Do you have a chart for your tracking of the monetary base? I use a combination of the Ms although each one has it’s flaws. Looking at the base, you can see a pretty dramatic shift:
YES, QE2 is most certainly a bailout to the Federal Government. I think its important to see the difference between QE1 and QE2. QE1 was really designed in my opinion to promote lending and credit creation, this is how America functioned for 30 years. So with QE2 he is hoping for two things.
Allow the government to spend more, which is inherently inflationary. But its inflationary regardless from whom they are borrowing.
Pull demand forward by crushing the yield curve in mid/long term bonds, thus trying to convince people to buy shorter term assets like stocks, commodities, etc. He pretty much admitted that when he said that stocks create a wealth effect. Which is disgusting, because he is now tampering with the stock market - something he should NOT be doing.
I think I’ve been using the same chart. Really I’ve just been going by what Gary North has linked to in his articles on the subject, which IIRC are the charts provided by the St. Louis Fed. Sorry if this makes me sound like a mere parrot.
IMHO, QE1 seems geared to bail out the “too-big-to-fail” banks. If Bernanke wanted the holders of excess reserves to start lending again, he could change the excess-reserve policy from paying positive (but small) interest on excess reserves to charging a fee for holding them. Presumably the fee would be large enough to motivate most excess-reserve holders to lend them out instead.
The fact that Bernanke hasn’t changed the policy there tells me that he doesn’t want the banks to lend that money. At the very least, he fears that the lending out of excess reserves would lead to an uncontrollable monetary situation, given the massive amount of excess reserves currently being held.
From one point of view, it’s really amazing that Bernanke is actually trying to cause an inverted yield curve in Treasuries. Such yield curves seem to be rather accurate predictors of future recessions. I think he’s buying Treasuries to offset withdrawal from them by foreign central banks. Additionally, lowering the yield curve for longer-term Treasuries would seem to mean that the government would face lower interest payments on its debt over the longer term. If your goal is to (try to) preserve the outward solvency of the government, that’s what you’d do.
QE1 is definitely a bailout for the banks. After all, he bought MBSs and those securities represented the majority of holdings of the major banks. So by buying them he definitely lent them a hand.
Gary’s idea is interesting, but I honestly disagree with it. Banks are not lending because there is no demand for loans, everyone is saturated. Even if Bernanke tries to punish them, they will not do it. They cant. The whole point of lowering interest rates is to promote lending and even with ZIRP no lending takes place. He fired his last salvo and he knows it.
Yeah Bernanke is trying to corner the Treasury market, its quite remarkable. I agree, he is trying to keep the yield low to promote refinancing AND to reduce interest payments by the Govt. That will only happen for some time, eventually that will break and our interest payments will jump to 500B a year. We will turn into Greece. Unless of course…Congress makes drastic cuts. DRASTIC. I wont hold my breath.
I will admit though, I am not really sure what he means by ‘creating reserves in the banking system’ other than what the Fed always does. Open market operations.
Assets
=
Liabilities
Equity
US Gov. Debt
Comm Bank Debt
US Gov Deposits
Com. Bank Deposit
Fed Equity Acct.
Begin
$1,000,000,000
$1,000,000,000
$500,000,000
$1,000,000,000
$500,000,000
Before the purchase of the bonds you can see that the total money supply is 1.5 billion (the amount of money that the depositors at the Fed have access to).
Assets
=
Liabilities
Equity
US Gov. Debt
Comm Bank Debt
US Gov Deposits
Comm Bank Deposit
Fed Equity Acct.
Begin
$1,000,000,000
$1,000,000,000
$500,000,000
$1,000,000,000
$500,000,000
$600,000,000
$600,000,000
End
$1,600,000,000
$1,000,000,000
$500,000,000
$1,600,000,000
$500,000,000
When the Fed purchases the bonds it simply makes ledge entries increasing its asset accounts and increasing its liability accounts.
Assets
=
Liabilities
Equity
US Gov. Debt
Comm Bank Debt
US Gov Deposits
Comm Bank Deposit
Fed Equity Acct.
End
$1,600,000,000
$1,000,000,000
$500,000,000
$1,600,000,000
$500,000,000
After the bonds are purchased the depositors now have access to $2.1 billion (US Gov $500 million and Comm Banks $1.6 billion). The money supply has just been increased by $600 million.
Reserves are money kept on deposit. He is creating reserves by creating money. Above is a rough representation of what the Fed (or any other bank for that matter does).
Now what the Comm banks do with that money is another question. If they dont lend it out and keep it on reserve then it will not cause a rise in prices… But from the austrian definition of inflation (and increase in the money supply) what he is doing is inflationary.
Thank you for the breakdown. I still think we are on the same page. When I said that QE1 was marginally inflationary, I meant that had the banks lent out out the money then the money supply would have ballooned out tremendously. In the true spirit of FRB I suppose.
The reason why price increases did not take occur in any reasonable fashion is because most of the money really was not used. They drove up assets in commodities, etc, which obviously hurts, but not as much had a real credit bubble been generated.
Jonathan (or anyone else), what do you think of the possible monetary regime suggested in this paper (PDF pages 10-11) by the NY Fed?
That is, instead of drawing in the excess liquidity later they let it stay in the system and control the level released into the economy by adjusting the interest paid on excess reserves, even in good times.
Heh, exactly. There’s really nothing I can add to that.
I wouldn’t say that there’s no demand for loans. For example, I just bought a house.
Bernanke himself said that the Fed can prevent the banks from lending the excess reserves (and hence causing massive inflation) by paying interest on them. Of course, the interest being paid on them is a miserable 0.25% IIRC. In theory, they could lend all that money and make much more interest. So maybe you’re right and the demand side has collapsed.
A Chinese credit-rating agency (if it’s not the only one) recently downgraded its rating of the US government’s credit. I wouldn’t be surprised if hyperinflation hits before the US government is unable to make the interest payments on its debt. It could even purposely create hyperinflation to make it easier to pay off the debt, à la Zimbabwe. Of course, that itself would lead to a severe downgrade of its credit rating.
The reason why price increases did not take occur in any reasonable fashion is because most of the money really was not used. They drove up assets in commodities, etc, which obviously hurts, but not as much had a real credit bubble been generated.
You are absolutely right. The banks have been forced to keep much of the new money on hand as reserves.
Which aren’t really assets to begin with. But even if privately held Treasuries are indeed assets, Treasuries held by the Fed are just obfuscatory accounting since the Fed has an unlimited ability to purchase Treasuries from the US government - it is, in fact, money printing. And that’s what “quantitative easing” is a euphemism for… printing money.
Toxic assets are probably as worthless as Treasuries but the fact that the Fed has an unlimited ability to purchase them means that no meaningful market valuation can be applied to them, so whatever numbers are put on the “asset” side of the balance sheet are pure voodoo.
It’s cute how he reverses causality here. The Treasuries are purchased as a cover for expanding bank reserves. In other words, if he were honest, he would phrase it as, “the Fed expands bank reserves in the banking system and places these expanded reserves on the liability side of its balance sheet… to balance this out, the Fed puts Treasury securities, among other things, on the asset side of its balance sheet.”
Now, that’s just trite. Of course no one means merely that M0 is expanding when they say that QE means printing money. “Printing money” is obviously figurative or metaphorical. That Bernanke would interpret such statements in their most woodenly literal meaning actually shows a measure of desperation.
Fractional reserve banking is problematic precisely because the central bank continuously alters the supply of base money (money proper). This allows banks to continuously expand the supply of money and credit beyond the demand for money and credit, which causes structural imbalances. Additionally, the central bank essentially consolidates the entire financial system into a single bank; there is no competition. There is nothing wrong with fractional reserve banking in itself, from an economic point of view. There’s a lot of literature on this topic.
"The problem is that hyperinflation destroys the Fed too. This is nothing something he wants or any of the holders want.
That is why I think calls for hyper-inflation just play into hysteria and fear."
To create hyperinflation, they would have to create massive amounts of money, keep doing it until people are driven out of US treasuries altogether.
What is the FEDs solution to every problem? Create more money.
That is the ONLY thing they will do, and will continue to do. That seems to be there only ace in the hole.
I’m really starting to believe that you actually don’t believe the FED creates money out of thin air. Maybe you’ve over analyzed how the FED creates new money so much, you’re not able to see how very simple it all actually is.
In the 21st century, you type in a large number into software. That software then transmits those digits elsewhere. In time, those digits are transmitted elsewhere, like bank accounts, or credit cards.
Understand? No money printing.
People are so used to Helicopter Ben’s boring and vague speeches, they forget that the gram of him that is still human retains the capacity to make literal statements.
I really think the Fed officials understand that hyper-inflation is self destructive and so if they would see a hint of such imbedded in any of the price indices they would tighten money supply. However, I think that would lead to the bust of the hyper-inflationary bubble, which would give further credence to the assertion that just the creation of new money does not lead to true economic growth.
The mechanics of QEII are illustrative I feel. Here is my understanding: The Fed announces it will be buying treasuries of certain maturity from the Primary Dealers (GS, JPM, etc.) on a given date, so, like any rational market actor the PD’s splurge on the appropriate part of the curve and flip them to the Fed on POMO (permanent open market operations, a euphemism for market manipulation) days for cold, digital cash.
The Fed has accomplished two things: 1) placed a price ceiling on government debt and 2) injected money into the banking system by purchasing said debt. Since banks today are essentially massive hedge funds and apparently can’t make money issuing loans in this kind of environment they speculate. The money sloshes around equity and commodity markets where the dollar debasement registers as higher nominal prices, reflating the bank’s balance sheets and squeezing the margins of business that actually make things.
Bernanke’s printing money alright, the inflation is just showing up in inputs and “trade surplus” economies.
“Inflation” is the common name for the economic condition where the purchasing power [“price”] of individual units of the currency is lower - it takes more units to buy the same amount of goods than was previously required.
“Deflation” is the opposite condition- an increase in per unit purchasing power of individual currency units- it takes fewer individual units of the currency to buy the same amount of goods that previously required more units.
“Immutable” economic law says: Price = supply minus demand [no exceptions!]
The “price” of money [its actual real-world value in the market place, relative to all other goods/services] ,means its actual purchasing [i.e buying] power in the real world, at any point in time.
Therefor logically, employing the “immutable” final price = supply less demand economic law previously stated:
the “price” of money [i.e. its real world purchasing power ; be that less than {i.e. “inflation”}, or greater than before {i.e.“deflation”} ] must always be = to the final outcome of the total supply of it available in the market place, minus the total demand by individuals to acquire it and then hold onto and not spend it, at any point in time.
Ra-heel simple, folks. A fiat currencies market place value at any point in time, whether that value is lesser or greater than before, must always = the total supply of it available, less the total demand to acquire and hold onto[not spend] that supply, at any point in time.
Treasuries are sold at an auction. The T bills are going to sell even if the Fed doesn’t buy them with newly printed or electronically deposited funds. What the Fed intends to do is rig the auction. If the Fed steps in and bids they can keep interest down . Without QE2 the other participants will demand a higher return on investment until both buyer and seller mutually agree and the product is sold. Of course this smacks of “free market” and the Bernanke boys aren’t having that. If they don’t bid the price down any yokel like you or me or the Chinese could go to treasury.com and buy T bills and make a decent ROI.
Look at what’s happening in the Eurozone. Greek and Irish bonds are selling with a much higher yield than the German Bunds.If the Greek or Irish governments could print Euros at will they could drive the price down at their auctions as well. Of course that would piss the Germans off because they’d have those junk bonds on their books as well
Of course. I think every inflationary regime from the beginning of time understood the risks of excessive devaluation. The problem is that the Fed only controls have the equation of the value of money. Hyper-inflation occurs not only as a result of the sheer supply of new money but also a collapse in demand for that money. The Fed does not know and cannot control the market’s “breaking point”, the point at which people begin to sell dollars en masse and move into other currencies. Americans are more at the mercy of the Fed because of its monopoly grant on currency issue from the United States government. So, we stand to suffer a lot more than other people around the world if the Fed decides to continue its policy of rapid dollar devaluation.
*shrug - Tightening the money supply after a collapse in demand for dollars is too late. Hyper-inflation will already have run its course.
“breaking point”, the point at which people begin to sell dollars en masse and move into other currencies."
What other currency?. It’s a beauty pagaent where the least ugly wins. The Yuan is pegged to the dollar in spite our table pounding and allegations of currency manipulations. The Euro? I don’t think so. The Euro is destined to be a failed experiment just as Milton Freidman predicted at it’s inception. Germany is just not willing or able to carry the sovereign debt of it’s not so responsible neighbors. ie; PIIGS. QE2 was the opening volley of a currency war that will be a race to the bottom. The Emerging Markets can’t let their currencies appreciate too much or there goes their export driven economies. A return to the gold standard? That’s my personal favorite but that too is highly unlikely. Besides last time I checked the US had the most gold holdings per ounce than any other country by a long shot. Re: usdebtclock.org US almost 289 million ounces..Germany 120 million ounces..International Monetary Fund 106 million ounces.The Chinese are a distant 6th. In spite of popular opinion I don’t think the USD wins the race to the bottom.
Exactly right. Credit is being destroyed in America faster than bernanke can print money. Primary inflation source are the banks and they are not playing along. If Ben wants to use the Fed. Government as his source of money distribution then so be it. As awful as it is, its not going to eclipse the deleveraging process that is already in full swing. 52 Trillion in credit vs. QE2, 3, 4 - he cant win. If he announces QE3 the other nations will shriek like crazy, as we saw from their reaction after QE2.
Worse for Ben, he is raising awareness. EVERYONE is now talking about the Fed as people discover the truth, they will be unhappy with their discovery.
I would love a gold standard, but what I would really prefer is the abolishment of central banking and the monopoly on money. It is not working and it is a failed experiment and gives the Govt too much control. Enough is enough.
