very reasonable opportunity to do so.
What is initially thought of as a disadvantage to a barter economy (services and goods acting a messy form of medium of exchange) actually serves as a pretty robust correction mechanism for those who make mistakes.
----- Monetized economy Examle ------
Now if you have an economy where everything is denominated (and owed) in currency rather than skills, things are probably much more efficient on the surface, but you can get in a situation where you have DEBTS to pay someone, but have to earn the money from someone else with your skill. Now if enough people in an economy make some economic mistakes, or we suffer from a financial crisis, people will be very reluctant to give up the thing that pays their bills. But this results in tons of human capital going to waste, as an accountant can't afford to hire a plumber because nobody wants their taxes done, a plumber can't afford to have his shoddy deck rebuilt because nobody is calling him to get plumbing done, and the handy-man can't afford to get his taxes done because nobody can afford his help.
They all have skills and could create wealth for each other, and oddly enough, if they're comfortable with barter they just might. But they are "tightening their belts" so they can all pay their mortgage with dollars.
The economy is simply not very easily able to adjust its level of debts in a healthy way. Everyone ends up in a Mexican Standoff because there is only ONE THING they can pay others for their services (or their debts) with in any reasonable manner.
This is how we can have an economy with "excess capacity," where even low interest rates and deficit spending don't induce inflation. Businesses completely outside the realm of the infected area may be bankrupted because everyone is "tightening their belts." This is what creates the seemingly impossible phenomenon of "unemployment" in many cases. Someone who has skills and wants to work literally can't find it... this can only exist if the economy is living under some kind of artificial constraint... and while some people think it's just "minimum wage," I think "monetization" is the main contributor.
And if you look at history, money, even in gold form, was a very state-backed enterprise. So "free money" is kind of an oxymoron historically... it COULD work going forward, but still would likely require our government (unless it abolishes itself) to "pick the winner" of the currency game by dictating what gets to be used to pay taxes. Debts were a common socio-economic tool, but usually in much looser terms of repayment, and for a long time without the terms of that repayment HAVING to be little chunks of yellow metal or green pieces of paper... If I could give you half a cow or fix your roof that was good enough
.And, Scene!
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Cullen Roche interview
Hello, I'm Tom Brown (creator of the accounting style blog explaining QE that Gumby linked to above). I created that blog to help explain to myself (and others) some of the concepts I've picked up by reading articles by Roche, JKH and others over the past couple of years.
One of the posts I'm most happy with is my Example #11:
http://brown-blog-5.blogspot.com/2013/0 ... lance.html
I think it goes a ways towards clearing up a lot of confusion. There's a lot of words there, but you can skip right to the macro balance sheets. I have two cases: Case 1: excess reserves exist, Case 2: no excess reserves. There are MANY simplifying assumptions (you can read about in the text), but the idea was to capture all possible macro balance sheets given those assumptions: dividing the macro world into four categories: Tsy, Fed, banks, non-banks. There's an interactive spreadsheet there too to play with.
So, for example, the question of whether or not reserves can ever "go out in the economy" is an interesting one. That can be unwrapped like this:
1. Since reserves are defined as base money at banks, then they will never leave the banks by definition.
2. OK, how about the money that makes up the reserves? Can that leave the banks? Yes it can, in a few ways:
A. Cash withdrawn by non-banks (people and non-bank businesses)
B. Base money (cash or electronic Fed deposits) transferred to non-bank Fed deposit holders (e.g. Tsy)
C. Base money that goes back to the Fed (where it loses it's face value, if not in the form of coins)
Say we don't make a distinction between Fed deposits at banks and not at banks. Normal people/businesses don't have Fed deposits so the "not at banks" list is rather limited. Tsy is the most prominent member of that set.
Then really the only way reserves leave the Fed deposit system is by going back to the Fed (where they are effectively destroyed) or via cash advances. That's it!
So if there's a huge surge in demand for cash amongst bank deposit holders, then reserve levels can be drawn down.
Note that in my simple example, I have 0% reserve requirements (the real number in the US is more like 10%).
My blog explains reserve requirements, capital requirements, where reserves can go, the different categories of money, etc. with super simple balance sheet type examples where possible. Have a look:
http://brown-blog-5.blogspot.com/
Gumby is absolutely correct about there being no money multiplier. Look up the wiki article on "Money Supply" ... it explains it all pretty well there.
MB = base money = cash + Fed deposits
M1 = MB + checkable bank deposits
etc.
There's no direct relation! You can't say that M1 = 10*MB. Some countries (like Canada) have a 0% reserve requirement (which would give them an infinite multiplier, if the multiplier concept were true). I have posts on this in my blog.
Enjoy!
One of the posts I'm most happy with is my Example #11:
http://brown-blog-5.blogspot.com/2013/0 ... lance.html
I think it goes a ways towards clearing up a lot of confusion. There's a lot of words there, but you can skip right to the macro balance sheets. I have two cases: Case 1: excess reserves exist, Case 2: no excess reserves. There are MANY simplifying assumptions (you can read about in the text), but the idea was to capture all possible macro balance sheets given those assumptions: dividing the macro world into four categories: Tsy, Fed, banks, non-banks. There's an interactive spreadsheet there too to play with.
So, for example, the question of whether or not reserves can ever "go out in the economy" is an interesting one. That can be unwrapped like this:
1. Since reserves are defined as base money at banks, then they will never leave the banks by definition.
2. OK, how about the money that makes up the reserves? Can that leave the banks? Yes it can, in a few ways:
A. Cash withdrawn by non-banks (people and non-bank businesses)
B. Base money (cash or electronic Fed deposits) transferred to non-bank Fed deposit holders (e.g. Tsy)
C. Base money that goes back to the Fed (where it loses it's face value, if not in the form of coins)
Say we don't make a distinction between Fed deposits at banks and not at banks. Normal people/businesses don't have Fed deposits so the "not at banks" list is rather limited. Tsy is the most prominent member of that set.
Then really the only way reserves leave the Fed deposit system is by going back to the Fed (where they are effectively destroyed) or via cash advances. That's it!
So if there's a huge surge in demand for cash amongst bank deposit holders, then reserve levels can be drawn down.
Note that in my simple example, I have 0% reserve requirements (the real number in the US is more like 10%).
My blog explains reserve requirements, capital requirements, where reserves can go, the different categories of money, etc. with super simple balance sheet type examples where possible. Have a look:
http://brown-blog-5.blogspot.com/
Gumby is absolutely correct about there being no money multiplier. Look up the wiki article on "Money Supply" ... it explains it all pretty well there.
MB = base money = cash + Fed deposits
M1 = MB + checkable bank deposits
etc.
There's no direct relation! You can't say that M1 = 10*MB. Some countries (like Canada) have a 0% reserve requirement (which would give them an infinite multiplier, if the multiplier concept were true). I have posts on this in my blog.
Enjoy!
Re: Cullen Roche interview
Tom what do you think the effects would be of a 100% reserve requirement on:
MB
M1
M2
MB
M1
M2
Re: Cullen Roche interview
and BTW, you can simplify my Example #11 by setting Ut = D = 0.
Ut = unspent Tsy funds (it's fair to assume this is zero during deficit spending)
D = undistributed bank profits. Just assume the banks always distribute profits right away.
Also keep in mind those balance sheets exclude non-financial assets (so it doesn't include land or gold, etc).
You'll note that all the financial assets on all the balance sheets add up to zero (assets = liabilities if consolidated onto one sheet).
Also, the Tsy's negative equity is the non-banks' equity (T is the variable I used).
Since normal people and businesses don't have deposits at the Fed, banks must be used for any transactions between the Fed and/or Tsy and the public. That's why the Fed buying Tsy bonds from the non-bank public (the primary seller of Tsy bonds on the market), still expands the banks' balance sheets.
Ut = unspent Tsy funds (it's fair to assume this is zero during deficit spending)
D = undistributed bank profits. Just assume the banks always distribute profits right away.
Also keep in mind those balance sheets exclude non-financial assets (so it doesn't include land or gold, etc).
You'll note that all the financial assets on all the balance sheets add up to zero (assets = liabilities if consolidated onto one sheet).
Also, the Tsy's negative equity is the non-banks' equity (T is the variable I used).
Since normal people and businesses don't have deposits at the Fed, banks must be used for any transactions between the Fed and/or Tsy and the public. That's why the Fed buying Tsy bonds from the non-bank public (the primary seller of Tsy bonds on the market), still expands the banks' balance sheets.
Re: Cullen Roche interview
Kshartle,
A 100% reserve requirement: Keep in mind that reserve requirements are ONLY on checkable deposits (i.e. checking deposits) and not CDs, savings accounts, etc. They have nothing whatsoever to do with loans or anything on the assets side of a bank's balance sheet. Capital requirements fold in the assets side of a bank's balance sheet. So the requirement is really on a fraction of what makes up M1. Make sense?
I address that here (towards the bottom of the post):
http://brown-blog-5.blogspot.com/2013/0 ... ple-2.html
If you want to take a step back and look at the no-reserve no-capital requirements situation, it's here:
http://brown-blog-5.blogspot.com/2013/0 ... posit.html
So basically a 100% reserve requirement would not shut down the expansion of credit. It would make it more difficult for banks which hold deposits to maintain a positive spread on their balance sheets, but that's about it.
I suggest you also read a piece by Canadian economist Nick Rowe on this subject (use his search box: look for 100% reserve requirement).
A 100% reserve requirement: Keep in mind that reserve requirements are ONLY on checkable deposits (i.e. checking deposits) and not CDs, savings accounts, etc. They have nothing whatsoever to do with loans or anything on the assets side of a bank's balance sheet. Capital requirements fold in the assets side of a bank's balance sheet. So the requirement is really on a fraction of what makes up M1. Make sense?
I address that here (towards the bottom of the post):
http://brown-blog-5.blogspot.com/2013/0 ... ple-2.html
If you want to take a step back and look at the no-reserve no-capital requirements situation, it's here:
http://brown-blog-5.blogspot.com/2013/0 ... posit.html
So basically a 100% reserve requirement would not shut down the expansion of credit. It would make it more difficult for banks which hold deposits to maintain a positive spread on their balance sheets, but that's about it.
I suggest you also read a piece by Canadian economist Nick Rowe on this subject (use his search box: look for 100% reserve requirement).
Re: Cullen Roche interview
... in this example I have both reserve and capital requirements:
http://brown-blog-5.blogspot.com/2013/0 ... ments.html
I have two other variations on that theme, but they are admittedly a bit dull! (Examples #3, 3.1 and 3.2)
Example #7 explores what is mean by "bank capital" and how that's different than equity. Again, it's from my layman's point of view, but I didn't see any other resource out there to explain these concepts in a simple way, so I made my own:
http://brown-blog-5.blogspot.com/2013/0 ... pital.html
so if you see errors, let me know!
http://brown-blog-5.blogspot.com/2013/0 ... ments.html
I have two other variations on that theme, but they are admittedly a bit dull! (Examples #3, 3.1 and 3.2)
Example #7 explores what is mean by "bank capital" and how that's different than equity. Again, it's from my layman's point of view, but I didn't see any other resource out there to explain these concepts in a simple way, so I made my own:
http://brown-blog-5.blogspot.com/2013/0 ... pital.html
so if you see errors, let me know!
Re: Cullen Roche interview
Is it your premise Tom that an increase in the base money supply of say 100 billion dollars, only leads to a 100 billion dollar increase in the broad money supply, if all other factors are held constant?
Re: Cullen Roche interview
Kshartle, yes that's correct. There's no pressure to force M1, M2, etc upwards after MB has been increased. However, I will tell you that there's a strong difference of opinion on the effects of increasing MB in the LONG term. Market Monetarists (such as Scott Sumner, Nick Rowe, etc.) claim that if MB is permanently increased and this is effectively communicated, then in the long term, the price level will rise proportionately. Scott Sumner has a great article on this called "Hot Potato Effect Explained" which you can find through his search box.
The disagreement comes about because of what is defined as money. Even MMs don't agree with each other on this. Scott ONLY calls MB money, and the rest credit. He equates MB with the "medium of account" (MOA) which to him is all that's really important. Rowe disagrees w/ Scott on some of the details here and assigns more weight to the medium of exchange (MOE) which can be equated with M1 (it includes bank deposits). In the long term they agree though.
Cullen is more inclined to start with bank deposits as the most important form of money. So his view is fundamentally different than Sumner's on this point. Still, none of them believe in the money multiplier concept.
The truth is that increasing MB does not necessarily cause M1, M2, etc to rise. Decreasing MB could cause interest rates to rise dramatically and even bring the whole financial system and payment clearing system to it's knees. Practically central banks supply whatever level of reserves are needed to keep the system going, reserve requirements or not. Supplying less than what's required could be a disaster. The jury is still out on supplying more. Supplying just enough allows the CB to have tremendous control over overnight interest rates, with very small changes in reserve levels. That was essentially our situation in the US prior to 2008.
The disagreement comes about because of what is defined as money. Even MMs don't agree with each other on this. Scott ONLY calls MB money, and the rest credit. He equates MB with the "medium of account" (MOA) which to him is all that's really important. Rowe disagrees w/ Scott on some of the details here and assigns more weight to the medium of exchange (MOE) which can be equated with M1 (it includes bank deposits). In the long term they agree though.
Cullen is more inclined to start with bank deposits as the most important form of money. So his view is fundamentally different than Sumner's on this point. Still, none of them believe in the money multiplier concept.
The truth is that increasing MB does not necessarily cause M1, M2, etc to rise. Decreasing MB could cause interest rates to rise dramatically and even bring the whole financial system and payment clearing system to it's knees. Practically central banks supply whatever level of reserves are needed to keep the system going, reserve requirements or not. Supplying less than what's required could be a disaster. The jury is still out on supplying more. Supplying just enough allows the CB to have tremendous control over overnight interest rates, with very small changes in reserve levels. That was essentially our situation in the US prior to 2008.
Re: Cullen Roche interview
Tom,Kshartle wrote: Is it your premise Tom that an increase in the base money supply of say 100 billion dollars, only leads to a 100 billion dollar increase in the broad money supply, if all other factors are held constant?
To piggy-back on this question, if the $100 Billion was used to buy 6-month t-bills, which are included in "broad money supply," would you still say that this is even increasing "broad money supply" at all?
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Cullen Roche interview
Kshartle,
A hard and fast reserve-requirement that was held to would be a DEPARTURE from current policy. When Gumby and I say that the "Money multiplier is a myth," we don't mean that the fed couldn't change how it goes about doing things (and, almost as important (or more important), how the market expects them to do things)... we're saying this is how things are done, and that there's little reason to think they'll change, given the power it gives both them and member banks.
So yes, if the fed changed how it did everything it did, our system could collapse.
The question is, which one is truly "manipulation?" Doing things as it has said it is going to do them, given certain economic indicators, or completely changing to something that Austrians would prefer?
For the most part, they've simply done what they've always said they're going to do given these stimuli, and the market has NO reason to think they won't undo it if we saw recovery and/or high inflation tomorrow.
A hard and fast reserve-requirement that was held to would be a DEPARTURE from current policy. When Gumby and I say that the "Money multiplier is a myth," we don't mean that the fed couldn't change how it goes about doing things (and, almost as important (or more important), how the market expects them to do things)... we're saying this is how things are done, and that there's little reason to think they'll change, given the power it gives both them and member banks.
So yes, if the fed changed how it did everything it did, our system could collapse.
The question is, which one is truly "manipulation?" Doing things as it has said it is going to do them, given certain economic indicators, or completely changing to something that Austrians would prefer?
For the most part, they've simply done what they've always said they're going to do given these stimuli, and the market has NO reason to think they won't undo it if we saw recovery and/or high inflation tomorrow.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Cullen Roche interview
... when the CB supplies more reserves than are needed (our current situation), then the overnight interest rate is driven down to the interest on reserves (IOR) rate. Thus the only way to adjust the overnight rate with excess reserves (ERs) is to adjust the IOR rate.
Prior to 2008 (when ER = $0), the IOR rate could be set at 0%, but the overnight rate controlled via small changes to reserve levels. I show the concept of how this functioned here:
http://brown-blog-5.blogspot.com/2013/0 ... ntrol.html
This is where another big disagreement comes into play between MMs (like Sumner) and people like Cullen (who's more of a post-Keynesian, or "PK"). PKs tend to see the role of the CB as facilitating the private economy and payment clearing and overnight interest rate setting as it's most important. MMs tend to see the long term role of the CB in setting monetary policy as being most important.
MMs tend to write off interest rate setting, etc as being uninteresting "short term" effects. They think the fact that the CB targets a short term rate and holds it constant for a few weeks to be almost completely uninteresting. They don't really care about the rates at all!
Our current system adjusts the overnight target (every few weeks) so as to target the inflation rate in the mid to long term. MMs think this is a bad idea: they think we should target nominal GDP (NGDP) levels instead, and that all the focus on interest rates, short term effects, and inflation causes lots of problems.
Interestingly enough, there is a growing breadth of agreement amongst all the schools, including New Keynesians, that targeting NGDP levels (NGDPLT) is probably a good idea. The hold outs tend to be old school Monetarists (like John Cochrane) and Austrians.
Prior to 2008 (when ER = $0), the IOR rate could be set at 0%, but the overnight rate controlled via small changes to reserve levels. I show the concept of how this functioned here:
http://brown-blog-5.blogspot.com/2013/0 ... ntrol.html
This is where another big disagreement comes into play between MMs (like Sumner) and people like Cullen (who's more of a post-Keynesian, or "PK"). PKs tend to see the role of the CB as facilitating the private economy and payment clearing and overnight interest rate setting as it's most important. MMs tend to see the long term role of the CB in setting monetary policy as being most important.
MMs tend to write off interest rate setting, etc as being uninteresting "short term" effects. They think the fact that the CB targets a short term rate and holds it constant for a few weeks to be almost completely uninteresting. They don't really care about the rates at all!
Our current system adjusts the overnight target (every few weeks) so as to target the inflation rate in the mid to long term. MMs think this is a bad idea: they think we should target nominal GDP (NGDP) levels instead, and that all the focus on interest rates, short term effects, and inflation causes lots of problems.
Interestingly enough, there is a growing breadth of agreement amongst all the schools, including New Keynesians, that targeting NGDP levels (NGDPLT) is probably a good idea. The hold outs tend to be old school Monetarists (like John Cochrane) and Austrians.
Re: Cullen Roche interview
What laws of economics are you talking about Kshartle?
Most economists who have successfully predicted the macroeconomic environment over the last 5 years are not the ones you seem to agree with.
How about the law of "supply and demand" when it comes to loanable funds? Why "should" interest rates be higher if demand for loanable funds is way down? If t-bills are essentially included in the money supply, why "should" swapping reserves for them be inflationary, unless the interest rates are being manipulated into an unfair territory (to see if they are, see previous question)?
What law of economics keeps Japan from unraveling?
What law of economics kept the UK from going under after WWII when its productive capacity was either decimated or geared towards war, and it had a MASSIVE debt/GDP ratio?
Why would the fed raise rates unless the economy had RECOVERED, or inflation was tearing off? If the fed chose to raise rates then, why would it "crash" the economy, rather than just tame the growth or inflation?? Why so binary?
Do you realize that inflation actually HEALS our debt/GDP ratio? Nominal GDP ratio goes up when inflation goes up, lowering the very thing that you seem to be so obsessed with. Higher interests rates have the potential to raise deficit issues, but if the economy is growing fast enough from a nominal perspective, there is no problem.
If you're so sure that you understand econ 101, then why does the market disagree so much with you? Inflation AND interest-rate expectations are low. You're saying that we HAVE to suffer one or the other.
Lastly, if the feds liability of cash is a "accounting gimmick," then why isn't the treasury's liability to pay that dollar to someone else? Is the treasury's liability to the fed an accounting gimmick if the fed owns its debt?
To the government, isn't all of this stuff "accounting gimmicks" that make up a fiat currency system? A treasury bond is just a piece of paper that our government manufactures a value of, no different than a dollar. If a dollar is just confetti, what is my T-Bill? Why are these fundamentally different? Yes, the government said that they'd pay you back one for the other, and that you can only use one to go buy bread, but the same government (different department) says that they'll hold interest rates such to generate a balance of price stability and full employment... what about that promise? Should they break that so your mattress cash can go up in real value?
I think this gets to the crux of the issue... you're wanting the government's promises within the monetary system to change the rules mid-game. You want them to break from what they've tried to balance in an effort to get rates to where you think you and other savers DESERVE them to be, with inflation consequences that will have massive effects on the real on-going debt-levels of business-owners, home-owners, etc.
Most economists who have successfully predicted the macroeconomic environment over the last 5 years are not the ones you seem to agree with.
How about the law of "supply and demand" when it comes to loanable funds? Why "should" interest rates be higher if demand for loanable funds is way down? If t-bills are essentially included in the money supply, why "should" swapping reserves for them be inflationary, unless the interest rates are being manipulated into an unfair territory (to see if they are, see previous question)?
What law of economics keeps Japan from unraveling?
What law of economics kept the UK from going under after WWII when its productive capacity was either decimated or geared towards war, and it had a MASSIVE debt/GDP ratio?
Why would the fed raise rates unless the economy had RECOVERED, or inflation was tearing off? If the fed chose to raise rates then, why would it "crash" the economy, rather than just tame the growth or inflation?? Why so binary?
Do you realize that inflation actually HEALS our debt/GDP ratio? Nominal GDP ratio goes up when inflation goes up, lowering the very thing that you seem to be so obsessed with. Higher interests rates have the potential to raise deficit issues, but if the economy is growing fast enough from a nominal perspective, there is no problem.
If you're so sure that you understand econ 101, then why does the market disagree so much with you? Inflation AND interest-rate expectations are low. You're saying that we HAVE to suffer one or the other.
Lastly, if the feds liability of cash is a "accounting gimmick," then why isn't the treasury's liability to pay that dollar to someone else? Is the treasury's liability to the fed an accounting gimmick if the fed owns its debt?
To the government, isn't all of this stuff "accounting gimmicks" that make up a fiat currency system? A treasury bond is just a piece of paper that our government manufactures a value of, no different than a dollar. If a dollar is just confetti, what is my T-Bill? Why are these fundamentally different? Yes, the government said that they'd pay you back one for the other, and that you can only use one to go buy bread, but the same government (different department) says that they'll hold interest rates such to generate a balance of price stability and full employment... what about that promise? Should they break that so your mattress cash can go up in real value?
I think this gets to the crux of the issue... you're wanting the government's promises within the monetary system to change the rules mid-game. You want them to break from what they've tried to balance in an effort to get rates to where you think you and other savers DESERVE them to be, with inflation consequences that will have massive effects on the real on-going debt-levels of business-owners, home-owners, etc.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Cullen Roche interview
moda0306,
regarding 6 mo T-bills, are they really part of the broad money supply? I agree they have a high degree of liquidity and are money-like. Which measure are they included in? M1, M2, M3, M4, etc?
When I think about "money" I tend to cut it off at M1 more or less: cash + Fed deposits + bank deposits.
So if the Fed purchased 6 mo T-bills, and you were counting those as money, then the amount of broad money in the private economy would remain unchanged (if the T-bills were purchased from banks). If purchased from non-banks, it would grow the money supply (since bank BSs would expand in the process, the assets side with reserves), but private equity would not change. See cases 1 and 2 here:
http://brown-blog-5.blogspot.com/2013/0 ... asing.html
It's all a bit arbitrary though... should we count the T-bills now held by the Fed as "money?" Well I said "private hands" so no. It kind of comes down to how we label things.
The big picture remains the same: excluding all non-financial assets, the equity of the private sector is equal to the negative equity of the Tsy. Everything else is a zero sum game. Given my simplifying assumptions in Ex #11 anyway. (I'm specifically ignoring foreign trade here).
Expanding balance sheets caused by Fed spending doesn't necessarily make anybody much wealthier.
regarding 6 mo T-bills, are they really part of the broad money supply? I agree they have a high degree of liquidity and are money-like. Which measure are they included in? M1, M2, M3, M4, etc?
When I think about "money" I tend to cut it off at M1 more or less: cash + Fed deposits + bank deposits.
So if the Fed purchased 6 mo T-bills, and you were counting those as money, then the amount of broad money in the private economy would remain unchanged (if the T-bills were purchased from banks). If purchased from non-banks, it would grow the money supply (since bank BSs would expand in the process, the assets side with reserves), but private equity would not change. See cases 1 and 2 here:
http://brown-blog-5.blogspot.com/2013/0 ... asing.html
It's all a bit arbitrary though... should we count the T-bills now held by the Fed as "money?" Well I said "private hands" so no. It kind of comes down to how we label things.
The big picture remains the same: excluding all non-financial assets, the equity of the private sector is equal to the negative equity of the Tsy. Everything else is a zero sum game. Given my simplifying assumptions in Ex #11 anyway. (I'm specifically ignoring foreign trade here).
Expanding balance sheets caused by Fed spending doesn't necessarily make anybody much wealthier.
Re: Cullen Roche interview
If demand for loans is down the price people pay for a loan (interest rates) would go down, not up.moda0306 wrote: Why "should" interest rates be higher if demand for loanable funds is way down?
Demand down = price down
Demand up = price up
Supply down = price up
Supply up = price down
Do you agree with those statements? Does anyone disagree?