Uh oh, Mr. Bernanke, the natives are getting restless. Now it’s not just Sarah Palin and Glenn Beck, or foreign central bankers, but more and more American economists who are starting to openly challene the second round of “quantitative easing.” FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/14679/quantitative-easing-its-sinking-the-feds-status/
Quantitative Easing: It’s Sinking the Fed’s Status
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The purpose for this money creation is easy. That is to give the reborn GM a quick price advantage over foreign competitors. I guess it is funny as most major competitors Toyota, Honda, Kia, Hundai, Mercedes Benz, BMW, Tesla, and soon to be Tata all have manufacturing facilities in the USA and may make more parts and cars in the USA than the new GM that has lots of facilities in Canada.
You don’t really need a Phd to be an economist. Every business owner probably knows more about “real” economics than most so called class room economist. The Phd economist is a myth.
That many million/billionaires are socialists is enough to disprove that. The laws of economics always apply, even if nobody knows, or even if everyone denies, their existence. An entrepreneur need not understand economics to be successful.
That many million/billionaires are socialists is enough to disprove that.
Oh, I don’t know about that. It’s never their money they advocate be taken away from them.
I like how our leaders handle every problem, first they say “Trust Us, We know what were doing.” and Then they comeback with “It’s to complex to understand.”
I think Bernanke will still do what my dad used to do with the ketchup bottle. He would add some water to the ketchup. I never liked how it tasted, but that liquidity really got the ketchup flowing.
It also makes it much easier to spill the ketchup all over the white tablecloth ruining it for future use as Bernanke is doing to the economy.
The thought of that makes me want to barf – gross!
Turning the bottle upside down and waiting a while is the non-interventionist approach. It takes longer, but the ketchup tastes better.
in fact you should hit the bottle right about where the label is. Guy in a dinner showed me that once. Don’t hit the bottom of the bottle, hit the label
“At some point, some commercial banks will find it more attractive to begin lending out their nearly trillion dollars in excess reserves, rather than keeping them on deposit with the Fed, where they currently earn 0.25 percent.”
I’ve been hearing this for a long time. You’re assuming people/firms want to, or can, borrow. This is a demand problem, not a supply problem. People are tapped out from decades of excessive borrowing/spending. Can banks lend to the gov? Sure, but unless the gov expands fiscal stimulus more than expectations it will have little effect. Unless inflation expectations get un-anchored (skyrocketing crude, gold, food; a sudden drop in the USD etc) and there’s a mass shift in psychology adding more reserves to the system won’t do anything. Unless the shadow banking system and distressed asset prices recover more reserves won’t do anything. At this point it’s not the amount of reserves out there, it’s the psychology of the private sector and/or the political will for more stimulus that matter.
If adding more reserves did nothing, then why would they be doing it?
Maybe they think it will help banks improve their balance sheets and capital position? Maybe they think it will create an inflationary psychology? They probably want to drive long rates down.
But as for creating monetary inflation its irrelevenat unless there is a demand for loanable funds as people spend cash/bank deposits, not reserves.
Seems like smoke & mirrors to me. No substance.
What if instead of selling the TBills, the FED starts writing out-of-the-money gold and silver put options to reduce excess reserves? If the puts are ever exercised, the FED can just write more puts to get the cash to pay off?
1) the PM option market is too small for this to make a difference
2) the fed can’t legally do it (not like that matters)
3) you’re assuming silver/gold prices won’t explode up or down. If they wrote options on something and the market moved hard against them the losses could not be made up by selling more options. You could have 10x, 20x, 30x etc in losses for every x worth of options sold.
The only real option the fed would have is to sell assets, set up massive rev-repos or time deposits, jack up the rate paid on reserves, or issue its own debt.
First let me say that I don’t advocate this, just getting more ammo.
I’ve been asked why not have the FED sell a wasting asset, like an option, instead of a durable asset?
So for (3), the downside is that the dollar increases in value relative to what the FED’s holding on it’s balance sheet? So the FED would have to sell enough puts to reduce the number of dollars to the point where someone needs the dollars more than the option asset at the strike price? Is that what you mean by (1)?
The fed has to be careful with it’s balance sheet because it needs to maintain positive equity. If it were to sell options excess reserves(a liability) would drop while a new liability in the amount of the option would increase. If the option expired OTM then that liability would fall but if the option expired far ITM then the fed would be liable for an amount far greater than the initial reduction in reserves which would lead to both an increase in reserves and an erosion to the equity on the balance sheet. If the loss was big enough they would technically be insolvent and the congress would have to nationalize, nominally atleast.
As for (1) there are about $1 trillion in excess reserves. The fed needs the ability to withdraw billions at a time to control that. The PM options market is very small relative to that and there is no way they could sell enough options to pull that kind of money out of the system.
Maybe I am overlooking something but there seems to me a rather direct way to navigate out of this mess. As I see it there are two distinct black swan events that are of concern.
The first, and most pressing, is the potential for a runaway deflationary collapse in bank asset values. Most of these assets consist of residential and commercial real property. The bank’s capital asset requirement is the link that connects money creation/destruction to these asset values. Once these asset values begin to fall (because sub-marginal owners can no longer afford them) the capital requirement should force the bank to sell the property into a falling market. This action serves to lower asset values further and therefore promotes more loan (i.e. money) destruction. Of course a variety of gimmicks have been used to forestall this scenario. The stated purpose of the latest gimmick, QE2, is to raise the value of assets in general and thereby arrest the decline in bank asset values.
The second and less tangible black swan is the scenario Dr. Murphy describes. The cause for concern here results from the feeble monetary reserve requirement imposed on the banking system: money leaking out of “excess reserves” into the general economy can be leveraged to inflate the monetary aggregates to monstrous levels.
The present circumstance seems to offer an ideal political opportunity to make the fractional reserve banking system much less fractional. If the monetary reserve requirement were hiked substantially (let’s say to 50%) most of the perceived inflationary threat would be removed. Furthermore, if the bank’s capital asset requirement was reduced substantially (let’s say to 3%) then a great deal of the pressure for banks to make distressed sales would be lifted, and the deflationary feedback loop would be damped. Once the real estate markets are allowed to clear subsequent growth becomes possible and a higher capital requirement can be imposed. Perhaps in this politically viable way two black swans could be whitewashed into a medium shade of gray.
“Fearing a crash in the dollar, everyone rushes to dump their Treasuries first — hence leading to a crash in the dollar.”
Why would selling Treasuries lead directly, i.e. without central bank intervention to support the price, to a crash in the dollar?
As Del says, commercial bank required reserves could be increased or newly printed federal bonds could be bought directly by the Fed. The resulting federal government deposits at the Fed could be “quarantined”. Then the Fed could sell these government bonds on the open market to sop up reserves.
Speaking of PhDs who know jack, Cowen sounds more like a high school student with intellectual pretensions than a leading academic. “Wealth-elastic goods” (a rubber sailing yacht?) … “risk premia” (a new electric car with no airbags?).
If you think that this is an unwarranted attack on an intellectual giant by an anonymous nobody then read a little bit further, where Cowen argues persuasively that what he knows about economics could be printed double-space on ordinary paper in Arial 12pt and crammed into a thimble:
I have no idea what the second half of that sentence means but I think that the first part is self-explanatory.
In the Economic Supplement of “Le Monde” of this Tuesday, we have a translation of Martin Wolf’s truly ugly piece at the FT: http://www.ft.com/cms/s/0/93c4e11e-ec39-11df-9e11-00144feab49a.html
Deflation menaces us? Higher inflation will rescue the economy? The Fed can exit easily by calling upon Congress to heighten reserve requirements? Japan’s problem in the 90′s was chronic deflation caused by too little easing? Yes, it’s all there.
Then comes something that sounds like the junkie telling off his dealer:
“Now turn to the argument that the Fed is deliberately weakening the dollar. Any moderately aware person knows that the Fed’s mandate does not include the external value of the dollar. Those governments that have piled up an extra $6,800bn in foreign reserves since January 2000, much of it in dollars, are consenting adults. Not only did no one ask China, the foremost example, to add the huge sum of $2,400bn to its reserves, but many strongly asked it not to do so.”
Watch out, junkie.
Bob – as you know when you looked over the budget forecasts for my upcoming book, I am very worried about the impact of rising interest rates on our budget deficits. The part of the “black swan” scenario you describe misses another enormous potential fallout – sovereign debt default by the U.S.
>may not lower subjective estimated risk premia
Is this “subjective” a recognition of individual choice, as in Austrian economics? And is it also Mises’
interest rates determined by the extent to which people value the future over the present?
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