$5 Triilion "QE" coming?

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

What goes around, comes around.

Does this make Iran's Forex positions a contrary indicator? That Euro call a year ago doesn't look so good now. I wonder if the Dollar call now will look any better next year.

[ASH]

Re: $5 Triilion "QE" coming?

The fact that the Fed or Treasury can print money without limit has no more impact on our economy than the fact that Disneyland can print ride coupons has on the price of a ride there, or on the profitability of the Walt Disney Company.

But they are not printing money without limit. This is not Zimbabwe.

They are creating debt entries without limit.

I was just using the phrasing you did, to address the issue I thought you were raising.

When you talk about creating debt entries without limit, that has more to do with money creation by commercial banks than quantitative easing by central banks. In a technical sense, both involve creating credit and a corresponding liability. When a commercial bank makes a loan, the debt that is created is a claim on the future wealth and productivity of the loan recipient, just as you say. The borrower gets access to spendable credit, but is also subject to debt that represents a claim on the borrower's future earnings. In contrast, when the Fed "prints" money, it creates reserve credits to pay for an asset. The recipient (a bank) ends up with reserve credit at the Fed (the equivalent of "spendable money" when comparing to the similar commercial transaction, except that it can be used as the base for fractional reserve lending), but the liability created is a liability of the Fed rather than of the recipient. And, unlike the debt that is created when someone borrows money from a commercial bank, the Fed's liability is limited to the assets on its balance sheet, without any reference to the material value of said assets, or to the Fed's ability to "earn" anything of value in the future. In the one case, the debt represents a burden to the borrower and a claim on the future; but in the case of the Fed, the liability is strictly limited. In this respect, the liabilities created when the Fed prints money don't have the same economic significance as the liabilities created when a commercial bank loans money into existence.

The only direct connection to debt (at least debt in the sense of claims on future productivity) is to dilute and re-distribute existing claims. Since the existing debt is denominated in 'claim tickets', adding claim tickets reduces the real value of what is owed. And by selecting who is to receive the new claim tickets -- and how many claim tickets to pay for the assets purchased -- the distribution of debt can be altered. Indirectly, of course, money 'printed' is reserves, so it can increase debt in the economy by encouraging more fractional reserve lending by banks, but that debt isn't itself created by the QE.

[Fiat Currency]

Re: $5 Triilion "QE" coming?

I don't watch much television, but judging by the pharma commercials on CNN et al one could come to no other conclusion than the biggest problem facing America today is erectile disfunction...

Raj on TV's Big Bang Theory ...

"The only thing I've learned in the last two hours (watching football) is American men love drinking beer, pee too often, and have trouble getting erections. I'm just saying: if they cut down on the beer, maybe they could spend less time in the bathroom and please their women without pharmaceutical help."

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

Originally Posted by ThePythonicCow
The fact that the Fed or Treasury can print money without limit has no more impact on our economy than the fact that Disneyland can print ride coupons has on the price of a ride there, or on the profitability of the Walt Disney Company.

Originally Posted by ThePythonicCow
But they are not printing money without limit. This is not Zimbabwe. They are creating debt entries without limit.

Response by ASH
I was just using the phrasing you did, to address the issue I thought you were raising.

I'll respond to your excellent description of Federal Reserve Quantitative Easing in a separate post.

My first reaction on reading the above was: "dang - I hate it when people use my own words against me" (said sotto voce with a bemused chuckle.)

My second reaction was to observe a difference in verb mood between my two remarks quoted above (I'll explain that in a second.)

My third reaction was to wonder if I was engaging in linguistic nit-picking, defensively, on my own behalf.

The verb mood distinction is this, and I am now convinced it's legitimate and that I still stand by both my remarks above. Yes, the Fed, or Disney, could (subjunctive mood) print ad infinitum, but they don't (indicative mood.) Those readers not familiar with verb moods can see further Verb Moods: Indicative vs. Subjunctive for a description of them.

In less introspective or pedantic words, yeah, they could print without limit, but they don't. They limit themselves, along just the lines you describe in the rest of your post, to which I intend to respond next.

P.S. -- my grammar sucks. My understanding of the subjunctive mood was based on some Latin I took a long time ago (and did not do well in at the time.) It seems my word "could" above is in the conditional mood, not the subjunctive mood.

[BigBagel]

Re: $5 Triilion "QE" coming?

I don't watch much television, but judging by the pharma commercials on CNN et al one could come to no other conclusion than the biggest problem facing America today is erectile disfunction...

Yes, that's correct, erectile dysfunction, dry eyes and getting up at night to go to the bathroom. Those three things along with a corrupt political system.

[ASH]

Re: $5 Triilion "QE" coming?

[My third reaction was to wonder if I was engaging in linguistic nit-picking...

In less introspective or pedantic words...

I'm the last guy who should fault someone for either nit-picking or pedantry. That is my main stock in trade.

Since I missed the distinction you were making, I guess I didn't catch the drift of what you were saying. Sounds like I was responding to something I thought you had said, but which you actually had not. Perhaps I'll get it the next go round...

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

When you talk about creating debt entries without limit, that has more to do with money creation by commercial banks than quantitative easing by central banks. In a technical sense, both involve creating credit and a corresponding liability.

Yes, indeed. Double entry bookkeeping is ubiquitous.

When a commercial bank makes a loan, the debt that is created is a claim on the future wealth and productivity of the loan recipient, just as you say. The borrower gets access to spendable credit, but is also subject to debt that represents a claim on the borrower's future earnings.

...

In contrast, when the Fed "prints" money, it creates reserve credits to pay for an asset ... the liability created is a liability of the Fed rather than of the recipient.

Are you describing the Fed's actions here rather like I would describe a pawn shop?

In any case:

• In a traditional bank loan, the bank monetizes some of the borrowers future earnings (as you said.)
• In pawn shop loan, the pawn shop monetizes the possession of some item of value, such as a TV or guitar.
• In some NINJA (no income, no job, no assets) home mortgages, the bank essentially monetized the value of a house they would likely end up foreclosing on.
• When a mortgage broker securitized a bundle of mortgages it had sold, it was monetizing a bundle of mortgages. Each of these mortgages provides an income stream or collateral promised by borrower.
• When the Fed buys some Treasuries from one of its Primary Dealers, it is monetizing some U.S. government debt. Each of those Treasuries provides an income stream and principal repayment promised by the United States.
• When the Fed buys some mortgage backed securities of dubious market value from Fannie or Freddie, it is monetizing junk. Debt (the future income stream half) that is likely to default is being moved to the Fed's balance sheet, while high powered money is moved to that GSE's balance sheet.
• When the Fed swaps currencies with another central bank, it is monetizing that other nations currency (perhaps in return for a promise they will in turn monetize some Treasuries.)

...

[B] Ordinary debt monetizes [A] future rights to real stuff and real income.
[C] Securitized debt monetizes [B] ordinary debt.
[D] Derivatives monetize [C] securitized debt.
[E] AIG's swaps monetized the risk in [C] securitized debt and [D] its derivatives.

Debt is recursive!

Debt is the monetizing of future income, property claims and risks into present spendable credit.

What matters in the end is

1. the likelihood of default (which roughly depends on how much the promises to pay exceed the capacity to pay) and
2. the strength of the firewalls (which influence how far and wide a default will spread.)

All these new innovations in finance, along with "globalization" (shipping overseas of productive capacity), the militarization of half the planet, and unending promises of pensions and social benefits, have dug a very deep debt hole for the United States. We're still digging, with a nuclear powered steam shovel. More and more debt, six ways from Sunday, with weaker and weaker firewalls and reduced underlying productive capacity.

Perhaps if this newly passed financial reform bill has any real teeth, their sharp points will puncture this balloon. More likely it will be the opposite, and this bill will plaster some band-aids over some of the weaker spots, in order to keep this tennis match going another day.

And, unlike the debt that is created when someone borrows money from a commercial bank, the Fed's liability is limited to the assets on its balance sheet, without any reference to the material value of said assets, or to the Fed's ability to "earn" anything of value in the future. In the one case, the debt represents a burden to the borrower and a claim on the future; but in the case of the Fed, the liability is strictly limited. In this respect, the liabilities created when the Fed prints money don't have the same economic significance as the liabilities created when a commercial bank loans money into existence.

I lost you a bit in this last paragraph above. I'd have thought that in general, the liability of a lender was limited to the "assets" (promises to be paid) on their balance sheet. I don't see why that applies only to the Fed.

The economic significance of debt always depends on three things:

1. the eventual value of the newly added spendable credits,
2. the eventual value of the "assets", the promises to be paid something in the future, and
3. the impact that lending activity had on underlying real productivity.

Debt issuance does not necessarily expand the money supply and reduce the value of each monetary unit (aka "inflation"), at least not for long. Bad debt can destroy more wealth than it creates.

I don't see why the Fed's activities are any different or more limited in these regards, except in so far as the Fed happens to engage in different sorts of (lending/monetization/debt creation/debt swaps).

The only direct connection to debt (at least debt in the sense of claims on future productivity) is to dilute and re-distribute existing claims. Since the existing debt is denominated in 'claim tickets', adding claim tickets reduces the real value of what is owed.

But on the other hand, any full or partial default of the debt contracts the available liquid wealth captured in the monetary system.

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

I'm the last guy who should fault someone for either nit-picking or pedantry. That is my main stock in trade.

Since I missed the distinction you were making, I guess I didn't catch the drift of what you were saying. Sounds like I was responding to something I thought you had said, but which you actually had not. Perhaps I'll get it the next go round...

The only sentence I can make sense of in that silly pedantic post of mine above is this one:

In less introspective or pedantic words, yeah, they could print without limit, but they don't.

Ergo -- no contradiction.

[flow5]

Re: $5 Triilion "QE" coming?

The FED's a "day late and a dollar short".

ZIRP? No, by definition the interest rate "floor" is the remuneration rate. There is no “liquidity trap”. The FED is "pushing on a string" with its new policy tool - IORs.

What the FED has fostered is a contractionary policy with the use of a penalty rate.

The floor on the FFR (or the interest rate on excess & required reserves), now @ .25%, has created dis-intermediation among the non-banks (an outflow of funds), and has reduced money velocity, in the thrifts, as well as the CB system.

IORs have caused massive portfolio shifts in the earning assets among the commercial banks ($1,047,858T in new excess reserves).

These portfolio shifts have induced system-wide bank credit contraction (the remuneration rate on IORs will have exceeded all 4-week, 3-month & 6-month Treasury bills for 2 years as of this Nov 5th). Back then, the target FFR was @ 1% (on 11/05/08).

From a System standpoint, interbank demand deposits represent savings that have a velocity of zero. As long as these savings are impounded within the commercial banking system, they are lost to investment or to any type of expenditure.

From a system standpoint, excess reserves are not a source of loan-funds for the banking system as a whole. CBs do not loan out excess reserves. They always create new deposits when lending & investing.

The liquidity preference curve is a false doctrine. (see Alfred Marshall's "money paradox").The money supply can never be managed by any attempt to control the cost of credit (whether the FFR & IORs), & the Taylor Rule is a fictitious "sign post".

Nominal GDP will cascade in the 4th qtr (down in every month - Oct, Nov, & Dec), without extra (upwards of the linear path), stimulus.

[sishya]

Re: $5 Triilion "QE" coming?

For everybody concerned about deficit spending, this is a video to watch

U.S. Senate Candidate Warren Mosler Explains Why The US Government is Not Revenue Constrained

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Mosler is very good. I agree with his Quotes on Govt Book keeping entry regarding taxation and spending and how buying Treasury is a like a savings account with Govt unlike FRN which is like checking account. Yes his medicine can cause some high inflation(US Dollar is nearly a hard currency tied to Oil and World contracts).

[flow5]

Re: $5 Triilion "QE" coming?

Keynes used simple equations too.

[flow5]

Re: $5 Triilion "QE" coming?

Bernanke's reputation as "helicopter ben" is just a dog & pony show. No campaign, by any Chairman, has ever come close to being as policy restrictive.

The financial markets, and the economy, respond immediately to open market operations of the buying type. Bernanke's operations have largely been sterilized.

The liquidity preference curve is a false doctrine. There is no liquidity trap. ZIRP doesn't exist. The interest rate floor is the remuneration rate @ .25% which is acting as a penalty rate.

Historically, the largest percentage of new jobs originate with small businesses. Banks aren't loaning to small businesses because they make more money on larger loans. Where are the legislative incentives?

[Rajiv]

Re: $5 Triilion "QE" coming?

See also G20: Doves on finance reform, hawks on austerity

As the world waits for the decisions to roll out from the G20 summit, Rob Johnson discussed fiscal austerity with the Real News Network. “If it wasn’t so tragic I would say it was humorous,” he started out. But tragic it is. A lot of it all comes back to banks: why are deficit numbers so high? The financial crisis, caused by big banks. Who does fiscal austerity benefit, when it risks killing economic recovery? Those who hold treasury bonds at 0% interest — big banks. “Finance is supposed to be a servant to commerce, [the] economy, [and] social goals. Well the servant’s servant has become the master’s master. And it’s time to reinvert that,” Rob says. Watch the full interview:

[Jay]

Re: $5 Triilion "QE" coming?

ASH and TPC, nice discussion as usual. I would add two things, 1) FNR's the Fed creates monetizing lousy assets end up as high powered money and mortgage debt isn't. The only restraint on that base money right now is the 0.25% banks get for holding it and the unwillingness of the private sector to borrow. And 2) when and if that money makes it into the economy the Fed will not necessarily be able to control where it goes, whether into financial assets or tangible goods. Obviously most of us around here think it will likely be the latter.

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

The only restraint on that base money right now is the 0.25% banks get for holding it and the unwillingness of the private sector to borrow.

I sense an implication in your comment here that the banks are independent profit seeking businesses who would readily withdraw their high powered money from the Fed and lend it out, if they only had willing and more profitable borrowers. You are apparently saying that it is just that 0.25% and the lack of borrowers that's holding back the banks from lending that money.

I tend rather to think of the Fed and the major banks to be working more co-operatively than competitively, and the major ebb and flow of events to be determined more by larger, more powerful interests, economic realities and power struggles. That pile of high powered money that the Fed has created by monetizing lousy assets could disappear in a heart beat if JPMorgan, the NYFed, the Fed Chairman and the Sec. of the Treasury so wanted it. For example if the Fed were to force a bunch of the junk that they and the major banks hold to be suddenly marked to market, then this would be like detonating a neutron bomb on Wall Street, creating a giant hole which just such high powered cash could be useful in papering over.

Inflation (weakening of the Dollar due to too many Dollars in circulation) it may well be, perhaps for several years as EJ suggested in order to make the debt burden more manageable. But if such it be, that cash currently on hold at the Fed will not be the essential reason why.