jrober38 Posted July 23, 2019 Posted July 23, 2019 (edited) 3 hours ago, BeginnersMind said: The Republican Party has no credibility with respect to spending. Anytime an R politician not named Paul talks about financial responsibility, people should burst out laughing. Agreed. They spent 8 years bitching while Obama was President, and now that Trump is the one ballooning the deficit, no one on that side cares. Once upon a time, Trump campaigned on the premise he'd eliminate the National Debt in 8 years. WHOOPS!!! Edited July 23, 2019 by jrober38
/dev/null Posted July 23, 2019 Posted July 23, 2019 5 hours ago, BeginnersMind said: The Republican Party has no credibility with respect to spending. Anytime an R politician not named Paul talks about financial responsibility, people should burst out laughing. Mike Lee of UT is pretty consistent fiscal conservative too
ALF Posted July 23, 2019 Posted July 23, 2019 (edited) The day the tea party died The tea party was born February 19, 2009. It died, officially, July 22, 2019. "This represents a fitting conclusion of the Budget Control Act — the crown jewel of the 2011 'tea-party Congress.' The decade-long shredding of these hard-fought budget constraints mirrors the shredding of Republican credibility on fiscal responsibility." https://www.cnn.com/2019/07/23/politics/debt-deal-budget-ceiling/index.html Edited July 23, 2019 by ALF
TPS Posted July 24, 2019 Posted July 24, 2019 (edited) Quote US$ is just a form of currency. People, corporations and states don't have to issue dollars to buy, sell or borrow. A company's stock is a valid form of currency that doesn't rely at all on what the Treasury or the Fed are doing. The corporate bond markets are the same, as is the growing cryptocurrency market. Apple can buy Tesla tomorrow by issuing the EQUIVALENT of $300 billion of new stock tomorrow. Apple wouldn't be deficit spending to buy Tesla. They would either borrow, or create currency out of thin air by issuing new stock that is backed by the future earnings potential of the combined company. I certainly understand the credit system and the ability to use "other forms of currency," but those do have limits. Currently, the main "currency" used to support is credit creation is whatever is accepted as collateral, and US treasuries are the collateral of choice, so in a way the financial system does depend on the actions of the Treasury and Fed. More important, the US$ is NOT "just a form of currency," it is the unit of account that is designated "legal tender," and--what you seem to have difficulty grasping--the US government owns the monopoly on its creation (note, we're not simply talking about physical dollar bills). While Apple can purchase Tesla by issuing new stock, it does not pay its suppliers with stock, it is not buying Intel's chip business with its stock, it does not pay interest on its bond in stock, nor can it pay its taxes with its own scrip. While there are many financial transaction that use different financial instruments, they have limitations. In the end, there is only one financial instrument that is designated as "legal tender for ALL debts public AND PRIVATE." In the next financial crunch, when financial entities are scrambling to "get liquid," they are not going to buy crypto or apple stock, they will buy US treasuries because they are guaranteed to be converted into the designated means of payment. Note, there will also be a dramatic scramble for the government's "currency" (I mean treasuries here) used as collateral, especially if it's been re-hypothecated.... Getting back to the main point, which is: as the monopoly issuer of the US$, the federal government does not face a financing constraint Quote The settlement mechanics of banks' reserves have nothing to do with the fundamental analysis of whether an entity has the wherewithal to repay an obligation. What matters more to the markets and individuals, the behind the scene mechanics of title transfers or the ability to obtain the mortgage in the first place. Do we care how Apple creates new treasury stock that is used in the Tesla purchase and how those shares are exchanged for the Tesla shares? No! We just care that Apple just issued $300 billion in new stock. You continue to argue that the mechanics of Fed/bank settlements is the important part, while evidence shows that central bank reserves were a minor reason for stabilizing the financial system. You focus on the financial plumbing that is about 10% of banks' business and are clueless about how the 90% of the business works. This is where you seem to have trouble grasping the difference between the US government and any other entity. It is the settlement "mechanics" between the treasury, Fed, and primary dealers that guarantees the US government does not face a financing constraint--it can spend ANY AMOUNT of money that congress appropriates. If congress says here's another $200 billion to fund war against Iran, then it will be spent, and it doesn't matter what the financial sector thinks. Central bank reserves as a minor reason for stabilizing the system? Hmmmm.... How do you think reserves get created? When everyone panics and wants to get liquid, where do you think that "money" came from? When the FED supports any market in times of crisis, how do you think it does that? Reserves are the "ultimate currency" of the banking system and the FED controls their creation. The FED's actions to stabilize the system are what created the $3 trillion in additional bank reserves. First, your favorite Wall Street banks were given a lifeline (use of the discount window) when they were required (by the FED) to become bank holding companies. This gave JPM and Goldman the ability to borrow reserves directly from the FED. However, the majority of reserves were created in the traditional way--open market operations, though they expanded the types of assets they "bought" dramatically, no longer just treasuries. When the FED bought commercial paper and MBS, they "pay" for those assets by crediting the reserve account of the "bank" they bought it from. Reserves are what backstops the drain of funds from financial institutions. As funds are drained from an entity, they can either sell assets or borrow funds to replenish their accounts. In the crisis, the only entity lending was the FED. The current $1.4 trillion of excess reserves in the banking system is the legacy of the FED's unprecedented intervention in the markets--plural! Quote Nobody outside federal government spending uses the term deficit spending, because that doesn't describe what they are doing. You provided the definition above, which is what everyone else has to deal with when they do not have enough current resources to pay for what they need. In that sense the government is no different than any other entity anywhere in the world. There is nothing wrong with proper utilization of credit, because very rarely do your resources line up perfectly with the outflows. The problem comes up when you continue to outspend your resources. By calling it deficit spending sweeps the problem under the rug. This is the issue--the US government is different, and it is NOT because the US$ is the reserve currency. Quote US government borrowing is constrained by the same market forces that hold other governments' borrowings in check. But the US enjoys structural advantage that no other country can get away with at this point. In short, no matter how dire the US financial position may seem, the alternatives are much worse. That's why there hasn't been the inflationary blowback that the economic models predict. There's no reason though that US won't be subject to the single truism of financial markets - you either have access to credit or you don't. That's the main reason US shouldn't be complacent about its preferred status. NO! Again, THE MAIN ISSUE: the US government does NOT have a financing constraint (it does not have to borrow that which it creates). There are two politically imposed legal constraints that makes it difficult for people to see this: 1) the US government is required to sell bonds equal to its deficit; and 2) the FED CAN'T directly fund the treasury. The mechanics are important to understand this, and the mechanics require the use of private sector banks, the primary dealers. PDs are required to make the market for treasury auctions, and they (almost) always buy treasuries using their excess reserves (which are simply values on a computer at the NYFed). For example, when JPM's bids are accepted, their securities increase and their reserves are decreased by the value of their purchase (2 actions on the asset side of its BS); on the Fed's BS, JPM's reserve position is reduced and the treasury's account is increased (2 actions on the liability side of the FED's BS). Here is the key: What if JPM does not have the excess reserves to purchase the treasuries they are required to bid on? The Fed will buy some of JPM's existing treasuries (again, the Fed can't directly fund the treasury) and the Fed "buys" them by crediting JPM's reserve account (on the Fed's computer). Voila! JPM now has the excess reserves to "buy" the new treasuries at auction (and the treasury's account at the Fed is increased in the same way as above). In this case, the FED has indirectly funded the treasury. After these actions JPM's BS is unchanged; and on the Fed's BS, its treasuries are increased (asset side) and the Treasury's account (liability side) is increased by same. The political constraints complicate the process, but the end result is the FED "funds" the Treasury. Since the FED has unlimited "funding capacity" (because it owns the computer and accounts that credit and debt reserves and the Treasury's checking account), the Treasury effectively has an unlimited capacity to spend US$s--it is only limited by the amount congress appropriates. Despite the flexibility of finance to use other means to purchase assets and create credit (and I completely agree with you here), they ARE financially constrained--they can't create reserves and US$ in which the majority of payments are required. Note, since the treasury auctions are always filled because the PDs are required to bid, it does not matter that the US$ is the global reserve currency. Again, the republicans seem to understand there is no financing constraint--they have no problem cutting taxes (for the rich...) and increasing defense spending causing larger deficits. They ONLY seem to care about debt and deficits when the Dems are in the WH and want to increase spending on social programs. While there is NO limit to the federal government's ability to spend (any amount of money congress appropriates), it IS constrained by available resources--in the US, we typically run out of labor before we run out of physical capital. For example, during WWII, the unemployment rate hit 1.2%. This happened because government used deficit spending. In 1943 the deficit was 30% of GDP! However, the government reached the limits of its ability to spend--If you try to increase deficit spending when you run out of labor and capital, the result will be inflation. This is why I think it's interesting that Trump expanded the deficit at a point when many economists thought the US was at full employment. The bigger deficits juiced the economy and pushed unemployment below 4%. Since we still don't see much inflation, it suggests there is still "fiscal space" available to push the economy faster and unemployment lower. The end comes when the FED decides to take away the punch bowl, which is why Trump is haranguing Powell about raising interest rates. The end. Edited July 24, 2019 by TPS
Buffalo_Gal Posted July 25, 2019 Posted July 25, 2019 US weekly jobless claims unexpectedly decline The number of Americans filing applications for unemployment benefits unexpectedly fell last week, pointing to continued strong labor market conditions. First-time claims for state unemployment benefits fell 10,000 to a seasonally adjusted 206,000 for the week ended July 20, the Labor Department said on Thursday. Economists polled by Refinitiv had expected initial claims to increase by 3,000 to 219,000. </snip> And durable goods numbers for June: US factory orders for large manufactured goods surged 2% in June </snip> The Commerce Department said Thursday that orders for durable goods — or items meant to last at least three years — rose 2%, after a 2.3% decline in May and an even bigger 2.8% drop in April. A category that serves as a proxy for business investment rose 1.9%, its best showing since February. </snip> 1 1
Chef Jim Posted July 25, 2019 Posted July 25, 2019 42 minutes ago, Buffalo_Gal said: US weekly jobless claims unexpectedly decline The number of Americans filing applications for unemployment benefits unexpectedly fell last week, pointing to continued strong labor market conditions. First-time claims for state unemployment benefits fell 10,000 to a seasonally adjusted 206,000 for the week ended July 20, the Labor Department said on Thursday. Economists polled by Refinitiv had expected initial claims to increase by 3,000 to 219,000. </snip> And durable goods numbers for June: US factory orders for large manufactured goods surged 2% in June </snip> The Commerce Department said Thursday that orders for durable goods — or items meant to last at least three years — rose 2%, after a 2.3% decline in May and an even bigger 2.8% drop in April. A category that serves as a proxy for business investment rose 1.9%, its best showing since February. </snip> Yeah but the economy is down today.
3rdnlng Posted July 25, 2019 Posted July 25, 2019 37 minutes ago, Chef Jim said: Yeah but the economy is down today. Global warming has taken a hit today in WNY. It's still in the sixties at 11:00am.
Chef Jim Posted July 25, 2019 Posted July 25, 2019 6 minutes ago, 3rdnlng said: Global warming has taken a hit today in WNY. It's still in the sixties at 11:00am. It's raining here today. It NEVER rains here in the summer. Doooooooomed!!!!
3rdnlng Posted July 25, 2019 Posted July 25, 2019 5 minutes ago, Chef Jim said: It's raining here today. It NEVER rains here in the summer. Doooooooomed!!!! Is there still snow in the San Gabriels or cant you see them?
Chef Jim Posted July 25, 2019 Posted July 25, 2019 Just now, 3rdnlng said: Is there still snow in the San Gabriels or cant you see them? I can see them from my house but I don't see any snow on them because.......global warming/cooling/climate change.
GG Posted July 25, 2019 Author Posted July 25, 2019 On 7/24/2019 at 10:47 AM, TPS said: I certainly understand the credit system and the ability to use "other forms of currency," but those do have limits. Currently, the main "currency" used to support is credit creation is whatever is accepted as collateral, and US treasuries are the collateral of choice, so in a way the financial system does depend on the actions of the Treasury and Fed. More important, the US$ is NOT "just a form of currency," it is the unit of account that is designated "legal tender," and--what you seem to have difficulty grasping--the US government owns the monopoly on its creation (note, we're not simply talking about physical dollar bills). While Apple can purchase Tesla by issuing new stock, it does not pay its suppliers with stock, it is not buying Intel's chip business with its stock, it does not pay interest on its bond in stock, nor can it pay its taxes with its own scrip. While there are many financial transaction that use different financial instruments, they have limitations. In the end, there is only one financial instrument that is designated as "legal tender for ALL debts public AND PRIVATE." In the next financial crunch, when financial entities are scrambling to "get liquid," they are not going to buy crypto or apple stock, they will buy US treasuries because they are guaranteed to be converted into the designated means of payment. Note, there will also be a dramatic scramble for the government's "currency" (I mean treasuries here) used as collateral, especially if it's been re-hypothecated.... Getting back to the main point, which is: as the monopoly issuer of the US$, the federal government does not face a financing constraint This is where you seem to have trouble grasping the difference between the US government and any other entity. It is the settlement "mechanics" between the treasury, Fed, and primary dealers that guarantees the US government does not face a financing constraint--it can spend ANY AMOUNT of money that congress appropriates. If congress says here's another $200 billion to fund war against Iran, then it will be spent, and it doesn't matter what the financial sector thinks. Central bank reserves as a minor reason for stabilizing the system? Hmmmm.... How do you think reserves get created? When everyone panics and wants to get liquid, where do you think that "money" came from? When the FED supports any market in times of crisis, how do you think it does that? Reserves are the "ultimate currency" of the banking system and the FED controls their creation. The FED's actions to stabilize the system are what created the $3 trillion in additional bank reserves. First, your favorite Wall Street banks were given a lifeline (use of the discount window) when they were required (by the FED) to become bank holding companies. This gave JPM and Goldman the ability to borrow reserves directly from the FED. However, the majority of reserves were created in the traditional way--open market operations, though they expanded the types of assets they "bought" dramatically, no longer just treasuries. When the FED bought commercial paper and MBS, they "pay" for those assets by crediting the reserve account of the "bank" they bought it from. Reserves are what backstops the drain of funds from financial institutions. As funds are drained from an entity, they can either sell assets or borrow funds to replenish their accounts. In the crisis, the only entity lending was the FED. The current $1.4 trillion of excess reserves in the banking system is the legacy of the FED's unprecedented intervention in the markets--plural! This is the issue--the US government is different, and it is NOT because the US$ is the reserve currency. NO! Again, THE MAIN ISSUE: the US government does NOT have a financing constraint (it does not have to borrow that which it creates). There are two politically imposed legal constraints that makes it difficult for people to see this: 1) the US government is required to sell bonds equal to its deficit; and 2) the FED CAN'T directly fund the treasury. The mechanics are important to understand this, and the mechanics require the use of private sector banks, the primary dealers. PDs are required to make the market for treasury auctions, and they (almost) always buy treasuries using their excess reserves (which are simply values on a computer at the NYFed). For example, when JPM's bids are accepted, their securities increase and their reserves are decreased by the value of their purchase (2 actions on the asset side of its BS); on the Fed's BS, JPM's reserve position is reduced and the treasury's account is increased (2 actions on the liability side of the FED's BS). Here is the key: What if JPM does not have the excess reserves to purchase the treasuries they are required to bid on? The Fed will buy some of JPM's existing treasuries (again, the Fed can't directly fund the treasury) and the Fed "buys" them by crediting JPM's reserve account (on the Fed's computer). Voila! JPM now has the excess reserves to "buy" the new treasuries at auction (and the treasury's account at the Fed is increased in the same way as above). In this case, the FED has indirectly funded the treasury. After these actions JPM's BS is unchanged; and on the Fed's BS, its treasuries are increased (asset side) and the Treasury's account (liability side) is increased by same. The political constraints complicate the process, but the end result is the FED "funds" the Treasury. Since the FED has unlimited "funding capacity" (because it owns the computer and accounts that credit and debt reserves and the Treasury's checking account), the Treasury effectively has an unlimited capacity to spend US$s--it is only limited by the amount congress appropriates. Despite the flexibility of finance to use other means to purchase assets and create credit (and I completely agree with you here), they ARE financially constrained--they can't create reserves and US$ in which the majority of payments are required. Note, since the treasury auctions are always filled because the PDs are required to bid, it does not matter that the US$ is the global reserve currency. Again, the republicans seem to understand there is no financing constraint--they have no problem cutting taxes (for the rich...) and increasing defense spending causing larger deficits. They ONLY seem to care about debt and deficits when the Dems are in the WH and want to increase spending on social programs. While there is NO limit to the federal government's ability to spend (any amount of money congress appropriates), it IS constrained by available resources--in the US, we typically run out of labor before we run out of physical capital. For example, during WWII, the unemployment rate hit 1.2%. This happened because government used deficit spending. In 1943 the deficit was 30% of GDP! However, the government reached the limits of its ability to spend--If you try to increase deficit spending when you run out of labor and capital, the result will be inflation. This is why I think it's interesting that Trump expanded the deficit at a point when many economists thought the US was at full employment. The bigger deficits juiced the economy and pushed unemployment below 4%. Since we still don't see much inflation, it suggests there is still "fiscal space" available to push the economy faster and unemployment lower. The end comes when the FED decides to take away the punch bowl, which is why Trump is haranguing Powell about raising interest rates. The end. Yet again you conflate topics and focus on the back office plumbing of how the reserves are created vs looking at how the private market uses the liquidity provided by the central bank. US$ is just another form of currency, and is a legal tender as much as GBP, EU and Yuan are. The USA's preferred status gives it an upper hand in setting the benchmark of what the currencies "cost," but by no means is the US$ money printing operation a monopoly on currency creation. It's laughable that you even suggested that. The transaction value may be expressed in US$ terms, because it is by far the most widely circulated and traded currency, but that doesn't mean that the exchange of goods needs the US$ currency. In your example, Apple may choose to pay Intel in Euros, Yuan or any other available currencies that are most efficient for that transaction. They may agree to utilize offset provisions in their contracts, where no dollars are exchanged, and everything is settled in the accounting ledgers. Apple is not reliant on the US money supply to conduct its business. The mechanics of the US money supply certainly affects Apple's cost of doing business, but it is not tied to the US$ in the way that you describe. What if Apple moves its HQ to Berlin and reclassifies its financial reporting into Euros? I'd like to hear your explanation of how the creation of cryptocurrencies relies on the US Treasury. Thanks for the long dissertation on the Fed's role as the lender of last resort, which wasn't a topic here and nobody asked for. Wonder why you added the tidbit that Fed required former investment banks to recharter as Fed-controlled banks to get access to emergency funding, but ignored the fact that the financial crisis was driven by creation of $$trillions of new debt by entities that were not under any central bank oversight. Doesn't that alone blow your theory out of the water? The discussion is why hasn't the unprecedented QE led to inflationary pressures that economic models predict? Citing the Fed's role as the ultimate backstop and lender of last resort in the US does not answer that question.
TPS Posted July 25, 2019 Posted July 25, 2019 2 hours ago, GG said: Yet again you conflate topics and focus on the back office plumbing of how the reserves are created vs looking at how the private market uses the liquidity provided by the central bank. US$ is just another form of currency, and is a legal tender as much as GBP, EU and Yuan are. The USA's preferred status gives it an upper hand in setting the benchmark of what the currencies "cost," but by no means is the US$ money printing operation a monopoly on currency creation. It's laughable that you even suggested that. The transaction value may be expressed in US$ terms, because it is by far the most widely circulated and traded currency, but that doesn't mean that the exchange of goods needs the US$ currency. In your example, Apple may choose to pay Intel in Euros, Yuan or any other available currencies that are most efficient for that transaction. They may agree to utilize offset provisions in their contracts, where no dollars are exchanged, and everything is settled in the accounting ledgers. Apple is not reliant on the US money supply to conduct its business. The mechanics of the US money supply certainly affects Apple's cost of doing business, but it is not tied to the US$ in the way that you describe. What if Apple moves its HQ to Berlin and reclassifies its financial reporting into Euros? I'd like to hear your explanation of how the creation of cryptocurrencies relies on the US Treasury. Thanks for the long dissertation on the Fed's role as the lender of last resort, which wasn't a topic here and nobody asked for. Wonder why you added the tidbit that Fed required former investment banks to recharter as Fed-controlled banks to get access to emergency funding, but ignored the fact that the financial crisis was driven by creation of $$trillions of new debt by entities that were not under any central bank oversight. Doesn't that alone blow your theory out of the water? The discussion is why hasn't the unprecedented QE led to inflationary pressures that economic models predict? Citing the Fed's role as the ultimate backstop and lender of last resort in the US does not answer that question. Two issues I responded to before you chimed in: someone asked about the $3+ trillion in Fed intervention and why it wasn't inflationary; and, do deficits matter. I answered the question in my first response when I stated the Fed's actions weren't inflationary because nearly all of those funds were parked in reserve accounts (which don't circulate and hence had very little impact on the REAL economy). I also said deficits don't matter. You then took the thread for a ride...apparently because you don't understand reserve accounting--yes, excess reserves are parked "under the FED's mattress" (on their computer actually). Now that the FED pays interest on reserves, there's less of an incentive for banks to minimize them as was the case pre-2008. I went into the Fed's LoLR function because you unbelievably stated the Fed's actions that injected the $3+ trillion in reserves played a minor role in stabilizing the financial system. Post-crisis, the reserves aren't really that important. What IS important are the actions the FED took that created those reserves. I would love to hear you explain why the FED's actions were only 10% of the story....? You also brought in other topics which took the thread elsewhere. For example, now you want me to discuss crypto and the Treasury. See why the discussion goes off track.... I'll say one thing about cryptos: if they begin to encroach on the government's currency monopoly, then the Treasury will take action to suppress their growth. Gee, the financial crisis was caused by unregulated finance, what a surprise! No ***** sherlock! The FED's role is to clean up the mess, and without its unprecedented intervention we all would've joined D.Drane in a bunker. The banking system backstops the rest of the financial system and FED backstops the banks. The FED's lifeline to banks also means a lifeline to its customers, which includes the shadow banking system. I'm surprised someone in finance doesn't get the inverted pyramid of money and credit? Yes, finance is extremely elastic and difficult to constrain, but the curtain is pulled back when crises occur and everyone is scrambling for safe, liquid assets. So, if you want to stick to the topics, then please do. I explained why the Fed's injection of $3 trillion was not inflationary. Then I tried to explain to you why deficits don't matter, and that explanation requires understanding the mechanics underlying the interaction between the Treasury, FED, and Primary Dealers.
plenzmd1 Posted July 26, 2019 Posted July 26, 2019 Hmm, interesting report on the economy today https://www.pbs.org/newshour/economy/u-s-economys-growth-slows-to-2-1-percent-in-2nd-quarter Contrast that with what @Buffalo_Gal posted on Unemployment claims..this stuff makes my heard hurt. Quote As part of its annual revisions to GDP, the government downgraded its estimate for 2018 growth from 3% to 2.5%. President Donald Trump had frequently boasted of the 3% growth figure as evidence that his policies have invigorated the economy. Quote While economists see the tax cut Trump pushed through Congress in late 2017 as a key factor boosting growth last year, they expect the impact of those cuts will fade this year. Most think it would leave the economy growing close to the annual average of 2.3 percent that has prevailed since this expansion began in June 2009. Quote I think going forward that recession risks are high especially if something major goes off the rails such as a resurgence of the trade war or a bad exit by Britain from the European Union.”
Buffalo_Gal Posted July 26, 2019 Posted July 26, 2019 16 minutes ago, plenzmd1 said: Hmm, interesting report on the economy today https://www.pbs.org/newshour/economy/u-s-economys-growth-slows-to-2-1-percent-in-2nd-quarter Contrast that with what @Buffalo_Gal posted on Unemployment claims..this stuff makes my heard hurt. Lies, damn lies, and statistics. My husband was (hmmm I better say is lest he see this) a finance guy and keeps telling me the sky is falling. And, I keep telling him "we shall see". I'll keep sharing the "unexpected" good data, and others will share the bad data. And then people will need to read the tea leaves and try and figure out what is actually happening in the economy. 1
Buffalo_Gal Posted July 26, 2019 Posted July 26, 2019 (edited) 1 hour ago, plenzmd1 said: Hmm, interesting report on the economy today https://www.pbs.org/newshour/economy/u-s-economys-growth-slows-to-2-1-percent-in-2nd-quarter Contrast that with what @Buffalo_Gal posted on Unemployment claims..this stuff makes my heard hurt. Ok, so the estimated by the "experts" for Q2 was 1.8%, the 2.1% beat expectations, but was down from Q1 which was an "unexpected" 3.1%. The estimates have been beaten both quarters so far this year, so Q3 and Q4 will be interesting. Edited July 26, 2019 by Buffalo_Gal 1
GG Posted July 26, 2019 Author Posted July 26, 2019 (edited) 23 hours ago, TPS said: Two issues I responded to before you chimed in: someone asked about the $3+ trillion in Fed intervention and why it wasn't inflationary; and, do deficits matter. I answered the question in my first response when I stated the Fed's actions weren't inflationary because nearly all of those funds were parked in reserve accounts (which don't circulate and hence had very little impact on the REAL economy). I also said deficits don't matter. You then took the thread for a ride...apparently because you don't understand reserve accounting--yes, excess reserves are parked "under the FED's mattress" (on their computer actually). Now that the FED pays interest on reserves, there's less of an incentive for banks to minimize them as was the case pre-2008. I went into the Fed's LoLR function because you unbelievably stated the Fed's actions that injected the $3+ trillion in reserves played a minor role in stabilizing the financial system. Post-crisis, the reserves aren't really that important. What IS important are the actions the FED took that created those reserves. I would love to hear you explain why the FED's actions were only 10% of the story....? Reserve accounting is not the reason that QE wasn't inflationary. Investor acceptance is the reason. Like I said above, the truism in banking is that you either have access to credit or you don't. The only differentiator is how much that credit costs you. The Fed has the power to control maybe 25-50 basis points within its interest rate target. If the markets bet against the sovereign, then it's game over. You focus on interest rates, the markets focus on yields. I hope you understand the difference. There is nothing unique to US Treasury creating its fiat currency. All sovereign nations do it, but investors don't treat all countries equally and that's why some countries get far more leeway. If the major bond buyers had a better investment and safety alternative to the US$, the QE would have been far more costly. This is where the credit fundamentals diverge from market acceptance. Bond dealers are still clamoring for high quality US$ assets despite their low returns, because the alternatives are far worse. In a world awash with financial liquidity, the premium on US$ assets is still high, and that's what affords the Fed to be more loosey with fiscal policy than what fundamentals would suggest. How about sticking to the proper timeline? QE wasn't the solution for the crisis. TARP was. The quick turnaround of the financial sector and the repayment of each TARP dollar proved that this was a temporary liquidity crisis rather than a full out financial crisis. QE went in to jump start growth after the financial crisis subsided. You keep harping on the reserve accounting, when you should focus on the $3 trillion that was created out of thin air. That creation is fundamentally inflationary, but the markets gave the US$ a pass because the alternatives are still much worse. Again, the Fed and Treasury are afforded financial privileges from the markets that few other nations can get away with. Quote You also brought in other topics which took the thread elsewhere. For example, now you want me to discuss crypto and the Treasury. See why the discussion goes off track.... I'll say one thing about cryptos: if they begin to encroach on the government's currency monopoly, then the Treasury will take action to suppress their growth. I brought in cryptos and stock because you still insist that the US Treasury has a monopoly on currency creation. It does not. It has a monopoly only on the US$, which is the largest reserve and base currency. That doesn't preclude anyone else from creating a separate currency. I can make the same analogy with kids trading in baseball and Pokemon cards. No dollars need to be exchanged. Quote Gee, the financial crisis was caused by unregulated finance, what a surprise! No ***** sherlock! The FED's role is to clean up the mess, and without its unprecedented intervention we all would've joined D.Drane in a bunker. The banking system backstops the rest of the financial system and FED backstops the banks. The FED's lifeline to banks also means a lifeline to its customers, which includes the shadow banking system. I'm surprised someone in finance doesn't get the inverted pyramid of money and credit? Yes, finance is extremely elastic and difficult to constrain, but the curtain is pulled back when crises occur and everyone is scrambling for safe, liquid assets. So, if you want to stick to the topics, then please do. I explained why the Fed's injection of $3 trillion was not inflationary. Then I tried to explain to you why deficits don't matter, and that explanation requires understanding the mechanics underlying the interaction between the Treasury, FED, and Primary Dealers. Excuse me, but when did I argue anything but? Why do you think I keep bringing up the fact that in finance, you either have access to credit or you don't? Why do you think I keep calling it a liquidity crisis and not a financial crisis? Why did Bear Stearns blow up in 2008, when everyone knew that the worst MBS securities were sold in 2005-2006? Why do you think that the Credit Suisse bankers who were forced to take the bad, illiquid MBS securities as part of their bonuses in 2010 made out like bandits within a few years? The Fed did it's job as the lender of last resort in 2008-2010, but that was not related to the QE program. QE was a shrewd way to pump liquidity back by using the Fed's balance sheet instead of Treasury issuing more money. The net effect was the same, creating $3 trillion out of thin air. The investors bought it anyway. Edited July 26, 2019 by GG
TPS Posted July 27, 2019 Posted July 27, 2019 7 hours ago, GG said: Reserve accounting is not the reason that QE wasn't inflationary. Investor acceptance is the reason. Like I said above, the truism in banking is that you either have access to credit or you don't. The only differentiator is how much that credit costs you. The Fed has the power to control maybe 25-50 basis points within its interest rate target. If the markets bet against the sovereign, then it's game over. You focus on interest rates, the markets focus on yields. I hope you understand the difference. There is nothing unique to US Treasury creating its fiat currency. All sovereign nations do it, but investors don't treat all countries equally and that's why some countries get far more leeway. If the major bond buyers had a better investment and safety alternative to the US$, the QE would have been far more costly. This is where the credit fundamentals diverge from market acceptance. Bond dealers are still clamoring for high quality US$ assets despite their low returns, because the alternatives are far worse. In a world awash with financial liquidity, the premium on US$ assets is still high, and that's what affords the Fed to be more loosey with fiscal policy than what fundamentals would suggest. How about sticking to the proper timeline? QE wasn't the solution for the crisis. TARP was. The quick turnaround of the financial sector and the repayment of each TARP dollar proved that this was a temporary liquidity crisis rather than a full out financial crisis. QE went in to jump start growth after the financial crisis subsided. You keep harping on the reserve accounting, when you should focus on the $3 trillion that was created out of thin air. That creation is fundamentally inflationary, but the markets gave the US$ a pass because the alternatives are still much worse. Again, the Fed and Treasury are afforded financial privileges from the markets that few other nations can get away with. I brought in cryptos and stock because you still insist that the US Treasury has a monopoly on currency creation. It does not. It has a monopoly only on the US$, which is the largest reserve and base currency. That doesn't preclude anyone else from creating a separate currency. I can make the same analogy with kids trading in baseball and Pokemon cards. No dollars need to be exchanged. Excuse me, but when did I argue anything but? Why do you think I keep bringing up the fact that in finance, you either have access to credit or you don't? Why do you think I keep calling it a liquidity crisis and not a financial crisis? Why did Bear Stearns blow up in 2008, when everyone knew that the worst MBS securities were sold in 2005-2006? Why do you think that the Credit Suisse bankers who were forced to take the bad, illiquid MBS securities as part of their bonuses in 2010 made out like bandits within a few years? The Fed did it's job as the lender of last resort in 2008-2010, but that was not related to the QE program. QE was a shrewd way to pump liquidity back by using the Fed's balance sheet instead of Treasury issuing more money. The net effect was the same, creating $3 trillion out of thin air. The investors bought it anyway. . So that we are speaking the same language, most people discuss QE as having three distinct phases: QE1 was the FED's actions during the crisis, where its BS expanded from $900K to $2.2 trillion the first few months after Lehman; QE2 (from late 2010 to May 2011) and QE3 (late 2012 to 2014) are what you describe, which were efforts to stimulate the economy post crisis (that link I gave with some graphs of the FED's assets and liabilities shows these stages clearly). Every major financial crisis is also a liquidity crisis, and the FED's LOLR actions through all of its various loan programs was the most important factor stabilizing the system--we agree here. In terms of size and impact, while all of the various lending programs were most significant, QE1 was 3-4 times the size of any TARP funds that went to the banks. 2. The reason QE was not inflationary is because the FED bought most of the assets from the banking system, and, since banks were now being paid interest on reserves, they were (and still are) content to hold those trillions. This has everything to do with bank management and almost nothing to do with "Investor acceptance." By harping on reserve accounting, I AM focusing on how the $3 trillion was "created out of thin air." I guess it's my turn to say "focus on the accounting." When the FED "creates funds out of thin air," it still operates under standard accounting practices--Balance Sheets must balance. Again, look at those graphs, specifically the "FED's liabilities" and the category "deposits of depository institutions." When the FED ;buys an asset, it simultaneously credits that account of the bank that it bought the asset from (or the bank of the investor it bought the asset from). In QE, The FED pays for the assets by crediting a bank's reserve account. Those deposits represent assets for the banks and liabilities for the FED, and all of the FED's actions that created them are done with keystrokes of a computer (bank reserves are created out of thin air!) at the NYFED. Prior to Lehman, that account was about $20 billion and after QE3 it peaked at about $2.7 trillion (which indicates the majority of QE was done via purchasing assets from banks). Since the FED pays interest on reserves about the same as the T-bill rate, these reserves are risk-free assets on bank Balance Sheets. Because these funds are parked on an account with the FED, they don't circulate in the economy AND therefore do not influence prices and inflation. They have nothing to do with "investor acceptance." 3. Regarding money, I never said anything other than the FED/Treasury is the monopoly issuer of US$. To quote Minsky, "Anyone can create money, the problem is getting it accepted." Yes, many people try to create things that function like money, but, as I said before, the government will squash any attempts that encroach upon its monopoly. Did you see the article today about the IRS sending letters to holders of crypto? Since they have designated it as property, any gains are taxable. 4. Your quote, Quote "QE was a shrewd way to pump liquidity back by using the Fed's balance sheet instead of Treasury issuing more money. The net effect was the same, creating $3 trillion out of thin air. The investors bought it anyway." sounds a bit like you are coming around to what i have been trying to say...but not quite. The Treasury "issued money" the way it ALWAYS does: congress appropriated funds for TARP which added to deficits in 2008 and 09. The Treasury still had to "sell bonds" to "fund" those deficits to provide the "money" for TARP. TARP was simply additional "deficit spending" by the Treasury (had to say it). Again, QE created liquidity by mainly creating additional reserves for the banking system, almost all of which show up as assets for the banks and liabilities for the FED (deposits of depository institutions). You won't understand how the FED creates "money out of thin air" AND why it doesn't impact inflation until you understand reserve accounting.
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