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flow5
389 Comments
Shorting Treasuries: What's the Rationale?
Deficits obviously generate a net increase in the demand for loan-funds; the larger the deficit, the greater the demand. That doesn't necessarily mean interest rates will be higher, the only other conclusion is that the deficits are keeping interest rates higher than they would be in the absence of the deficits.
While current deficits increase the demand for loan-funds, the expectation of higher rates of inflation, and larger deficits, decreases the present supply of loan-funds. Lenders, as a group, will not as a rule, lend long-term except at rates that will compensate for the expected rates of inflation. Thus, the deficit financing impacts on the supply side (as well as the demand side) will push interest rates up or retard their fall.
The more alarming aspect of the deficits is not the effect on interest rates but the effect of interest rates on the level of taxable income and the volume of taxes required to service a cumulative debit now exceeding $11T. Higher interest rates and higher taxes induce stagflation, thus eroding the tax base, and increasing the volume of future deficits.
Shorting Treasuries: What's the Rationale?
Shorting Treasuries: What's the Rationale?
We are first heading for a "command economy", and failing that - "state capitalism".
Shorting governments should be outlawed.
Fed Balks at Releasing Toxic Waste Details
There are staff studies which aren't released to the public for years. Case in point: the 1931 commisson on member bank reserve requirements which wasn't declasified until 1983. Makes you wonder what else is classified.
What Kind of Monetary Policy Do You Want?
What Kind of Monetary Policy Do You Want?
We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. - Fed. Res. Accord of Mar. 1951 was all about.
The effect of tying open market policy to a fed. funds bracket or rate or (corridor) is to supply additional (and excessive legal reserves ) to the banking system when loan demand increases. Since the member banks have no excess reserves of significance the banks have to acquire additional reserves to support the expansion of deposits resulting from their loan expansion.
If they use the federal funds market (or discount rate), which is typical, the rate is bid up and the Fed responds by putting through buy orders, reserves are increased and soon a multiple volume of money is created on the basis of any given increase in legal reserves.
The Fed's technical staff either never learned, or forgot, how Roosevelt got his "2 percent war". This was achieved by having the Fed stand ready to buy (or sell) all Treasury obligations at a price which would keep the interest rate on "T" bills below one percent, and long-term bonds around 2-2 1/2%, and all other obligations in between.
This was achieved through totalitarian means, involving the control of total bank credit and the specific rationing of that credit. Plus there were controls on prices and wages that kept the reported rate of inflation down.
There are 5 interest rates that the Fed can directly control in the short-run; the Discount Rate charged to bank borrowers & the Primary Credit Rate for the PDCF, ABCP, ABCP MMF, & MMIFF. The effect of Fed operations on all other interest rates is INDIRECT, and varies WIDELY over time, and in MAGNITUDE.
An "easy money policy" will bring lower short-term rates in the short run; but, if continued long enough, will bring about higher interest rates, both long & short-term.
Higher interest rates consequently are not evidence of “tight money”; rather they are the consequence, over time, of an excessively easy (irresponsible) money policy – money expansion so great that monetary flows (MVt) substantially exceed the rate of expansion in real output.
The only tool at the disposal of the monetary authorities in a free capitalistic system through which the volume of money can be controlled is legal reserves (now not constraining). We are on a ship without a rudder or an anchor.
What Kind of Monetary Policy Do You Want?
By definition 50% of the population has an IQ over 100 & 50% have an IQ under 100. Economists fall below the line.
" monetary policy acts with long and variable lags" -- B.S.
First, there is no ambiguity in forecasts. In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise” (1) nominal GDP is measured by monetary flows (MVt); (2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters; (3) “money” is the measure of liquidity; & (4) the rates-of-change (roc’s) used by the Fed are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;
Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.
The lags for monetary flows (MVt), i.e. proxies for (1) real GDP and the (2) deflator are exact, unvarying - respectively. Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).
Not surprisingly, adjusted member commercial bank "free/gratis"... legal reserves (their roc’s) corroborate/mirror, both lags for monetary flows (MVt) –-- their lengths, or frequency, are identical -- (as the weighted arithmetic average of reserve ratios remains constant)
The lags for both monetary flows (MVt) & "free/gratis"... legal reserves are indistinguishable or synchronous. Consequently it has been mathematically impossible to miss an economic forecast (housing bubble, commodity bubble, etc.).
There are no inaccuracies, just some non-conforming & unavailable data (e.g., revisions have been overlaid & lost, flawed deposit classification, data discontinued, etc.). This is the “Holy Grail” & it is inviolate & sacrosanct.
The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly.
Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP. Note: roc’s in nominal GDP can serve as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.
Because of monopoly elements and other structural defects which raise costs and prices unnecessarily and inhibit downward price flexibility in our markets, it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 percentage points. In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.
Some people prefer the devil theory of inflation: “It’s all Peak Oil's/Housing's fault.” This approach ignores the fact that the evidence of inflation is represented by "actual" prices in the marketplace.
The "administered&quo... prices of the world's oil producing countries would not be the "asked" prices were they not “validated” by (MVt), i.e., validated by the world's Central Banks ( i.e., as Friedman maintained "inflation is always and everywhere a monetary phenomenon")
Monetary Mechanisms: Then and Now
The point is that you can't segregate transaction accounts from savings-investment accounts (time deposits). An increasing percentage of newly created money was transferred into interest-bearing accounts and the FED ignored the growth of highly liquid interest-bearing accounts (ignored the growth of the money supply).
If the “store of purchasing power” attribute of money, when applied to a given asset, is to have significant meaning, it ought to be defined in terms which are applicable to the whole economy. That is, no asset really has a “monetary store of purchasing power” quality unless there can be a net conversion of that asset into money, ceteris peribus.
In other words it must be possible to effect this conversion without necessitating that any present money holder reduce/liquidate his holdings/assets. Any other interpretation becomes mired in a futile discussion of relative degrees of confidence and liquidity.
But much more than monetary liquidity for the individual holder is necessary if an asset can be said to have the “store of purchasing power” quality; it must be simultaneously monetarily liquid for society as a whole.
Monetary Mechanisms: Then and Now
research.stlouisfed.or... (from 1973)
Disintermediation is a term which only applies to the financial intermediaries (non-banks). REG Q was a conspiracy (literally)...not in the sense that legislators received kickbacks from lobbyists, but the bankers literally bought off - economists, both pro & con. Debates were cancelled, papers unpublished.
You have to look at the data and not rely on the pundits. Alton Gilbert's Requiem for Regulation Q: What It Did and Why It Passed Away. He circumvents the arguement and provides no statistics. This is the biggest error in economics.
The idea that required reserves are a tax is applicable to the individual commercial bank, but from the collection of banks, the CB system (from the economic point of view), excess reserves are like manna from Heaven (free/gratis), they provide a multiple expansion of money & credit and bank earning assets.
This is the HOLY GRAIL:
As many people have noted, there have been eight boom-bust cycles in the housing industry since World War II. It is widely believed that those periodic crises in the housing industry are largely attributable to “disintermediation-whi... means that money flowed out of savings accounts in banks and thrift intuitions…Their solution? Have the Federal Reserve Board and other regulators…take the immediate step of raising the interest ceilings on new consumer time deposits nationwide by 1 or 2 percent…After a period of adjustment to this initial step, they advocate raising interest ceilings on all consumer savings accounts in all institutions now subject to loan associations and mutual savings banks. In their opinion, this will give financial institutions the flexibility to meet the needs of the housing industry.
I am certain their interest-raising nostrum, far from curing the patient, would actually create crises in the housing industry that could otherwise be avoided.
Take, for example, the housing crisis of 1966. In Dec. 1964, the monetary authorities raised interest ceilings on consumer savings accounts in all insured commercial banks from 4.5 to 5.5 percent. During the next seven months-January 1966-July 1966 time deposits in CBs increased by 10.1 billion, compared with an increase of less than 500,000 dollars in the savings accounts of savings and loan associations.
Housing starts decreased by almost 50 percent and for a time it was almost impossible to obtain financing for the sale and purchase of existing houses.
A housing crisis existed, and the Federal Reserve authorities diagnosed the cause as disintermediation. But instead of raising interest ceilings, as others would suggest, the ceilings were lowered to 5 percent in July 1966.
The effect of this reduction in interest ceilings on commercial bank held savings accounts was to sharply reduce the volume of “saved” demand deposits being shifted into time deposits.
Instead these deposits were transferred through the savings and loan associations-and consequently became available for the financing of the housing industry.
During the August-December 1966 time period, time deposits in CBs increased only 2 billion, and savings accounts in S&Ls increased 3.1 billion. There was thus an immediate increase in the volume of loan-funds available to the housing industry, and the industry gradually recovered.
In the hope of forestalling similar future crises, the Federal Reserve authorities collaborate with the Federal Home Loan Bank Board to have interest ceilings imposed on S&Ls as well as the CBs. The ceilings become effective September 1966 with the proviso that the rates for S&Ls would be one-half of a percentage point higher-later reduced to one-quarter of a percentage point-than the ceiling rates imposed on CBs.
It is obvious from those data that the CBs suffered no disintermediation in the January-July 1966 period but the S&Ls did, even though they were not subject to any interest rate ceilings. Why this seeming contradiction?
Disintermediation occurred in the S&Ls because their loan inventory was mostly made up of 4 to 5 percent long-term mortgages, and they simply could not compete when most of the CBs chose to go to the 5.5 percent ceiling. (The S&Ls held large deposits with the CBs, the S&Ls were the customers of the CBs)
The CBs suffered no disintermediation before or after the ceilings were lowered for the simple reason that the CBs disintermediation is not predicated on interest rate ceilings.
Disintermediation for CBs can exist only in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction as a consequence of currency withdrawals from the banking system.
The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. Ever since 1933 the Federal Reserve has had the capacity to take unified action, through its “open market power, to prevent any outflow of currency from the banking system by forcing the banks to contract credit.
Unlike S&Ls and other financial intermediaries, the CBs suffer no disintermediation when savers decide to shift their savings to another type of investment. Shifting from TDs in CBs to nonblank types of investments has no effect on the total assets or the volume of earning assets of the CBs. It merely involves a transfer from TDs to DDs within the banking system.
CBs do not loan out TDs, DDs or the equity of bank owners. CBs acquire earning assets through the creation of new money. When CBs make loans to, or buy securities from, the nonblank public, new money-DDs-are created in the banking system.
The aggregate lending capacity of the CB system is determined by the monetary policy of Federal Reserve authorities. It is in no way dependent on the savings practices of the public. People could cease to hold any savings in the CBs and the legal lending capacity of the CB system, given our current institutional arrangements, would be unimpaired.
Insofar as there is an interest-rate solution to the problems of the housing industry, I would recommend that interest ceilings on savings accounts held by S&Ls and other financial intermediaries be removed and that interest ceilings be placed on all types of TDs in CBs. Existing Ceilings should be lowered-gradually. This action would decrease the proportion of TDs to DDs, increase the flow of funds available to the so-called thrift institutions-and vastly reduce the costs and increase the profits of the CBs.
Irving Fisher on Debt, Deflation, and Depression
Solutions to our economic problems require that economists are able to distinguish between:
A. the difference between the supply of money and the supply of loan funds.
B. the difference between means-of-payment money and liquid assets.
C. the difference between financial intermediaries and money creating institutions.
D. recognize aggregate monetary demand is measured by the monetary flows (MVt) not nominal GDP.
E. recognize that interest rates are the price of loan-funds, not the price of money
F. recognize that the price of money is represented by the price (CPI) level.
G. realize that inflation is the most important factor determining interest rates, operating as it does through both the demand for and the supply of loan-funds.
Even so, our problems cannot be totally solved. They can only be ameliorated.
Forecasters See A Bear Market Till Mid-2009
Obama Honeymoon Likely To Be Cut Short By Bond Market
The volume of prudential reserves held by each E-D bank presumably is dictated by “prudence” – not by any legal requirement administered by a monetary authority. All prudential reserve banking systems have heretofore “COME A CROPPER”. Money creation by private profit institutions is not self-regulatory- the “unseen hand” simply does not function in this area.
Invariably the systems created too much money, speculation became rampant, inflation distorted and destroyed economic relationships, confidence that the banks could meet their convertibility obligations eroded, “runs” on the banks caused mass banking failures, and entire economies were left in ruin. Déjà vu
Citigroup Strategist: Market Has Already Bottomed
Will European Interest Rate Cuts Strengthen the Dollar?
Monetary Mechanisms: Then and Now
But you don't know either. You can't take money out of the commercial banking system. If funds are transferred to the financial intermediaries (non-banks), the only thing that changes is the ownership of the deposit. The funds don't leave the CB system.
Savings held within the commercial banking system are LOST TO INVESTMENT. Why?
When CBs grant loans to, or purchase securities from, the non-bank public (which includes every institution, & every person), (except the commercial and the Reserve Banks), they acquire title to earning assets by initially, the creation of an equal volume of new money- (transactions accounts) -- somewhere in the banking system. I.e., commercial bank deposits are the result of lending, not the other way around.
Thus, the growth of time/savings deposits within the CB system, shrinks aggregate demand and therefore produces adverse effects on GDP and the level of employment. That was the source of STAGFLATION and it was predicted by Dr. Leland James Pritchard, MS Statistics Syracuse, Ph.D. Economics Chicago (Milton Friedman was his classmate).