Money. Doing it Right this Time.

[Cutlass]

Yes. And in fact many people are both at the same time. It's hedging their bets and not putting all their eggs in one basket and a dozen other metaphors which escape me at the moment. Most any serious investor has a mixed portfolio. So some people may look at a Treasury bond, and have serious concerns about where it may go, but buy them anyways because of where they are now.

 

[Integral]

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

The QE will continue until morale improves.

 

[Monsterzuma]

Is it wise to do QE on such a scale when core CPI and PPI are both at fairly high levels?

 

[Integral]

CPI inflation of 2% is the Fed's goal, of course, so it's not running "high" by any means. PPI simply looks to be more volatile, so I'm inclined to put less weight on it.

Remember too the other side of the dual mandate:

and I find it hard to believe that the natural rate is 8% right now.

The Fed seems to be moving towards an Evans 7/3 rule: ease until unemployment's below 7% or inflation's above 3%. It's not NGDP path targeting or price-level path targeting but it's close.

 

[Cutlass]

Money velocity is not recovering. So money supply must be increased. And there is no inflationary pressure in sight other than oil prices.

 

[Monsterzuma]

there is no inflationary pressure in sight other than oil prices

What about capacity utilization reaching 80% recently? Isn't that potentially inflationary? When supply can't rise along with new demand by filling up slack capacity, doesn't the new demand just raise prices?

 

[Cutlass]

What about capacity utilization reaching 80% recently? Isn't that potentially inflationary? When supply can't rise along with new demand by filling up slack capacity, doesn't the new demand just raise prices?

Not in a fully globalized economy it's not.

Supply and demand determine prices. In order for prices to go up the demand has to be high enough so that supply does not keep up and then prices are bid up. Demand is weak everywhere and for almost all things. Supply is slack everywhere and for almost all things. And supply can be ramped up rapidly for most things.

I don't see any demand pull. Nor do I see any real supply push.

Except oil.

And, really, a little bit of inflation now would be a good thing.

 

[Monsterzuma]

I was curious if we could discuss Scott Sumner's idea of using an NGDP futures market to guide monetary policy.

I used to think the idea was to simply use a small NGDP futures market as an indication of how many QE-style long dated treasury bond purchases had to be made, but I recently read that another suggestion was to basically fix the price of NGDP futures so that (somehow?) the effects you want (i.e. controlled NGDP growth) propagate through the rest of the economy?

I'm generally having trouble wrapping my head around that mechanism. Is there an explanation somewhere of the causal relations that would be at play in it?

One objection I have to using NGDP futures for estimating the required size of QE purchases is that it wouldn't pay for anyone to bid the NGDP futures away from their targeted level. When the Fed so clearly states it's intentions, it is never a good idea to bet against them. As such the NGDP futures market would always simply indicate the stated target of the Fed and never "sound the alarm" even when the Fed's actions are inadequate, except maybe at the last possible moment (i.e. when it's too late for the Fed to respond, which is not helpful).

I think to a large extent this argument already applies to TIPS spreads. It's why I'm not convinced they are a conclusive argument against the likelihood of major currency events (this in addition to the fact that they would display a "neurotic" indecision between deflation and inflation as if there is currency stability).

 

[Integral]

The use of explicit (market) futures targeting is kind of exotic and I'm not convinced it would work.

On the pro side, It has the whole "target the forecast" vibe that is so crucial to modern monetary policy. Sumner has dedicated much of his profesional career to investigating the properties of such a system.

However, as you say, we already could target the futures index, using either CPI futures or TIPS spreads. We don't, however; the Fed has internally decided that such a policy is inferior to targeting the overnight interest rate.I'm not saying the Fed's current policy is optimal, but it's a data point that they could implement futures targeting, but don't.

Some good sources for this are any of Scott's early papers, and (on the other side) Tyler Cowen's 1997 Journal of Money, Credit and Banking article. It's been a while since I've read any of them, so I'll withhold detailed comment until I've refreshed my memory.

 

[Cutlass]

I'm not a monetarist of any description. So my opinion on it is that may be helpful, up to a point. But that no specific program will, or in fact can, in any sense of the word work in all situations. As soon as you lock in any monetary policy that you think will solve all of your problems, the world will prove you wrong.

 

[Monsterzuma]

However, as you say, we already could target the futures index, using either CPI futures or TIPS spreads. We don't, however; the Fed has internally decided that such a policy is inferior to targeting the overnight interest rate.I'm not saying the Fed's current policy is optimal, but it's a data point that they could implement futures targeting, but don't.

Well there's no doubt on my mind that they are looking at CPI futures and TIPS spreads. If we know about these things, certainly they do. So depending on how much weight they place on such data, they might implicitly already be using them to target the rate to a certain extent (if only to nudge things slightly in one direction or another). I doubt it's entirely irrelevant to their judgment.

Some good sources for this are any of Scott's early papers, and (on the other side) Tyler Cowen's 1997 Journal of Money, Credit and Banking article. It's been a while since I've read any of them, so I'll withhold detailed comment until I've refreshed my memory.

Thanks, those sound like they're worth a look.

 

[Monsterzuma]

 

[Cutlass]

Yeah, that's pretty much how it goes.

 

[Integral]

I'd say the Fed did a much better job this time around than in 1930. I mean, unemployment peaked at 10%, not 25%.

At this rate, we might figure it out completely next cycle!

 

[Monsterzuma]

I'm trying to understand the effects and implications of currency speculation and interest rate arbitrage between different national economies as a result of quantitative easing.

I understand that when the Fed buys down long term interest rates by buying long dated treasuries, the asset price raising effect spills over into other asset markets. After all when the yield on treasuries is bought down, it becomes attractive for the marginal buyers of these to invest in different markets instead, thus bidding up the price and bidding down the yields in these markets. As a result, QE1 and 2 did not just affect the price of US treasuries, but also of other assets such as mortgage backed securities.

Now, from what I understand, this form of "spillover" also takes place between different national economies via the carry trade: people borrow money in Dollars at a rate that is lowered by QE and invest the borrowed money in foreign asset markets, buying down the yield on the assets in these and in so doing creating additional demand for the foreign currency in question.

I'm trying to understand whether this is something I should think of as a net-negative to the host economy (i.e. the one in the currency of which is being borrowed). Intuitively it seems to me like a form of capital flight, with the receiving economy essentially "leeching" off the loose monetary policy of the host economy. Is this at all accurate? Or is it something more harmless than that?

 

[Cutlass]

I'm not sure. I'm inclined to think there's a lot of situational specific results you would be looking at there. But I'm not a finance expert. Whomp might be a better person to direct that question to.

 

[Cutlass]

I'd say the Fed did a much better job this time around than in 1930. I mean, unemployment peaked at 10%, not 25%.

At this rate, we might figure it out completely next cycle!

Only if the fiscal officials get it right too....

 

[wolfigor]

the truth behind money

Spoiler :

 

[Monsterzuma]

The critical feature of our theoretical model is that it exhibits the key function of banks in modern economies, which is not their largely incidental function as financial intermediaries between depositors and borrowers, but rather their central function as creators and destroyers of money. A realistic model needs to reflect the fact that under the present system banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries.

http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf (page 9)

This recently issued IMF working paper argues for an endogenous money view of banking.

An article on it's general contents:
http://www.telegraph.co.uk/finance/...o-conjure-away-debt-and-dethrone-bankers.html

 

[innonimatu]

Oh, great, not even is the IMF in cahoots with the EU and the ECB to steal my country blind, now it's stealing my ideas also! Those bastards!