Gyroscopic Investing

Kshartle wrote:

moda0306 wrote: Why "should" interest rates be higher if demand for loanable funds is way down? 

If demand for loans is down the price people pay for a loan (interest rates) would go down, not up.

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?

Exaaactly...  I totally agree.  That's why I'm asking you why you think interest rates should be higher.

Tom Brown wrote: 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?

As far as i can tell....the only thing you can buy with T-bills is USD. It's not used to bid up the price of anything and has to be sold for USD before you can buy anything with it.

Who could make change for it?

Fundamentally the only difference between a T-bill and a T-note or a T-bond is maturity (and the coupon payments of the latter two).

So how does something go from being part of the money supply to not part of it based on the time to maturity. I mean.....in some cases we could be talking a day and all Treasuries eventually make it only 6 months left....

Does that mean every bond sold by the governemnt eventually turns into part of the money supply?

moda0306 wrote:

Kshartle wrote:

moda0306 wrote: Why "should" interest rates be higher if demand for loanable funds is way down? 

If demand for loans is down the price people pay for a loan (interest rates) would go down, not up.

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?

Exaaactly...  I totally agree.  That's why I'm asking you why you think interest rates should be higher.

Supply of bonds goes up = price down = rates up

This is being offset by the FEDs buying. That's my point. The increased demand is neccessary to offset the additional supply to keep prices up and yields down.

This is what is constantly ignored as an effect of QE.

Kshartle wrote:

Tom Brown wrote: 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?

As far as i can tell....the only thing you can buy with T-bills is USD. It's not used to bid up the price of anything and has to be sold for USD before you can buy anything with it.

Who could make change for it?

Fundamentally the only difference between a T-bill and a T-note or a T-bond is maturity (and the coupon payments of the latter two).

So how does something go from being part of the money supply to not part of it based on the time to maturity. I mean.....in some cases we could be talking a day and all Treasuries eventually make it only 6 months left....

Does that mean every bond sold by the governemnt eventually turns into part of the money supply?

There are other parts of broad money that you can't use to buy a loaf of bread either... just some perspective on that aspect of the debate.

Demand for loans up or down: It seems you have a very definite arrow of causality in mind there. What if the CB forces the overnight rate up for some reason. Then couldn't this cause the demand for loans to go down?

The CB could actually target any maturity they wanted (not just overnight), though typically they only target the overnight rate. I believe they could even simultaneously target multiple points on the yield curve. At least they could put an upper bound on rates at any point, because they have a bottomless pocket with which to buy from.

Nick Rowe would probably tear my head off for those statements: he always insists that demand is a CURVE not a scaler value.

So rates go up (forced by CB) could cause the quantity (or total dollar amount) of loans to go down, right?

Kshartle wrote:

moda0306 wrote:

Kshartle wrote: If demand for loans is down the price people pay for a loan (interest rates) would go down, not up.

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?

Exaaactly...  I totally agree.  That's why I'm asking you why you think interest rates should be higher.

Supply of bonds goes up = price down = rates up

This is being offset by the FEDs buying. That's my point. The increased demand is neccessary to offset the additional supply to keep prices up and yields down.

This is what is constantly ignored as an effect of QE.

Kshartle,

New demand for loanable funds went way down after 2008.  I'm talking about demand for LOANS, not demand for bonds by savers.  There was less demand for money in exchange for taking on debt.  This is what drives interest rates in a "natural" setting that you so crave.  If NOBODY wanted to borrow new money in 2014, I could probably get one for super cheap. If everyone wanted to borrow money, I would have to pay a high interest rate...

This is all in reference to some "natural rate," of course.

QE changes the "supply" of two types of financial asset in the private sector... both of which result in money being paid in interest to the private sector (with reserves, in the form of IOR). One goes up, the other goes down, but they're pretty damn similar.

Tom Brown wrote: Demand for loans up or down: It seems you have a very definite arrow of causality in mind there. What if the CB forces the overnight rate up for some reason. Then couldn't this cause the demand for loans to go down?

The CB could actually target any maturity they wanted (not just overnight), though typically they only target the overnight rate. I believe they could even simultaneously target multiple points on the yield curve. At least they could put an upper bound on rates at any point, because they have a bottomless pocket with which to buy from.

Nick Rowe would probably tear my head off for those statements: he always insists that demand is a CURVE not a scaler value.

So rates go up (forced by CB) could cause the quantity (or total dollar amount) of loans to go down, right?

Tom,

I am not trying to say that in our current banking system demand drives the price... in fact that's precisely the opposite.  The FED, treasury, and member banks in their dance set the price, and demand falls in line.

What I'm saying is that this is a good test to see if we're departing from a "natural" rate that the market sets. If demand for new loans stays low in spite of the fed "artificially setting interest-rates low," then you have to wonder how "artificial" the pricing is.  Interest-rates SHOULD indeed be very low, and that's why keeping them low isn't resulting in a rush by everyone to borrow money.

Does that make more sense? 

I was trying to illustrate this point to Kshartle.

Tom Brown wrote: Demand for loans up or down: It seems you have a very definite arrow of causality in mind there. What if the CB forces the overnight rate up for some reason. Then couldn't this cause the demand for loans to go down?

The CB could actually target any maturity they wanted (not just overnight), though typically they only target the overnight rate. I believe they could even simultaneously target multiple points on the yield curve. At least they could put an upper bound on rates at any point, because they have a bottomless pocket with which to buy from.

Nick Rowe would probably tear my head off for those statements: he always insists that demand is a CURVE not a scaler value.

So rates go up (forced by CB) could cause the quantity (or total dollar amount) of loans to go down, right?

There are many potential impacts of certain activities.

If the supply of ketchup goes down we should expect the price to go up.

This higher price might result in fewer people buying hamburgers or hot dogs.

This would mean lower demand for say....mustard, thus dropping the price.


So we can easily see how a decreased supply of ketchup, due to whatever...ketchup embargo....moldy tomato infestation...whatever....could lead to a drop in the price of mustard.

The mistake I see made when people point to the low rates despite massive government debt issuance...is to assume the factors keeping the prices up are a function of the issuing. That is...we can assume rates would not be lower absent the issuance or that the factors keeping prices up will continue. They are related but the relationship is not perfect.

It's like we examine the effects of the ketchup shortage and the conclusion is that mustard prices will stay the same because mustard producers will immediately adjust and downshift production. They won't, and the government cant' issue endless amounts of increasing debt without upward pressure on rates that needs to be offset by other factors that do not have a direct relationship.

I hope that was clear. It was clear in my head.

moda0306 wrote: New demand for loanable funds went way down after 2008.  I'm talking about demand for LOANS, not demand for bonds by savers.  There was less demand for money in exchange for taking on debt.  This is what drives interest rates in a "natural" setting that you so crave. 

I know what you were talking about. You changed the subject of what I was talking about (bond prices) and claimed I was mistaken. It is called a strawman or just plain changing the subject.

Incindently, interest rates are the price of borrowing money which is set by supply and demand. Now you clearly understand that lower demand for a loan lowers it's price. Do you not also see how increasing the supply of bonds by the government lowers the price, or do you think that price is somehow immune to the supply factor and is exclusivly based on demand which will grow with supply 1 to 1 and maintain price?

Kshartle wrote:

moda0306 wrote: New demand for loanable funds went way down after 2008.  I'm talking about demand for LOANS, not demand for bonds by savers.  There was less demand for money in exchange for taking on debt.  This is what drives interest rates in a "natural" setting that you so crave. 

I know what you were talking about. You changed the subject of what I was talking about (bond prices) and claimed I was mistaken. It is called a strawman or just plain changing the subject.

Incindently, interest rates are the price of borrowing money which is set by supply and demand. Now you clearly understand that lower demand for a loan lowers it's price. Do you not also see how increasing the supply of bonds by the government lowers the price, or do you think that price is somehow immune to the supply factor and is exclusivly based on demand which will grow with supply 1 to 1 and maintain price?

K,

We're talking about interest rates AND bonds... lending for new loans AND supply of old ones... please try not to give us mini-logic lectures in every post when you don't even know what deductive logic is.  It's REALLY getting annoying, especially because you're usually just deflecting being wrong.  I didn't change the subject.  I was trying to focus on the "manipulation" of "artificially low' interest rates by the fed.  Demand for loans has been low in-spite of where rates are at, so this is super valid to your overall argument.

Increasing bonds to the market COULD increase the price of their bonds, but you're forgetting about the cease of lending by the private sector.  If we're looking at things in the aggregate, there was actually DELEVERAGING going on, even with all the deficit Federal Gov't spending.  If aggregate demand for loanable funds is going way down, AND risk on other bonds is going up, you're going to see treasury rates drop and prices rising, even without QE to aid it, as a function of macro-economic movements.

Therefore, it is no wonder that demand for loanable funds by the private sector isn't blowing up... because interest rates aren't really all that negative from a "natural" point of view.

Rules of basic economics my man... if prices are being held artificially low, you're going to see a ton of demand.  Maybe they're not that artificially low?

To both M and K:

Thanks for the clarifications... I'll have to mull those over a bit.

Kinda on the same topic: some people suggest that the correct or "natural" rate for short term (perhaps overnight reserve loans) should really be negative right now!  The NKers (who are very interest rate oriented) have even proposed some schemes for doing this. It would be difficult though, because with current rules there'd just be a flight to cash. You'd have to address that in your scheme.

MMers say that these extreme measures w/ interest rates at the "zero lower bound" (ZLB) are not necessary because monetary policy should not be about setting interest rates, but instead be about targeting NGDP levels (or even inflation rates) directly.

moda0306 wrote: Rules of basic economics my man... if prices are being held artificially low, you're going to see a ton of demand.  Maybe they're not that artificially low?

Bond prices are being held artificially high, not low.

moda0306 wrote: Increasing bonds to the market COULD increase the price of their bonds, but you're forgetting about the cease of lending by the private sector. 

I don't know what you mean here. Increasing bonds to the market....do you mean increasing the supply? That lowers the price.

Kshartle wrote:

moda0306 wrote: Rules of basic economics my man... if prices are being held artificially low, you're going to see a ton of demand.  Maybe they're not that artificially low?

Bond prices are being held artificially high, not low.

Once again, I'm talking about interest rates... not bond prices. 

Kshartle wrote:

moda0306 wrote: Increasing bonds to the market COULD increase the price of their bonds, but you're forgetting about the cease of lending by the private sector. 

I don't know what you mean here. Increasing bonds to the market....do you mean increasing the supply? That lowers the price.

I mean when the government borrows money, it's increasing the supply of bonds in the market (lowering bond prices), but raising "demand" for loanable funds (increasing interest rates).

We're getting in a jumbled word mess here.  I'll try to clarify what I'm talking about more, because we're talking about the same thing from two different directions.

moda0306 wrote:

Kshartle wrote:

moda0306 wrote: Rules of basic economics my man... if prices are being held artificially low, you're going to see a ton of demand.  Maybe they're not that artificially low?

Bond prices are being held artificially high, not low.

Once again, I'm talking about interest rates... not bond prices.

You're ignoring the other factors though. You're ignoring what is causing the borrower to not want to borrow. It's not because rates are lower.

Of course the rates are artificially low. Anyway...we've had this discussion so many times I can't do it again.

Kshartle wrote:Of course the rates are artificially low.

As Tom Brown pointed out, that is up for discussion. Some very intelligent people (far smarter than any of us) have different hypothesis about what the natural rate is. You might say that you, "think rates are artificially low," but you can't very easily prove that rates are artificially low since nobody really knows.

People will respect your opinion more if you aren't so absolute with your unprovable declarations. You don't have all the right answers (none of us do).

Gumby wrote:

Kshartle wrote:Of course the rates are artificially low.

As Tom Brown pointed out, that is up for discussion. Some very intelligent people (far smarter than any of us) have different hypothesis about what the natural rate is. You might say that you, "think rates are artificially low," but you can't very easily prove that rates are artificially low since nobody really knows.

People will respect your opinion more if you aren't so absolute with your unprovable declarations. You don't have all the right answers (none of us do).

If the "natural" rate is higher......then you must think the guys that create money and bid up the the prices....are actually causing lower prices, and thus higher rates with their manipulation.

Kshartle wrote:

moda0306 wrote:

Kshartle wrote: Bond prices are being held artificially high, not low.

Once again, I'm talking about interest rates... not bond prices.

You're ignoring the other factors though. You're ignoring what is causing the borrower to not want to borrow. It's not because rates are lower.

Of course the rates are artificially low. Anyway...we've had this discussion so many times I can't do it again.

Why don't people want to borrow?  If it's so certain that we'll either have 1) high inflation, or 2) high interest rates in the future, why wouldn't it make a ton of sense to borrow at low rates?

Maybe it's because (gasp) they don't have enough demand for goods at their factory to justify taking out a loan to expand it...

Maybe it's because we have inadequate aggregate demand to justify taking out loans .

Kshartle wrote:

Gumby wrote:

Kshartle wrote:Of course the rates are artificially low.

As Tom Brown pointed out, that is up for discussion. Some very intelligent people (far smarter than any of us) have different hypothesis about what the natural rate is. You might say that you, "think rates are artificially low," but you can't very easily prove that rates are artificially low since nobody really knows.

People will respect your opinion more if you aren't so absolute with your unprovable declarations. You don't have all the right answers (none of us do).

If the "natural" rate is higher......then you must think the guys that create money and bid up the the prices....are actually causing lower prices, and thus higher rates with their manipulation.

They did this in 1981.  They did this in 1920 (or 1919... can't remember).

moda0306 wrote:

Kshartle wrote:

Gumby wrote: As Tom Brown pointed out, that is up for discussion. Some very intelligent people (far smarter than any of us) have different hypothesis about what the natural rate is. You might say that you, "think rates are artificially low," but you can't very easily prove that rates are artificially low since nobody really knows.

People will respect your opinion more if you aren't so absolute with your unprovable declarations. You don't have all the right answers (none of us do).

If the "natural" rate is higher......then you must think the guys that create money and bid up the the prices....are actually causing lower prices, and thus higher rates with their manipulation.

They did this in 1981.  They did this in 1920 (or 1919... can't remember).

They bought bonds and printed money in '81 to raise rates?

I thought they just kept raising the discount rate.

moda0306 wrote: Why don't people want to borrow?  If it's so certain that we'll either have 1) high inflation, or 2) high interest rates in the future, why wouldn't it make a ton of sense to borrow at low rates?

Maybe it's because (gasp) they don't have enough demand for goods at their factory to justify taking out a loan to expand it...

Maybe it's because we have inadequate aggregate demand to justify taking out loans .

Hahaha.......

I suspect it's because they are worried about losing their jobs and can't think of productive way to use borrowed money in a stangnent economy being strangled with regulation and taxes.

There is no way to print a way out of this one I'm afraid.

KShartle,

The Fed's QE purchasers don't exactly "bid up" bond prices in the way you imagine. It's a little more complex than you think...

Felix Salmon wrote:The New York Fed has a direct line to the biggest banks in the world (Goldman Sachs, Morgan Stanley, Deutsche Bank, etc — 18 in all). And it gets all those banks to compete with each other, either directly or on behalf of their clients, for who will sell the Fed the Treasury bonds it wants at the lowest price. The winners of the auction get the Fed’s newly-printed cash*, and give up Treasury bonds that they own in return.

Source: How QE works

And furthermore, the effects of QE are more complex than your oversimplification:

CNBC: The Santelli Exchange wrote:Eugene Fama: 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...

Source: http://video.cnbc.com/gallery/?video=3000211021

Sorry to stir this up again but thanks for the replies.

Here is how I am working it out in my head.

It seems that before the Fed can proceed with QE, it basically gives itself a loan. This would allow for the asset to be created for the asset swap.

Before QE

Fed
Assets                Liabilities
$100 Reserves  $100 Deposit for Fed
                         

Bank
Assets                Liabilities
$100 bond          $0

After QE


Fed
Assets                Liabilities
$100 bond        $100 Deposit for bank


Bank
Assets                Liabilities
$100 Reserves  $0

whatchamacallit wrote: Sorry to stir this up again but thanks for the replies.

Here is how I am working it out in my head.

It seems that before the Fed can proceed with QE, it basically gives itself a loan. This would allow for the asset to be created for the asset swap.

Before QE

Fed
Assets                Liabilities
$100 Reserves  $100 Deposit for Fed
                         

Bank
Assets                Liabilities
$100 bond          $0

After QE


Fed
Assets                Liabilities
$100 bond        $100 Deposit for bank


Bank
Assets                Liabilities
$100 Reserves  $0

whatchamacallit,

Again, the proper accounting is found here:

http://brown-blog-5.blogspot.com/2013/0 ... asing.html