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Chris Cook

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  • The Transformation of QE [View article]
    @American in Paris

    "However, the central bank can still inject or withdraw liquidity from he banking system or raise the Fed funds rate.

    Securitization does not undermine Central Bank control. "

    I am well aware of the mechanics of the banking system.

    My point is that at the zero bound neither of these tools is of the slightest use, and therefore the steering wheel has come off in the Fed's hands.

    The only way of solving current problems is therefore not monetary action, but systemic fiscal reform. If you have a counter-argument setting out how the Fed may achieve its aims at the zero bound through use of these tools then I look forward to reading it.
    Oct 24 10:53 AM | Likes Like |Link to Comment
  • The Transformation of QE [View article]
    @ American in Paris

    As we know, how the banking system is supposed to operate in theory, and how it actually operates in practice are two different things.

    Securitisation and other mechanisms for outsourcing credit risk -such as CDS and credit insurance - between them removed whatever remaining control the Fed had over credit creation - always subject, of course, to banks' ability to attract wholesale deposits.

    When wholesale deposits froze, there was no-where other than Central Banks for private banks to go.

    Reserve requirements were and remain entirely irrelevant in view of the structural changes which have taken place in the banking system.

    At the zero bound, Central Banks are as much use as a chocolate teapot.
    Oct 22 04:46 PM | Likes Like |Link to Comment
  • Crude Oil at a Crossroads [View article]
    @ American in Paris

    By far the majority of global oil trading is now almost priced off Brent/BFOE either directly (more than 60%, I understand), or indirectly via the WTI arbitrage on the ICE platform.

    The number of qualifying 600,000 bbl cargoes coming out of BFOE monthly is in secular decline - indeed that decline in North Sea production is why Forties, Oseberg and Ekofisk were added to the Brent quality over the years to ensure adequate liquidity for a credible benchmark.

    It really would not take very much money/leverage at all by the standards of the players involve - a few billion, no more - to support the BFOE price through suitable operations in the BFOE complex.

    I have no doubt whatever that this is exactly what one or more producers are doing, because history shows that if they can, then they will.
    Oct 21 01:49 PM | Likes Like |Link to Comment
  • The Transformation of QE [View article]

    "They take these assets to their balance sheet and pay banks for them with newly created money. New money enters the banking system as reserves which the banks then use to create even more money."

    I think that this is a misapprehension in relation to how credit creation now works.

    Banks' ability to create credit is constrained not by reserves - there is no longer any such thing as 'fractional reserve banking' - but by the capital requirements specified by the Bank of International Settlements (BIS) in Basel.

    Banks are therefore able to create credit not only as interest-bearing loans (ie lending money into existence) but also - and this is a point missed by most economists - by crediting the accounts of suppliers, staff, management, shareholders (eg dividends) and sellers of financial or other assets acquired by the bank (ie banks also SPEND credit = money into existence).

    In both cases, the credit created by banks lending and spending results instantaneously in new demand deposits in the accounts of the recipients. To the extent that a bank may credit another bank account, it must then obtain the demand deposits necessary to balance its books from retail depositors; wholesale depositors (inter-bank) or if neither is possible, from the lender of last resort ie the Central Bank.

    QE as currently practised is simply exchanging an interest-bearing financial asset (a Bond) for a non Interest-bearing asset (a demand deposit). Although in fact Central Banks choose to pay interest on reserves, they need not do so, and IMHO should not do so, and if they really wish to stimulate lending they might consider negative interest rates on reserves.

    Central Bank monetary action can only have an effect if, and to the extent that, commodity prices are inflated, either:

    (a) through being used as an asset class by investors hedging inflation - which is NOT speculation, btw, but the opposite; or

    (b) adverse changes in the exchange rate in respect of non-dollar purchases.

    This could lead to stagflation.

    Hyperinflation requires fiscal - not monetary - action to generate it, because there has to be either a collapse of productive capacity (which there isn't) or a mechanism whereby purchasing power gets into the hands of the public, and frankly, I cannot see that happening either in the US or UK, since wealth has become unsustainably concentrated in both countries.

    So, in a nutshell, absent Bernanke's helicopter drops (which are fiscal, not monetary action) I see no way in which the proposed QE can do anything other than inflate financial assets, and lead to stagflation.
    Oct 21 01:34 PM | 1 Like Like |Link to Comment
  • Will Japan Be Able to Stop Deflation? [View article]

    Maybe I should have said 'could work to reflate the real economy' as opposed to the financial economy......
    Oct 19 10:30 AM | 1 Like Like |Link to Comment
  • Will Japan Be Able to Stop Deflation? [View article]
    I don't see any mechanism by which quantitative easing as a purely monetary mechanism - ie swapping one financial asset for another (currency for debt) - can ever work.

    Central banks are - at the zero bound - as much use as a chocolate teapot.

    I see no alternative to fiscal action by Treasuries, and that is where there are two diametrically opposing views as to 'what works'.
    Oct 19 09:08 AM | 2 Likes Like |Link to Comment
  • Crude Oil at a Crossroads [View article]
    WTI has been a pimple on BFOE/Brent's backside for about ten years now, and what we are seeing is the mopping up operation.

    IMHO the opaque Brent/BFOE complex is now instrumental in 'macro' manipulation by producers - necessarily including the Saudis - who are able to keep the price - through financial oil leasing to ETFs and other investors akin to the open market operations of a Central Oil Bank - at or around the 'upper bound' where demand destruction sets in.

    Don't forget that the global copper market was manipulated by Sumitomo/Hamanaka with the connivance of a few bank broker/dealers for five years before David Threlkeld blew the whistle on it and even then it took another five years before the regulators caught up.

    If commodity market history shows anything it is that if producers CAN manipulate prices to their benefit then they WILL.
    Oct 18 09:44 AM | 3 Likes Like |Link to Comment
  • The Federal Reserve Wants Inflation [View article]
    There is no pure monetary solution: period. So Central Banks are as much use as a chocolate teapot.

    The only solution is fiscal, and here we currently have two conflicting approaches. Neo-Keynesianism and the Austerian approach currently being bench-tested in Ireland and a couple of the Baltics, with the UK due out on the runway on the 20th.

    We know the neo-Keynesian approach leads to zombiedom at best: six months to a year should show us definitively what effect Austerian policies have.
    Oct 4 11:46 AM | Likes Like |Link to Comment
  • Record Breaking Contango Suggests Higher Oil Prices for 2011 [View article]
    @ Carl

    Oil producers are like any other rentier eg a landlord and will always attempt to maximise their rent.

    It makes no sense while dollar interest rates are at zero % for oil producers to pump all out, thereby depressing the price, and then to exchange their potentially more valuable oil for dollar-denominated IOUs yielding zero %.

    They are much better off - if they have no urgent need for the dollars - to leave the oil in the ground, and while almost everyone else in OPEC is desperate to cash in, I am quite sure that this profit maximisation strategy informs the Saudis' current market operations.

    As for Ferdinand's 'too high', well, it's all relative as you say.
    Sep 18 01:36 PM | Likes Like |Link to Comment
  • Record Breaking Contango Suggests Higher Oil Prices for 2011 [View article]
    @ ferdinand

    Whether or not analysts and their expectations have a role in futures prices is not really the point, although I agree they must have some minor influence in the short term. The point is that whether or not the price of crude oil will be higher or lower in 2011 is unrelated to anyone's expectations now.

    Re OPEC, they are currently in the position of controlling a very fragile (and possibly more apparent than real - I do not believe Saudi figures for a minute) monopoly position which is subject to even trivial demand shocks, and they are able to manage this position - and apply an oil/dollar 70/80$ bbl pegged range - through 'open market operations' in the forward market.

    The current deep contango, and high level of product stocks, suggest to me that OPEC now has very little room for manoeuvre and that the demand shock from the approaching double dip may be the big wave that overturns a crude oil market which is very much analogous to an unstable RoRo ferry sailing calm seas with its car deck awash.

    If so, we would see crude oil collapse as it did before, with an over correction below a 'lower bound' I see as at about $40/bbl. After a hiatus as demand picks up again then for as long as dollar interest rates are at the zero bound, producers will use ETF money to pump the prices back up again to the 'upper bound' of demand destruction.

    Rinse and Repeat.
    Sep 18 08:15 AM | Likes Like |Link to Comment
  • Record Breaking Contango Suggests Higher Oil Prices for 2011 [View article]
    "Contango doesn't guarantee higher prices, but it shows that analysts believe strongly that economic growth will accelerate enough in 2011 and take oil demand higher. And they may be right."

    Futures prices have very little to do with analysts' expectations and a great deal to do with hedgers' fears.

    The basic purpose of crude oil futures was to enable producers to hedge their physical sales requirements, and refiners to hedge their physical purchase requirements.

    In neither case has expectations anything to do with it: hedging is about fear.

    Of course, producers and consumer hedging alone is not enough for a particularly liquid market, so we get market-makers, hedge funds and other speculators who act as trading intermediaries to put their capital at risk in search of a transaction profit.

    But for some time now we have had ETF money in the market buying futures. This is NOT speculative money. It originates from investors who are getting out of dollars at zero interest, and getting into almost anything else, income-bearing or not - as a 'hedge' against inflation.

    ETF investors generally are not looking for a transaction profit - they are looking to avoid a loss. In a nutshell, they are off-loading dollar risk in favour of crude oil risk, which is precisely the opposite of what an oil producer is doing when he hedges. That is why ETFs are good for liquidity.

    They are - unlike true speculators - 'long only', and their massive presence in the market is enabling producers both to monetise the oil they store for free in the ground and to keep the oil price comfortably supported maybe $30 bbl higher than it would othewise be.

    All these guys expect is that the dollar will decline relative to oil, but the level of contango has nothing whatever to do with their expectations and everything to do with what is known as 'cost of carry'.

    Unlike a 'backwardated' market, where the difference between spot and later months is unlimited, a contango is limited by how much it costs to store and insure the oil, and - most importantly - to finance the 'carry' over time.

    That is why we see the oil price curve in contango mirroring the dollar yield curve right out into the distant future. The reason for the depth of contango is probably the lack of availability of storage and therefore nothing to do with analysts' expectations.
    Sep 17 01:35 PM | 5 Likes Like |Link to Comment
  • Why Fears That Quantitative Easing Will Lead to Hyperinflation Are Unfounded [View article]

    "They're a good way to eventually get hyperinflation, which is caused by an acceleration in money velocity as holders seek to quickly use currency whose value is noticeably declining over relatively short timeframes."

    That would be the case if:

    (a) 90% of US citizens were not in debt to the other 10% who own almost all US encumbered wealth;

    (b) Unemployment were not high;

    (c) Real incomes had not been pretty much flat for the last 30 years.

    The 10% are pretty much consuming all they need right now, and stashing their wealth anywhere that might not depreciate.

    I don't see the 10% rushing out to consume any more, and I don't see any mechanism whereby the 90% get their hands on the money necessary for them to generate hyperinflation.

    Sep 8 10:12 AM | 2 Likes Like |Link to Comment
  • New Job Opportunity - Spitting at the Moon [View article]
    @ cgm 2005

    " In it he shows why the govt taking of money from the taxpayers and later spending on projects which aid special parts of our economy..."

    The fundamental flaw here is that it ignores the reality of credit creation in the modern deficit-based economy.

    Banks do not take money from depositors and lend it - if they did, there could be no new money.

    Likewise, governments do not take money from taxpayers and spend it either.

    Banks do not only create credit/deposits when lending at interest, they also do so when spending on staff, management, suppliers, dividends to stockholders,and buying assets, whether real or financial. ie they both lend and spend money into circulation.

    Governments spend first, and tax later, and currently fund any shortfall with borrowing at interest. If government expenditure leads to the creation of new productive assets in the public or private sector then it creates new revenue streams available to be taxed and thereby to retire and recycle the development credit which produced it.

    @ neutrino 23

    A good thoughtful post. The point is that neither money nor property are objects: they are relationships.
    Sep 8 08:26 AM | 1 Like Like |Link to Comment
  • Evans-Pritchard: A Call for Aggressive QE [View article]
    Exactly how will Ambrose-Pritchard's QE proposal affect the purchasing power of those people (90% of the population) outside Planet Finance who do NOT hold bonds?

    Monetary measures such as this are as much use at the zero bound as a chocolate teapot.

    Only fiscal measures can have any effect, and even then, only fiscal measures which are politically impossible.
    Sep 6 09:20 AM | Likes Like |Link to Comment
  • New Job Opportunity - Spitting at the Moon [View article]
    I confess I'm struggling to see where the purchasing power for genuine demand is going to come from now that 90% of US citizens are in debt to the other 10% who own almost all unencumbered US wealth.

    I certainly don't advocate the State getting between citizens but how can the private sector get economic activity re-started without compound interest and private property concentrating wealth even further?
    Sep 5 08:22 AM | 9 Likes Like |Link to Comment