[aybartlett]

It makes sense now. Thanks for the exchange.

[aybartlett]

Right…… but it seems to me that there could be 10 trillion in excess reserves and still the same fed funds rate right now, no? I suppose my thinking is that the interest on excess reserves allows for the same fed funds rate no matter what they do, while excess reserves are exceedingly plentiful.

[aybartlett]

This from Gary North today, seems to be right in line with this topic

http://teapartyeconomist.com/2013/09/19/fed-does-not-control-federal-funds-rate/

This blew my mind., and it totally makes sense. I suppose then that the payment of interest on excess reserves is to put a floor on the fed funds rate and the increase in reserves due to QE will just DELAY the normalizing of the fed funds rate?

[aybartlett]

How do you explain the CPI since the 90’s in Japan along with your opinion on the possibility of stagflation in the US?

[aybartlett]

Then the idea of QE is countercyclical? Stimulate when weak and unwind the portfolio “when the economy is strong enough”?

I just don’t see how they are going to unwind QE and raise interest rates. They have failed desperately to produce the Keynesian “quasi-boom” and returning to pre-crisis policy would just allow the economy to tumble again…… thus, “not on my watch” imo.

I have to ask what you are predicting for the next 10 years in terms of monetary and fiscal policy and economic performance.

[aybartlett]

In the bank’s perspective, isn’t it just an asset swap? There was no change in net worth at the time of the QE. It seems to be analogous to a checking account vs money held in CD’s.

I am thinking too much is made of QE. The more I try to understand it, the more confused I get. I don’t understand why the swapping of treasury securities for reserves is to boost the economy.

Their goals are:
-They want to push down interest rates to spur lending….
-Push up stock and home prices
-Then spending and investment (via wealth effect) is encouraged

So treasuries are bid to prices that are less attractive to the private sector than would otherwise be. Thus they decide to invest in other assets? Their “cure” for the economy is capital market inflation? Are these assets included in any inflation measurement? Capital markets seem to be a repository of inflationary potential and this should be a potential warning sign for impending price inflation, no?

But QE isn’t really doing all that much of their stated goals. Sure, assets are doing well, but banks are still bloated in excess reserves. Is this the intention of the interest on excess reserves then?

Bank lending is not reserve constrained (in fact, many countries don’t even have reserve requirements at all). This means that banks do not need reserves before they make loans. Instead, banks make loans first and obtain reserves in the overnight market (from other banks) or from the Fed after the fact (if needed). New loans result in a newly created deposit in the banking system.
Banks are capital constrained. Banks can always find reserves from the central bank so banks do not check reserve balances before making loans. Instead, they will check the creditworthiness of the borrower and their own capital position to ensure that the loan is consistent with the goal of their business – earning a profit on the spread between their assets and liabilities.

~Cullen Roche

First, is this true as stated? I had understood the reserve requirement to be analogous to a ceiling.

This paper seems to suggest that I am wrong, or rather incomplete in understanding:
http://www.ny.frb.org/research/epr/02v08n1/0205benn.pdf

[aybartlett]

I think this will help out
http://en.wikipedia.org/wiki/Discounted_cash_flow

[aybartlett]

1)
http://en.wikipedia.org/wiki/Federal_funds_rate

The Fed does print money though.

“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Courtesy of Bernanke

Just because the newly printed money is parked right back at the Fed in “excess reserves” does not mean that money hasn’t been printed. Just see what happens if/when Bernanke decides to stop paying interest on excess reserves.

[aybartlett]

Apparently I need to become more productive at using Google.

Thank you again Jeff.

I’d like to see a better refutation of austerity(clear and concise). I think Ron Paul’s proposal will be a good framework to use. I will have to summarize Bush and Obama policy and then pick Greece for the EU. If I compare/contrast against Ron Paul’s proposal I am confident that EU policy is at least 99% wrong, according to Austrians.

http://c3244172.r72.cf0.rackcdn.com/wp-content/uploads/2011/10/RestoreAmericaPlan.pdf

Or maybe I should use Doug Casey’s numbers to cut government spending by 98% if “he” was president.

[aybartlett]

Hilarious!

Well yes. Many phony economists literally call for a decrease in productivity as our cure. This is one of many inherent problems in Keynesian logic. It is the broken window fallacy. Economics in One Lesson refutes this. There are unintended consequences that Krugman refuses to acknowledge.

If I had $1 million……..

1. With a Hurricane devastating my factory, I have to spend it to rebuild.

2. Without a Hurricane devastating my factory I have $1 million to invest for growth, or I can buy three Ferrari 458’s.

Without a hurricane, society has more stuff. I’d really like to see someone on their side of the argument practice what they preach.

(imagining Krugman setting his home ablaze and gloating about how wonderful this will be for the economy)

[aybartlett]

Thank You Jeff. Those were some good pieces of work you provided.

[aybartlett]

I like to study MMT more than Keynesian economics. The MMT’ers are the most obnoxiously loud of any economic school, so obviously hard to ignore. Their school seems to be based on the equation for GDP…… which is a misleading indicator anyways.

I’m no expert, but here are the obvious points that they make:

-Government spending is good. Sometimes they say “deficits are very necessary”.
-Lower taxes to stimulate growth + the above
-Governments can NOT default on debts if they are denominated in their currency
-Fiat money has never experienced hyperinflation.
-Following the 1st and 2nd rule above will not cause inflation.

Now my turn to point out the obvious flaws in MMT.

1. Gov’t spending could be productive…. but it just proves that it more often than not isn’t. This is b/c of the huge numbers of unproductive employees, among other things. Spending 1 trillion on producing goods vs spending 1 trillion on regulatory agencies draws a clear distinction. When you increase the number of goods in supply, costs go down. When you only increase the velocity of money, costs go up. Depending on gov’t spending is doomed to fail every time. We can spend 1 Billion to build a factory and produce goods….but let’s say the money is in the private sector’s hands. The private sector hires as few employees as possible, and produces as many goods as possible for the 1 Billion. In the hands of the government, they may favor employing as many people as possible, thus producing the goods as inefficiently as possible, (no tools etc). Fewer goods are produced. Society as a whole is poorer.

2. MMT’ers correctly note that taxes should fall, but ignore the similarities between taxation and dilution via printing money. If the private sector has $100 and the government imposes a %50 tax, then half of the purchasing power is now int he government’s hands. If there are $100 in the private sector and the government prints $100, then again the government now has %50 of the purchasing power. They get away with this obvious fallacy b/c people like Stephanie Kelton just say “We just need efficient government spending, of course it would be bad to print money and waste it.” Logic does not follow. Their entire economic theories rely on these ridiculous assumptions.

3. Often you will see an MMT’er tell you that a government can’t default on a debt issued in it’s own currency….. and they ALL literally act as if they are the first person to ever utter this statement. It doesn’t take a lot of common sense to have come to that same conclusion…… and I heard this long before I ever heard of MMT. Greenspan said it explicitly many years ago. The heart of MMT is that people will continue to accept payment in said currency.

4. Mike Norman has uttered this statement. I am not sure if it is true. But even if it is, It wouldn’t mean anything. Almost all of human history money was either barter or paper backed by something tangible….. Having something real to give currency purchasing power does not give it a better chance of becoming hyperinflationary. Most importantly to note, hyperinflation is an option.

Now about interest rates and the fed.

Increasing the interest rate on the bonds will lower the dollar value of the bonds. This represents less willingness to purchase said bonds and the price has to become lower for the market to clear. There is no way around what is coming. Creditors to the government will be wiped out. They can (per above) print money to meet obligations, but the purchasing power promised will not be delivered. Or if sound monetary policy were allowed to persist, the creditors would simply receive partial payment at best….. but paid in dollars of now higher value(still less p. power than promised).

The Fed would increase the rate due to employment reaching 6.5 percent or lower and inflation reaching 2.5 percent or higher (their words). I personally believe that a lot of inflation is already baked in the cake. As Mises said, it sometimes takes years for some goods and services to adjust to the “altered money relation”. If inflation hits 2.5 percent, it could continue to climb even after halting inflationary policy. I believe this to be the true testing point. What will the fed REALLY do? Bernanke and all of the top 3 prospective replacements to his position are anti-deflation zealots. QE will last far longer than they are telling us it will.

If the Fed immediately vanished, we would have a depression in short order. Interest rates would skyrocket.

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