Bank of England Paper shattering common misconcpetions

[Kushinator]

When those bond rates are gonna rise, something is gonna have to be done as that's the first sign inflation is gonna hit the consumer economy.

The Fed will increase interest rates when that time comes. Another thing to consider is this: if the Fed just allows it's balance sheet to decline on the basis of maturity, there is evidence to believe yields can actually fall below current levels, if left to the fickleness of the markets.

 

[JohnfrmClevelan]

I should add.. You have gaps between the two as wide as 8%.. that's a big miss. You know that inflation is a battle always has to be fought. Sometimes nothing has to be done, and sometimes something has to be done. Right now, a crappy world economy, key resources collapsing in value has saved the Fed having to raise interest rates, sooner and much more then it has. Which goes back to what I said and so many here want to ignore because its been "easy street" (who fundamentally nothing wrong with the Housing Market in 2007 or 2008).. bond rates are gonna rise at some point. When those bond rates are gonna rise, something is gonna have to be done as that's the first sign inflation is gonna hit the consumer economy.


It's something the MMT crowd doesn't understand. Government bonds are a way to battle inflation as it's literally taking excess dollars out of the world economy.

Excess dollars that would otherwise do what? Be spent on goods and services? Invested in production? What is your inflationary mechanism here?

 

[austrianecon]

I am arguing that there isn't a causative relationship between money supply growth and inflation, especially in post-industrial economies.

And we can't draw that conclusion in a post-industrial economies (Global Economies/end of Bretton Woods) as inflation is easily shipped offshore in trade deficits.

 

[austrianecon]

The Fed will increase interest rates when that time comes. Another thing to consider is this: if the Fed just allows it's balance sheet to decline on the basis of maturity, there is evidence to believe yields can actually fall below current levels, if left to the fickleness of the markets.

But can the Fed really allow it's balance sheet draw down over 20 or 30 years without causing inflation in the economy.

 

[austrianecon]

Excess dollars that would otherwise do what? Be spent on goods and services? Invested in production? What is your inflationary mechanism here?

If you have to ask, then you already failed.

 

[JohnfrmClevelan]

If you have to ask, then you already failed.

Your non-answer is noted.

 

[austrianecon]

Your non-answer is noted.

I don't have time to answer the obvious. Ask a specific question any why you don't understand it.

 

[JohnfrmClevelan]

I don't have time to answer the obvious. Ask a specific question any why you don't understand it.

OK, I'll answer it for you. The money that govt. bonds remove from the economy probably weren't going to be spent or invested anyway. Those bondholders want safety, not high returns; the next safest low-return investment is simply holding on to dollars. Riskier, higher-yield investments are always there, yet they chose to earn next to nothing in interest. Your assumption that, in the absence of bonds, trillions of dollars would be flying into fundamentally different investment vehicles and causing inflation just isn't logical.

 

[austrianecon]

OK, I'll answer it for you. The money that govt. bonds remove from the economy probably weren't going to be spent or invested anyway. Those bondholders want safety, not high returns; the next safest low-return investment is simply holding on to dollars. Riskier, higher-yield investments are always there, yet they chose to earn next to nothing in interest. Your assumption that, in the absence of bonds, trillions of dollars would be flying into fundamentally different investment vehicles and causing inflation just isn't logical.

Ignorance from the MMT crowd once again..

The money invested in Treasuries doesn't mean they wouldn't be invested elsewhere. Rather it's a sign of how CRAPPY an economy is right now and that's where MMTers fail. When US bond rates are in normal range between .5 to 5% (2 to 30 year) majority of investment isn't in Treasuries (outside of those who have to specifically hold them). Rather that money actually hits the economy in R&D funding or Investment elsewhere. Basically anything that beat inflation. It's why bond rates rose from 2003-2007 when "smart" money was going into Housing.

It's not an assumption. The absence of bond requires the Government to float a tax to kill of excess reserves (float meaning every year) or hike Fed rates to soak that up. There is no ifs ands or buts about it.

 

[JohnfrmClevelan]

Ignorance from the MMT crowd once again..

The money invested in Treasuries doesn't mean they wouldn't be invested elsewhere. Rather it's a sign of how CRAPPY an economy is right now and that's where MMTers fail. When US bond rates are in normal range between .5 to 5% (2 to 30 year) majority of investment isn't in Treasuries (outside of those who have to specifically hold them). Rather that money actually hits the economy in R&D funding or Investment elsewhere. Basically anything that beat inflation. It's why bond rates rose from 2003-2007 when "smart" money was going into Housing.

And like I said before, those kinds of investments are always an option, crappy economy or not. Investors aren't forced to buy treasuries, and the tiny yield on them isn't stopping anybody from investing elsewhere if they think it's the smart thing to do.

It's not an assumption. The absence of bond requires the Government to float a tax to kill of excess reserves (float meaning every year) or hike Fed rates to soak that up. There is no ifs ands or buts about it.

Excess reserves? Are we still worried about excess reserves? The Fed doesn't seem too worried about them.

And you still haven't explained how you think treasuries fight inflation.

 

[JP Hochbaum]

My next question is why would the government shed the use of TSY's? In the condition that we stop issuing TSY's to cover a deficit we could still issue TSY's for people who want a low risk investment.

They wouldn't just disappear they would just not be required to be issued to cover a deficit. So in that sense it becomes exactly like a CD at a bank.

 

[JP Hochbaum]

But can the Fed really allow it's balance sheet draw down over 20 or 30 years without causing inflation in the economy.

You can't jump from A-C without proving that B exists. You first have to show that drawing down the balance sheet (A) causes inflation (C). Like John said earlier, what is the mechanism that causes this inflation. Where is your B?

 

[Kushinator]

And we can't draw that conclusion in a post-industrial economies (Global Economies/end of Bretton Woods) as inflation is easily shipped offshore in trade deficits.

Your "belief" lacks statistical evidence. There isn't even a weak correlation between money supply growth and inflation; without correlation, there can be no causation.

 

[Kushinator]

But can the Fed really allow it's balance sheet draw down over 20 or 30 years without causing inflation in the economy.

If anything, each maturing bond would cause a reduction in base money, putting downward pressure on the type of loan creation necessary for the economy to grow faster than productivity (actual inflation). That's why the Fed has to maintain this level; if they don't they make the inter-bank lending market that much tighter.

 

[austrianecon]

And like I said before, those kinds of investments are always an option, crappy economy or not. Investors aren't forced to buy treasuries, and the tiny yield on them isn't stopping anybody from investing elsewhere if they think it's the smart thing to do.

Actually, this is where you keep getting it wrong.. Treasuries have to be bought by Primary Dealers . You as an individual can't buy them without having to buy them from primary dealers.

Primary dealers are also the middle man in Fed policy of QE. Fed can't buy directly from Treasury, so it goes to the Primary dealers and just "buys" the bonds back and expands it's balance sheet. This has caused excess reserve to DRAMATICALLY jump.

Excess reserves? Are we still worried about excess reserves? The Fed doesn't seem too worried about them.

And you still haven't explained how you think treasuries fight inflation.

Fed is always worried about excess reserves on both side of the coin. For example (look at the chart I linked):

1) Fed lowering fund rates down to practically zero was to get Banks to spend their excess reserves but Banks did the opposite because the Fed was very short sighted. Banks bought treasuries and sold them back to the Fed during QE thus boosting their excess reserves even more because when bonds are carrying higher yields then Fed Funds rate it becomes EXTREMELY profitable with zero risk.

2) And the reverse (is shown as well) happened. When the Fed slowed down QE in June 2013, Excess reserves started to fall and fell by $300b. Then in Dec 2015 the Fed hiked interest rates to .5% which put Banks in a position of having to be forced out the short term bond game (1 year or less).

Treasuries (or any kind of bond) fight inflation because selling bonds you are removing cash from the economy. Treasury issues bond almost on a weekly basis. While it may seem it doesn't actually fight inflation, it's actually fighting inflation in the manner of all that is being recycled is the same amount of cash over and over. A bond issued is another bond borrowed to pay off the previous bond. If the Treasury just printed $19t tomorrow and started debt free it would have to pay back that $19t from which it borrowed. That means there would be an additional $19t in the economy that wasn't there before.

 

[austrianecon]

My next question is why would the government shed the use of TSY's? In the condition that we stop issuing TSY's to cover a deficit we could still issue TSY's for people who want a low risk investment.

They wouldn't just disappear they would just not be required to be issued to cover a deficit. So in that sense it becomes exactly like a CD at a bank.

But the issuing of the TSY is what gives the US the ability to carry trade deficits and allow the Dollar to be largest medium of exchange. No country will accept dollars if you can't value of dollar via interest payment assets.

 

[austrianecon]

You can't jump from A-C without proving that B exists. You first have to show that drawing down the balance sheet (A) causes inflation (C). Like John said earlier, what is the mechanism that causes this inflation. Where is your B?

This isn't a question (and if you are questioning it you need to read up some more), B has always been a fact to the Fed.

 

[austrianecon]

Your "belief" lacks statistical evidence. There isn't even a weak correlation between money supply growth and inflation; without correlation, there can be no causation.

LOL, You should look at how the Egyptian Revolution took place.

 

[JohnfrmClevelan]

Actually, this is where you keep getting it wrong.. Treasuries have to be bought by Primary Dealers . You as an individual can't buy them without having to buy them from primary dealers.

The fact that we work through primary dealers doesn't change the net result.

Primary dealers are also the middle man in Fed policy of QE. Fed can't buy directly from Treasury, so it goes to the Primary dealers and just "buys" the bonds back and expands it's balance sheet.

Yes, and...

Fed is always worried about excess reserves on both side of the coin. For example (look at the chart I linked):

1) Fed lowering fund rates down to practically zero was to get Banks to spend their excess reserves but Banks did the opposite because the Fed was very short sighted. Banks bought treasuries and sold them back to the Fed during QE thus boosting their excess reserves even more because when bonds are carrying higher yields then Fed Funds rate it becomes EXTREMELY profitable with zero risk.

2) And the reverse (is shown as well) happened. When the Fed slowed down QE in June 2013, Excess reserves started to fall and fell by $300b. Then in Dec 2015 the Fed hiked interest rates to .5% which put Banks in a position of having to be forced out the short term bond game (1 year or less).

Treasuries (or any kind of bond) fight inflation because selling bonds you are removing cash from the economy. Treasury issues bond almost on a weekly basis. While it may seem it doesn't actually fight inflation, it's actually fighting inflation in the manner of all that is being recycled is the same amount of cash over and over. A bond issued is another bond borrowed to pay off the previous bond. If the Treasury just printed $19t tomorrow and started debt free it would have to pay back that $19t from which it borrowed. That means there would be an additional $19t in the economy that wasn't there before.

That's still no explanation of how or why excess reserves matter one whit. Reserves don't touch the economy.

Treasuries remove dollars from the non-governmental sector, but not from anybody who is going to spend or invest. That is the point. It takes no dollars out of our pockets; dollars don't become scarce. So, again, where is the inflation-fighting mechanism?

I have made this point before - if the Fed/Treasury did print up $19 trillion and eliminate all of the debt, there is no reason to believe that it would lead to a spending spree, because the difference between holding bonds and holding dollars is not that great. If you hold bonds, you probably weren't planning on spending or investing your dollars anyway.

 

[austrianecon]

If anything, each maturing bond would cause a reduction in base money, putting downward pressure on the type of loan creation necessary for the economy to grow faster than productivity (actual inflation). That's why the Fed has to maintain this level; if they don't they make the inter-bank lending market that much tighter.

Well I wasn't specifically talking about Bonds but rather MBS on the Fed's balance sheet. But both these "assets" (not really asset at the time they are bought by the Fed) cause the Fed to create dollars and excess reserves are in the $1.8-$1.9t range still. The Fed will have to go the traditional route and rise interest rates while it deleverage (over the 20 or 30 year period) which is what I was getting at.

Side note: I also don't really believe there is actually any pressure on US banks in the inter-banking lending market as they are sitting on $1.8-$1.9t in excess reserves and the Fed actually misplayed their hand when it went so low with interest rates and did QE at the same time. They **** the bed and made playing the bond game profitable for banks.. When they should have done QE first (strength the banks) and then raised interest rates (against bonds) to force lending.

 

[austrianecon]

That's still no explanation of how or why excess reserves matter one whit. Reserves don't touch the economy.

Excess reserves is the amount of reserves that don't have a liability against it. In typical Fed fashion $1.8t excess reserves would be 9xs that if it the real economy (loans). So you either A) reduce excess reserves or B) hike interest rates to slow that lending.

Treasuries remove dollars from the non-governmental sector, but not from anybody who is going to spend or invest. That is the point. It takes no dollars out of our pockets; dollars don't become scarce. So, again, where is the inflation-fighting mechanism?

1) You have a lot to learn if you think Bonds are not an investment. 2) It's not about creating a scarcity in dollars but rather managing when those dollars come "online" (that's a way to control inflation).

I have made this point before - if the Fed/Treasury did print up $19 trillion and eliminate all of the debt, there is no reason to believe that it would lead to a spending spree, because the difference between holding bonds and holding dollars is not that great. If you hold bonds, you probably weren't planning on spending or investing your dollars anyway.

And you are still wrong. Bonds are an investment tool. When you learn that, you'll understand how wrong you are. Holding dollars means you have instant access to buy groceries. You can't hold $50,000 in bonds and buy your groceries now can you?

 

[JohnfrmClevelan]

Excess reserves is the amount of reserves that don't have a liability against it. In typical Fed fashion $1.8t excess reserves would be 9xs that if it the real economy (loans). So you either A) reduce excess reserves or B) hike interest rates to slow that lending.

But those excess reserves haven't led to increased lending. We have had excess reserves for over seven years already, and nothing has happened. So you don't have to do either.

Also, reserves are not balanced against liabilities. Loan proceeds (deposits) are balanced out by promissory notes; required reserves are only tied up because of regulations, not because of accounting.

1) You have a lot to learn if you think Bonds are not an investment. 2) It's not about creating a scarcity in dollars but rather managing when those dollars come "online" (that's a way to control inflation).

And you are still wrong. Bonds are an investment tool. When you learn that, you'll understand how wrong you are. Holding dollars means you have instant access to buy groceries. You can't hold $50,000 in bonds and buy your groceries now can you?

If I have $50,000, it's not a choice I have to make - either I will spend my money, invest my money (in a real investment, with some risk), or I will sit on my money and earn minimal interest. The return isn't going to sway me. If I was going to buy groceries, I would have bought groceries.

 

[austrianecon]

But those excess reserves haven't led to increased lending. We have had excess reserves for over seven years already, and nothing has happened. So you don't have to do either.

And here is the crux of the problem you seem to be missing. Once Fed Funds rate is high enough to squeeze the margins on Bonds, Lending will increase. I've already stated it to Kush.

Also, reserves are not balanced against liabilities. Loan proceeds (deposits) are balanced out by promissory notes; required reserves are only tied up because of regulations, not because of accounting.

Regulations are law of the land, til that changes I am right and you are wrong.

If I have $50,000, it's not a choice I have to make - either I will spend my money, invest my money (in a real investment, with some risk), or I will sit on my money and earn minimal interest. The return isn't going to sway me. If I was going to buy groceries, I would have bought groceries.

So do you admit Bonds are an investment? Or you gonna ignore that... because you have been proven wrong.

 

[JohnfrmClevelan]

And here is the crux of the problem you seem to be missing. Once Fed Funds rate is high enough to squeeze the margins on Bonds, Lending will increase. I've already stated it to Kush.

So, higher interest rates are going to lead to more lending? I highly doubt that.

Regulations are law of the land, til that changes I am right and you are wrong.

Regulations or not, it doesn't mean that required reserves are balanced out by liabilities, because they are not. You are making more out of reserves than they deserve - they are settlement accounts, and nothing more.

So do you admit Bonds are an investment? Or you gonna ignore that... because you have been proven wrong.

Bonds are an "investment" in the same way that stocks and bonds or even collectibles are an "investment;" they bring a bit of interest to the holder. But government bonds do not fund real investment in production.

 

[JP Hochbaum]

This isn't a question (and if you are questioning it you need to read up some more), B has always been a fact to the Fed.

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