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Tuesday, September 21, 2010

Where are all my MMT'ers At?

Bill Gross, speaking after the Fed announcement today on CNBC, was asked by Erin Burnett 

"Can we afford $2Trillion never mind $4Trillion in tax cuts?"

Gross responded: 

"Well no we can't - we can afford $2Trillion in quantitative easing because that basically is printing money, but the deficit is out of control and ultimately the dollar will pay the price."

I took him to mean that we couldn't cut taxes by $2T because the deficit is out of control.

It's around the 9 minute mark in this video.

Gross proceeded to say that he did want tax cuts for the middle class, but not the top brackets.

So, here's the question:  Gross acknowledged "printing money" for quantitative easing, and advocates it heartily.  We already know from our prior discussions of Modern Monetary Theory (MMT) the government need not tax in order to spend - they can just spend - they can just print money (of course, there may be consequences if they do this). Why then, is it a problem to cut taxes by $2T, but not a problem to just print $2T for QE?  Said differently, we don't need taxes to "pay" for the budget - we can just print money for that too/instead.  Said a third way, why not get rid of QE, and use the $2 Trillion for tax cuts instead?

I guess it's possible that what Bill Gross really meant is that we can print $2T for QE, but we can't print another $2T in the form of tax cuts, because THAT would be too much for the dollar to handle...

-KD

40 comments:

Anonymous said...

Quant easing is not "printing money", it is just an asset swap, no net new financial assets are created. Only the Fed Gov. can print money.

Kid Dynamite said...

anon - doesn't the Federal reserve create money (or its digital equivalent) with which to buy the assets (ie: perform the QE) ? what asset are they "swapping" for the bonds they are buying? money...

now, eventually, if they un-QE the world, this money gets destroyed (or reigned in). but now, it's created (or unleashed).

no?

Anonymous said...

The key point is there is no "net new financial assets" in the banking system. Let's say the banks hold $1T in USTs. The Fed buys them and now they hold $1T in cash, no change, the banks don't hold any more "money" than they did before, it's just now cash rather than USTs.

TPC at Pragmatic Capitalism has covered this several times

scott fullwiler said...

I'm with anon. I explained the difference between QE (or helicopter drops) and "printing money" here, fyi: http://neweconomicperspectives.blogspot.com/2010/01/helicopter-drops-are-fiscal-operations.html

Kid Dynamite said...

ok, how about the practical resulting effects? if the Fed buys the $1T in UST from the bank, the bank now has cash. it takes that cash and goes and buys $1T of something else.

the point, obviously, is that this is "inflationary" at least in the sense that it results in more dollars chasing the same goods, right?

scharfy said...

Its empirically observable that QE boosts asset prices and changes the structure of risk assets across many classes.

It may not directly boost CPI , in terms of inflation, but asset inflation has wealth effects, which may or may not become inflationary - in the strict sense.

Even though no new financial assets are in the system (which is debatable since QE is money ex nihile), that cash finds its way into other risk assets eventually, even if it isn't promoting loan growth due to lack of demand.

QE may not stimulate loan growth, but stripping 1.5 trillion in mortgages and treasuries and quarantining them on the FED balance sheet has consequences.

The banks will hunt for yield (KD noted this) elsewhere. Hence asset inflation. Bernanke isn't a dummy - in the strict sense..

Kid Dynamite said...

right Scharfy. I want to apologize to all those banking mechanics experts, as it's a certainty that i'll use the wrong term or wrong actual method of money workings at some point. But what I really want to focus on is the end result - the effect.

In my view: when the Fed buys $1Trillion of stuff, it means that that people they bought that "stuff" from will go and buy other stuff. Asset prices inflate, by definition, don't they?

if you don't want to call that "printing money" (and it's clear you don't, and maybe it's even clear that it is not actually printing money) - then lets talk about the effect: printing money leads to asset price inflation, as does Fed Asset Purchases (aka QE)... right?... and please don't say "not necessarily." I mean in general, from a supply and demand of money/assets point of view.

Anonymous said...

It's only arguably simulative if that cash gets reinvested in risky assets, which in my opinion is not very likely. Since a UST is already a high quality, highly liquid investment, I don't see the motivation of a bank or investor who sells a UST to run out and take that cash and buy something speculative, they are more likely to buy an investment with similar characteristics to what they just sold. Japan's multi year experience with QE provides strong evidence that it is both not inflationary or simulative.

This post explains it far more eloquently than I can.

http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event

Kid Dynamite said...

Anon - what if the banks just take that money and go buy more treasuries with it? the price of treasuries rises... yields fall... right? asset price inflation. ???

eventually, you might repeat this ad infinitum until yields on treasuries are so low that banks buy other assets because they need yield!

getyourselfconnected said...

EconomPic was wondering something along the same lines last week:
http://tinyurl.com/39mjbdh

The answers he got were lacking. Better answers here so far, and this is an area I am most interested in.

Jake said...

From PragCap:

"First of all, the Fed doesn’t actually “print” anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector"

Did anyone actually think they still used printing presses?

I think your question is right on and I personally would like to know what peoples thoughts are on the result, not the actual function of how "printing", "transferring" or "swapping" works...

Kid Dynamite said...

I just read the Prag Cap piece, which is more about the failure of Bernanke's policies in the current environment than it is a good answer to my question. And this is not really the direction I wanted this thread to take, since it seems we always go through the minutiae each time, while not getting to the big picture, but hey - I admit that I get the minutiae wrong each time, so..

let me rephrase, though. Let's imagine the Fed did $10T... no - $100T of QE. Let's imagine they did enough of these "asset swaps" to buy all the treasuries in existence. That would have an effect, right? Of course it would. The banks would take that money, and they'd have to buy other stuff with it... OR, perhaps the Treasury would respond by issuing $100T of new debt for the Banks to buy (and then the Treasury would spend that $100T on new road signs and other stimulus!)... that would certainly have an effect, right?

Smaller versions have effects too - maybe we just don't notice them yet, or they don't have much effect because of the nature of this balance sheet recession.

But I guess my point is, QE does result in asset price inflation (or perhaps in prevention of asset price DEFLATION, which is the same effect!), which I treat the same as "the dollar will pay the price" which was Bill Gross's quote I wrote this post about. My dollar no longer buys as many UST as it did before the Fed bought $1t, $10T or $100T in UST from the banks, right?

scharfy said...

Very interesting stuff.

It would also stand to reason that the COMPOSITION the assets purchased or swapped by the Fed would tell us more about potential effects.

I.E. if they buy solely 1 year t-bills, the effect may be nil.

If they buy a swath of subprime mortgages, the effects may be more substantive.

And everything in between.

So on one extreme QE2 would be replacing cash for cash basically, and impotent- And on another extreme would be monetizing toxic assets.

All QE's are not created equal

Jake said...

just remember.. at the end of the day, cash = a treasury with a duration of 0 so a sell-off in the currency (i.e. why risk assets would rise relative to cash) should / could cause a sell-off in treasuries too

BUT... if the fed uses QE to simply purchase treasuries, then a number of scenarios could take place:

* investors could question the credit-worthiness of the US government = a sell-off in treasuries
* investors demand remains, but supply is removed = a rally in treasuries
* a blanket statement by the fed saying they would buy an unlimited amount of treasuries at a certain rate would put a floor on treasuries = a rally in treasuries

Anonymous said...

the fed needs a way out in case inflation kicks in in a bad way. if they print $2T and it does cause too much inflation, they will have no means to remove that money besides high taxation, and that is undesirable and politically impossible. if they just do an asset swap then they can later sell the asset and receive money back which exits the system. if they receive less money back this will still print some money, but not as much as if they just gave money away.

getyourselfconnected said...

Great stuff so far. I am thinking more along the lines that the big picture is that these shell games are just crude instruments with which they try and foster behavior they see as desireable; namely "increasing aggregate demand". They have to be a non-credible force here; buy enough treasuries as to make people not want to fight the fed, but not helicopter drops to regular people that would kill the dollar overnight. I would argue all thses instruments and swaps are as notional as the derivitives market in that they do not really exist at all in a sense. When I look at it this way all I see is the FED trying to get people to do dumb stuff with their money while they swap around notional money to affect rates and psychology. I will try to flesh this out better later, only 4 hours sleep last night after the football game and I have to go to bed!

IF said...

How about Gross is talking his book again?

QE reduces the duration of paper the public holds (cash has zero duration). With a steep curve that should lead to a rally in bonds. Good for Gross.

A deficit increases the supply of bonds. (The treasury competes with Gross.) Worse, the treasury does not finance itself with zero duration paper, but offers on average a few years worth of duration (4 to 7). Longer bonds get pushed down. Bad for Gross.

As a side, somebody in the sphere (maybe Krugman) observed that the Feds job would be simpler if the Treasury stopped issuing long bonds (no need for QE). Oh, yeah. Rollover risk. But still in its own currency.

Think of it that way, Iceland went bust and their currency only devalued by half. Similar with Argentina (1/3). How bad can it really get? (At least for the rich, ya know.)

lk232 said...

Buying agencies did work and was stimulative simply because they were not worth par w/o the Treasury’s guarantee, so in a sense buying agencies was "printing money" because the Treasury is being forced to inject capital in Fannie and Freddie's to uphold the guarantee. However, with U.S. Treasuries, I believe there is very little impact at all. Obviously there is some tipping point of how much QE the Fed can get away with before our whole monetary system looses credibility in the currency market's eyes, however that threshold appears pretty high given the lengths Japan went to and look where the Yen is now!

As a said before, how much more proof do you need than Japan's experience and our own UST purchases in QE1. From the point the Fed first announced that they would undertake QE (Dec'08), interest rates on long-term U.S treasuries have gone up, not down. The Fed is spinning their wheels here, this is not the silver bullet it is made out to be.

FWIW I am the first 3 anon posts.

Anonymous said...

you can argue that changes to duration profile of private _financial_ portfolios is inflationary however the mark-to-market that has been accrued to the FED since the first QE is clearly an income lost _forever_ to the private sector.

So what is more inflationary: some hypothesis about asset price inflation and resulting wealth effects or real income that is not accrued to the private sector?

But I agree that asset price inflation has been the critical GDP driver over the whole Greenspan/Bernanke rule

But What do I Know? said...

@IF Does Bill Gross ever not talk his book?

To my way of thinking, periodic QE's are necessary to hoover up the Treasuries that have been issued over the past two years. In the past two fiscal years the Federal government has issued $3 trillion in net new debt--all the Fed is doing is exchanging Federal Reserve Notes for those bonds--exchanging its debt for the US government's debt. Why do this? Because otherwise the price of the US Treasury debt would decrease to undesirable levels (interest rates would increase). Whether an increase in interest rates would be bad is another question, but Mr. Bernancke and friends seem convinced that they need to keep them low.

I suppose that we could conflate the Fed and the Treasury and call them the "US Government" and say that the "US Government" is simply making these Federal Reserve Notes out of thin air, but that is only the case when the central bank is not independent.

As for taxes, they involve the reverse flow of FRN's from other entities to the "US Government"--so taxes lessen the needs for the "US Government" to create more FRN's, and tax cuts increase the need to create more FRN's (ceteris paribus).

So to my way of thinking, QE is simply a method of keeping Treasury yields down (ignoring the dashboard warning light that increasing long yields represent), but tax cuts (and deficits) are the cause of that warning light going on.

/Representin'

Kid Dynamite said...

LK232 - I'm glad you brought that up - it's an important distinction.

When the Fed buys treasuries, the effect is temporary - more bucks are freed up in the financial world to chase less assets. Since we all think that the Treasury will be able to pay back their debts, this is TEMPORARY - and will be reversed if/when the Fed's holdings of Treasuries mature, and the reverse happens - the money goes back in to the Fed (that's what I meant earlier when i said used the terms "unleashed" and "Reigned in)

I'll give you guys another example: what if the Fed took everyone's MSFT shares tomorrow and paid them current price - that's an "Asset swap" right? investors used to have MSFT, now they have cash.. guess what - they'll go use that cash to buy, who knows - IBM. AAPL... the point is - it's "inflationary" in the real world sense - it drives prices higher

Fed buying Treasuries does the same thing.

IF said...

Kid, I think people have pointed you to it before several times. The Treasury issuing bonds (= new future money) is inflationary. The Fed (used to) only change the composition of outstanding future money (and make it now money). When they buy a billion in treasuries they don't really print a billion. They only print enough to make up for making "future" money "present" money (e.g. changing the yield curve). And at zero percent rates this delta is just not very much.

Your MSFT example is completely different. 99 percent of the population never assumed MSFT stock to be good as cash (unlike treasuries). If you make this risky asset unexpectedly cash you changed something at a much more sensitive place than with treasuries. (Stock for instance is handled differently for margin than treasuries etc.) I would expect that if the Fed buys 1 billion MSFT the delta they effectively print and issue into circulation is much higher than in the treasury example.

We are back at the helicopter. The more unexpected the drops the more impact it has.

Kid Dynamite said...

IF:

as usual with this topic, no one is giving me a real world answer i can understand. Believe me, although I'm completely aware that my theoretical understanding of the back machinations of the banking system are subpar to yours and others, I'm not a moron, and I will understand it in REAL WORLD TERMS. yet, no one can adequately offer those terms.

I'll say it again - for the umpteenth time: if the Fed buys millions, billions, or trillions of Treasuries (Yes - I know they are MONEY GOOD!) from the banks, the banks now have real current NOW money to spend again. Before, they had spent it already. After QE, they have to spend it AGAIN, on something else...

how can that possibly NOT be inflationary? (and yes, I use the term "inflationary" to mean "more money competing for the same goods")

since you didn't like my MSFT cash example, how about MSFT bonds - or other AAA rated bonds that people think are money good - if the Fed buys those, then the former bondholders will have to take the money that they get from the Fed, and re-spend it on what is now a smaller pool of available goods (since the Fed is holding the other junk on its balance sheet).

Kid Dynamite said...

another question for you to ponder, IF:

you wrote "99 percent of the population never assumed MSFT stock to be good as cash (unlike treasuries)."

really? I'd say that 99% of the population assumes that they can sell their MSFT stock at market prices - for cash. It's absolutely as good as cash (while at the same time being a risky asset). It has a value. that value is published, and it's liquid.

Kid Dynamite said...

In case anyone else wants to weigh in,

I am in complete agreement with anon@ 9:26pm who said

"the fed needs a way out in case inflation kicks in in a bad way. if they print $2T and it does cause too much inflation, they will have no means to remove that money besides high taxation, and that is undesirable and politically impossible. if they just do an asset swap then they can later sell the asset and receive money back which exits the system. if they receive less money back this will still print some money, but not as much as if they just gave money away. "

I mentioned this a few times - QE allows the Fed to eventually "undo" what they've done, but there are absolutely effects in the meantime.

and I have the same question as anon @ 4:06am who asked "So what is more inflationary: some hypothesis about asset price inflation and resulting wealth effects or real income that is not accrued to the private sector?"

I think he was asking a rhetorical question - implying that the latter is clearly more inflationary, and maybe that's the answer to my post: QE, although it may be inflationary, isn't AS inflationary as a like amount of tax cuts. I'm not entirely convinced this is the case, although I can certainly understand an argument for it.

finally, it seems Gross is flat out wrong when he said "QE is just printing money." that much we all seem to agree on.

IF said...

Kid:

MSFT has a yield of 2 percent (13 cents a quarter). This leads to a duration of 50 years and in addition you take the risk MSFT folds.

Compare that to the average treasury (4-7 years) which is risk free.

Which one looks more like cash to you? Which one more like far, far away money? Which would you take as collateral to give somebody a 1 year loan? Etc. If you still think there is no difference, I guess I'll give up.

IF said...

Kid:

one more: MSFT is not liquid in the sense that even BillG could not sell his share at the market price. It would have completely crashed the stock.

If you want to sell 100 billion 5 year treasuries, you'll probably get more than 99 billion for it. Big difference. The reasons are called "duration" and more importantly "full faith and credit".

And yes, it is the evil central bank that makes this difference possible.

Kid Dynamite said...

IF: fair points - a treasury looks more like cash than MSFT stock to me, on a longer term horizon (I don't want to belabor the point, but today, if i need cash, I'm pretty much indifferent if my account shows "TREASURIES" or "MSFT" - I'm perfectly confident that both can be sold for their current price - but you're definitely right that there's a limit to that size with MSFT).

so let me try again, sticking with MSFT.

MSFT, yesterday, issued 30 year debt at rates that implied that they were basically riskless. Investors allocated capital to that debt. It's long duration, and it's as close to treasuries as you can get. JNJ did the same thing a few weeks ago.

If the Fed were to come in and buy up all of MSFT's debt, and JNJ's debt - it would just be "an asset swap" - right? Investors would be selling the debt, and receiving cash. they'd be no wealthier than when they started. I think that's your point.

My response is - so f'n what? In the real world, they have to go out and spend that money they are now saddled with - which, again, back to my initial point, is inflationary.

right?

prices are the merger of supply and demand. Fed buying assets alters that equation - on both ends. They increase demand (they buy, obviously) and they decrease supply (because they take assets out of "the pool"

vjk said...

I'll say it again - for the umpteenth time: if the Fed buys millions, billions, or trillions of Treasuries (Yes - I know they are MONEY GOOD!) from the banks, the banks now have real current NOW money to spend again. Before, they had spent it already. After QE, they have to spend it AGAIN, on something else.


If a bank sells a treasury, it's an asset swap -- the bank ability to lend, which is limited by the bank capital, does not increase. The bank reserve (cash) does increase which improves the bank's ability to settle on the interbank market.

Increase in bank reserves generally depresses FF/interbank interest rate and therefore the feds buying/selling treasuries is the handle that controls the overnight rate. With the rate already close to zero, buying more treasuries is rather impotent *today*. The bank excess reserve holdings may turn out to be inflationary, in an indirect way, *if* the economy starts growing and credit expansion may be facilitated due to extra cash sitting on the banks' reserve accounts.

Before, they had spent it already

Since lending is not restricted by the reserve cash (other than intraday and longer term liquidity implications), they had not as evidenced by the 1tril in excess reserves.

TC said...

@6:42 PM you said, "But what I really want to focus on is the end result - the effect."

With this in mind, then, what difference does it make whether we print $2T in the form of QE rather than tax cuts comes down to the fact that, in the end it is the creditworthiness of the U.S. Treasury (and therefore the power of our federal government) -- the ultimate backstop -- that is at greatest risk.

The game right now is predicated on the assumption that, securities being backstopped will be made whole. Tax revenues ultimately supporting the backstop can only serve to bolster perceptions of the backstop's viability. That it has come down to this suggests the presumed benefit of tax cuts in hastening cash flows necessary to assure that, backstopped securities are made whole is less valued than maintaining the viability of the backstop itself. In other words, QE is part of a game of "controlled disintegration," whereas tax cuts should be seen as a "status quo" response whose effect is all the more likely to precipitate a chaotic disintegration given the severely imbalanced state of both finance and physical economy, particularly given shot confidence in securities-based finance.

How many more years can we afford to add to those decades already in which the private sector has become extraordinarily adept at mispricing risk? We should cut taxes to provide such capital as will encourage this capacity further? It cannot be done. Yet reigning it in is no walk in the park either.

That the severely imbalanced state of things still receives little consideration at this point in a crisis of confidence such as we continue experiencing I think touches on the same psychological element you raise in your Sep 22, 2010 post on the problem with pensions.

Now, you might be thinking what does QE have to do with the U.S. Treasury? QE is a Fed operation. Well, let's face facts. Were it not for the existence of the U.S. Treasury, the Federal Reserve would already be in receivership. In fact the Fed is broken beyond any repair short of bankruptcy reorganization. Time surely will bear this fact out, and I fear sooner than most imagine.

Indeed, you probably can kiss the Bush tax cuts bye bye. All posturing notwithstanding, the backstop is hemorrhaging and no vote-getting opportunity is likely to supersede the desperate need for capital in the coffers of the lender of last resort.

Kid Dynamite said...

VJK -
you touched on the important disconnect, I think - thank you. you wrote:

"If a bank sells a treasury, it's an asset swap -- the bank ability to lend, which is limited by the bank capital, does not increase. The bank reserve (cash) does increase which improves the bank's ability to settle on the interbank market."

I'm not talking about LENDING at all - unless you consider banks buying debt "lending," which you may - in which case the Fed buying assets from the banks absolutely DOES increase their ability to lend - they can buy more debt now.

then again, you're saying they already have plenty of money to "lend" (aka - BUY STUFF WITH) currently - as evidenced by reserves. fine.

vjk said...

I'm not talking about LENDING at all - unless you consider banks buying debt "lending," which you may - in which case the Fed buying assets from the banks absolutely DOES increase their ability to lend - they can buy more debt now.


Kid,

I am not sure what you mean. Bank lending is currently restricted by capital needed to absorb a possible loss due to a potential loan default. Therefore, the above asset swap Treasuries<-->cash does not influence bank lending capacity.

The bank may decide to pay bonuses with available cash, by depleting its capital, but procuring cash by selling treasuries could have been attempted on the open market without any fed inducement.

Kid Dynamite said...

VJK -

I'll bring it back to the real world again.

let's pretend I run a trading desk at a bank, say, JP Morgan. Maybe I run the Government Bond Desk. If the Fed comes and buys $1T of Treasuries that I had on my book (my balance sheet) - what do you think I'm going to do? I'm going to go out and buy a trillion dollars worth of something else.

That is indisputable. When I go out and buy $1T of "something else" (or maybe, I buy the same treasuries back from someone else) - the price rises (or at least doesn't fall as much as it would have had I not bought $1T of something)

this is my only point!

i can't believe we're still even arguing about it - after all, the Fed's open market purchases are designed to do precisely the same thing - control interest rates (and, inversely, ASSET PRICES)

vjk said...

TPC:


Were it not for the existence of the U.S. Treasury, the Federal Reserve would already be in receivership.

Not sure what you are saying.

The treasury is a central bank client (the Feds) with no overdraft privileges. The treasury account with the feds is funded a) through taxation; b) through bond issuance(treasuries).

The feds open market buy/sell operations are monetary in nature and are supposed to influence the short term interest rate (overnight rate) by the T<-->cash swap shell game.

Currently, the result of such a game is bloated bank reserve accounts that do not appear to have any other consequence except being bloated.

vjk said...

Kid:

i can't believe we're still even arguing about it - after all, the Fed's open market purchases are designed to do precisely the same thing - control interest rates


I am not, maybe someone else is. Sure, OMOs are designed, for better or for worse, to control the overnight rate.

The points are:

1. the fed, by OMO, can directly control only the overnight rate being both the marginal seller and buyer at the interbank market. The feds can hardly control any longer duration interest rate, perhaps their influence stops somewhere around commercial paper.

2. any further treasury buys by the fed are pointless because the rate is already at about zero.

3. No single bank with its extra cash can influence interest rates, assuming it wanted to do so for whatever reason, with whatever cash it has on its reserve account. I believe you assume some concerted action on part of the entire bank system. I am not sure what kind of (ir)rational collusion one had to assume to imagine any lasting consequences of moving the 1tril grand total.

Kid Dynamite said...

VJK, i'm pretty surprised at your last comment. you wrote "1. the fed, by OMO, can directly control only the overnight rate being both the marginal seller and buyer at the interbank market. The feds can hardly control any longer duration interest rate, perhaps their influence stops somewhere around commercial paper."

false. totally false. when they buy trillions of long dated paper via QE, what do you think they are doing?!?!! influencing longer duration rates! maybe not "controlling" it in a strict sense, but I am positively sure that rates would be higher if the fed were not buying assets.

and then, you wrote "No single bank with its extra cash can influence interest rates, assuming it wanted to do so for whatever reason, with whatever cash it has on its reserve account."

again, I don't know what kind of theoretical world you're living in. Maybe my past as a trader is biasing me. I'm telling you how the real world works - when trading/investment desks at banks have additional cash to spend, they look for ways to spend it.

Now, PERHAPS what you're getting as is that since the Bank owned Treasuries before, that didn't really hit their balance sheet at all anyway, since treasuries can be super highly leveraged? Is that what you meant? But obviously there is a not-insignificant haircut on 30 year treasuries held in trading accounts...

vjk said...

Kid:

Re: lt rates: false. totally false

And you have numbers to prove that ?

Taking into account that a)the Fed is not monopolistic LT paper issuer -- T-Bonds compete with the corporates of the same maturity modulo credit risk; b) unquantifiable uncertainty of the future economy, it is unlikely that LT QE will have lasting or any effect. Maybe some initial shock. I readily admit that I may be wrong -- we'll see.

I don't know what kind of theoretical world you're living in
Commercial banking mainly.

I'm telling you how the real world works - when trading/investment desks at banks have additional cash to spend, they look for ways to spend it.

Investment desks cash handling is hardly something to imitate as it was mostly quite repulsive.

Kid Dynamite said...

VJK -
by definition, if i buy a treasury bond, don't i influence it's yield, by removing a seller from the market?

anyway.. you wrote "T-Bonds compete with the corporates of the same maturity modulo credit risk; "

isn't that exactly what I'm saying? When the Fed removes the T-bonds, the banks buy the corporates - that's PRECISELY my point!

finally: "investment desks cash handling is hardly something to imitate as it was mostly quite repulsive." - so what? it's still what happens in the real world! desks spend their capital. when they get more cash (As a result of selling assets to the Fed), they have more capital to spend...

scharfy said...

Just wanna say this has been a great thread. I can't believe there's any debate about this..

The US has 13 Trillion in Public Debt.

Buying 1.5 Trillion (of unknown duration) has some effect.

We can debate what the effect is, and how pronounced, but can someone honestly argue taking 10% of the stock of US public debt out of circulation and putting it on the Fed's balance sheet is merely an accounting issue?

My head hurts. MMT guys have expanded my view a ton, but holy shit if they done think this type of activity has ANY ramification?

Its like pouring lighter fluid all over a smoldering campfire and saying "Look! No flame. Nothing to see here. Just a lighter fluid transfer. No new lighter fluid has been created"

Check out the the Tepper interview on CNBC. He seems to agree with your/my POV. plus its an awesome interview

Kid Dynamite said...

lol scharfy - lighter fluid transfer. well done.