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Lawrence J. Kramer  

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  • The Monetary Illusion [View article]
    "QE in ways does function as a "tax" as supply of interest bearing assets is bought and replaced by cash."

    The assets are sold voluntarily for fair value or, some would say, more than fair value. On whom or what is that a tax? Can you elaborate? Inflation is a tax, but QE is not inflation: it is just the tool du jour of the central bank to induce the same level of inflation it always seeks to induce.
    Mar 29, 2015. 09:45 AM | Likes Like |Link to Comment
  • The Monetary Illusion [View article]
    7 -

    I'm afraid you have been reassimilated. (Surely, you have a better pic to go with that UID.)

    This article is one long string of misconceptions.

    1. "No one needs to explain how policymakers have made painfully little progress on the structural reforms necessary to increase global productive capacity "

    The world is awash in capacity. Inflation is down because supply is up. Globalization has multiplied global capacity enormously. Robots make things, and poorly paid workers make things. There are things everywhere. We need more infrastructure, we need more desalinated water, we need a lot of things. But more capacity? Yikes.

    2. "...monetary policy has perversely morphed into a new orthodoxy where even central bankers admittedly view it as their job to use their balance sheets as a tool to implement fiscal policy."

    I don't know what Mr. Minerd means by "fiscal" policy. Do you? The amount spent, the nature of spending, the relationship of revenues to borrowing? Is he saying that central bankers are trying to stimulate private spending because the government is not spending enough? Is that really "fiscal" policy? How can so vague a claim be seen as an "insight"?

    3. "Capital is that which is held in reserve to absorb losses. If losses are to be anticipated, then a reasonable inference is that a certain expectation of risk must exist. Therefore, central banks must be expected to take on some risk for policy purposes, which implies a function beyond the creation of a monetary base to maintain price stability."

    The Fed's capital is like an emu's wings. We can infer nothing from it other than ancestry.

    4. "The defense of the currency as a store of value and medium of exchange is another appropriate risk. The defense of the currency as a store of value and medium of exchange is another appropriate risk."

    Leaving aside what "risk" to the Fed's vestigial capital is involved in this exercise, we need to get past the idea that the dollar is a "store of value." It is not a store of value except to the limited extent that it must hold its value long enough to be a useful unit of account and medium of exchange. The dollar has "lost" some 9x% of its "value" since 1913, and yet the republic stumbles on, the richest place in the history of the known universe. Surely, no one has stored any value in a 1913 dollar, whereas they have stored value in 1913 gold coins. Currency is like the insulated bag you use to take the ice cream home from the grocery store. It needs to protect value long enough for you to put the ice cream in your belly or in the freezer; it need not BE a freezer.

    5. "one need only point toward the impact of quantitative easing (QE) on interest rates."

    If there were no QE, we would have the same low rates, only we would get them through the mechanism of weak demand rather than monetization. QE is just the best way for rates to fall, it is not the cause of their falling. The "monetary illusion" here is the illusion that the Fed has a choice about interest rates. It can only go with the flow and appear to be steering, nothing more.

    6. "The depressed returns available on fixed-income securities, largely as a result of QE, are acting as a tax on investors, "

    To cure a tapeworm, eat an Oreo and drink a glass of milk every day for a week. On the eighth day, eat the cookie, but do not drink the milk. When the tapeworm sticks his head out and asks for the milk, you've got him. "Investors" have been getting real risk-free returns for so long that they forget that the interest they receive is not an entitlements but COMPENSATION for forgoing spending. The risk-free rate compensates non-spenders for not competing for goods and services. The risk premium compensates for the risks taken. Now, thanks to the excess productive capacity that Mr. Minerd says we need to increase, we no longer need people not to spend, so we have stopped paying them not to spend. Investment returns thus now consist almost entirely of risk premium. That is not a tax. It is a price discovery.

    7. "Essentially, monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers. Taxation and subsidies, as well as other wealth transfer payment schemes, have historically fallen within the realm of fiscal policy under the control of the electorate."

    So THAT's what he means when he says that monetary policy has become fiscal policy. But he has it exactly backwards. First, because QE is really just price discovery without the recession, it is not a tax or a subsidy or a transfer payment any more than any private renegotiation is such. Second, monetary policy ALWAYS affects the risk-free rate, and, therefore, ALWAYS raises or lowers the "taxes" and "subsidies" of the bogus sort Mr. Minerd claims QE affects. If we were to allow that monetary policy is fiscal policy continued by other means, we could not say that it has "morphed" into it, but only that it has always been it. Nothing new but the dimension.

    8. "With the benefits of monetary expansion going to a small share of the population and wage growth stagnating, incomes have been essentially flat over the past 20 years."

    So we've had QE for 20 years? What about the Clinton surplus (aka the dumbest bit of macro policy since 1937)? Maybe it turns out that fiscal policy is just monetary policy continued by other means. (As I said, Mr. Minerd has the relationship backwards.) More likely, the relevant authority here is Mr. Einstein, whose general theory of relativity boils down for us dummies to gravity and momentum being the same thing. Fiscal policy has monetary implications. Whether that makes it monetary "policy" is of concern only to semanticists. In the real world, the Monetary Sovereign is just a logical entity whose many parts do things that together affect the value and utility of the currency. Drawing bright lines between "fiscal" and "monetary" responsibility and jurisdiction is a fruitless, largely polemical exercise.

    9. "classical economics would tell us that the pricing distortions created by the current global regimes of QE..."

    What pricing distortions? They are assumed, but never named. What worthwhile investment is going unfunded because money is cheap? What misallocation of capital is occurring? Even misallocations create activity in the short run. The housing bubble created jobs and incomes, until it didn't. Where are the jobs and income from the misallocations attributable to QE? There are none, because the problem we face is a prudent non-allocation of capital in the face of weak aggregate demand, not a misallocation of capital resulting from cheap money.

    Maybe you won't agree with all of these points. I'll settle for seven of the nine.
    Mar 28, 2015. 11:09 AM | 8 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    " In effect, the economy, in the person of me, has been taxed to the tune of whatever it cost me to make the doughnut."

    That's not what I should have said. I am just the delivery guy. The "tax" will fall on whoever has to do a bit more work, or make do with a bit less of something because resources were diverted from whatever else they might have been doing instead of being devoted to the creation of one more doughnut. There is no guarantee that there is any economically cognizable cost at all.
    Mar 27, 2015. 03:29 PM | 1 Like Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "Who are you, or any central government planner, to decide how much can be taken without destroying the above? "

    Bill Clinton answered that question: the bond market. If the bond market does not like what the government is doing on the fiscal front, it reacts by raising or lowering the price of bonds. These faceless "central planners" that right-wingers whine about do not exist, or they do not matter. They are subject to political recall, and the bond market tells us when to vote them the hell out, so they react to the bond market before that happens.

    " I strongly distrust anyone who thinks they can spend my money more efficiently and effectively than I."

    Can you build a battleship? Do we not need battleships? Shall we wait for the private sector to build them on spec? What on earth makes you think that the government wants "your" money because it can spend "it" more efficiently than you? The government doesn't want your money. The government wants a goddam battleship. And so do you.

    If the government has to commandeer steel and labor to build a battleship, then that's what it will do. The MECHANISM whereby it commandeers those things is to print money to buy the parts and labor, just as it prints the money to give John Q. to buy my doughnut. If that action crowds out private access to steel and labor, then the price of those things goes up as the private users who most want those resources bid against the government, and those who want them less have to do without (a form of taxation). Rather than impose the tax by inflation and price-based rationing, the government, i.e., we, the people, in Congress assembled, confiscate purchasing power in a more politically equitable fashion, i.e., via dollar taxes.

    So, no, the government is not claiming that it can use your money more effectively than you; it is claiming that it can use steel and labor more effectively than you FOR YOUR BENEFIT, and it is TAKING your money via a progressive income tax so that you, with your tons of money, won't try to outbid the government and your poorer neighbors, for those resources.

    The issue is the wise use of inputs, not money. The government does not spend your money. The government consumes the resources on which you might choose to spend your money, to the exclusion of some other user, but only to the extent that the supply of those resources is made tight by the government's consumption, which is not today the case. The tax code politically reallocates access to the remaining resources in a way that keeps the overall value of the medium of exchange stable so as to avoid the negative externalities of an unreliable currency. Reductive claims about who can "spend your money more efficiently" simply do not address the real issues of public finance, good as they may feel to beat your breast about.
    Mar 27, 2015. 03:16 PM | 5 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "Seriously, I don't think your donut example is a good one, because we pay our taxes in dollars, not donuts. The bottom line question is: "Who can spent your money more efficiently, you or the Federal Gov.?""

    Bulldog -

    Which taxes are you talking about? Monetary policy is about the implicit stealth tax of inflation. THAT tax is paid in doughnuts. If we drop money from a helicopter, John Q. Senior picks $3 up off the ground and comes to my shop for a doughnut. I sell it to him for $3. In effect, the economy, in the person of me, has been taxed to the tune of whatever it cost me to make the doughnut. AND, I have the $3. I have not raised the price of doughnuts on account of John's order, so the $3 has not yet created inflation.

    Now, what do I do with the $3.00? I give a small part of it to the guy who supplies my raw materials. Does he raise the price of his materials? Not if he, like me, has excess capacity. The rest I spend elsewhere, but you can see the drill: the only prices that rise on account of the helicopter drop are the prices of things in short supply.

    At the same time, some merchants are realizing economies of scale that will allow them to lower prices on account of rising demand. The net effect of the helicopter drop on prices may, therefore, be nil. My point, though, is that the inflation tax is paid in doughnuts, and its burden is thus a function of marginal costs, not average costs.

    How we pay actual dollar taxes is beside the point, as I am not advocating that we increase taxes to cover the deficit. On the contrary, I am advocating that we print money, i.e., that we pay our "taxes" in doughnuts.
    Mar 27, 2015. 02:56 PM | 4 Likes Like |Link to Comment
  • What Does It Mean For The Natural Rate Of Interest To Be Negative? [View article]
    " the result of inflationary policies has always been to favor business and banking interests."

    It pisses off the Giants when something good happens to the Eagles. But the Giants make their money by playing against a good Eagles team.

    We need a robust banking sector, and the banks need a creditworthy pool of borrowers. They compete with each other for the money, but they depend on each other's financial health for their own. So, when something "favors" banks and business, that may or may not be a good thing for everyone else.

    Narrow, zero-sum views misconstrue the whole point of a competitive economy. Any coherent argument about policy needs to say (i) in which direction optimal lies relative to the status quo, and (ii) whether any policy under discussion moves toward or away from optimization. Statements about whether some policy, generally or in any specific case, benefits one party or another are never useful, absent a consensus about where optimal lies. Such enthymematic, question-begging claims add nothing to our understanding.
    Mar 27, 2015. 01:23 PM | 3 Likes Like |Link to Comment
  • What Does It Mean For The Natural Rate Of Interest To Be Negative? [View article]
    "Negative real rates, and the ZLB, are a consequence of weak demand, which is a consequence of stagnant or declining real wages."

    Negative real rates, and the ZLB, are a consequence of weak demand relative to supply, which is a consequence of burgeoning supply and/or stagnant or declining real wages and/or insufficient transfer payments.

    Lots of moving parts (most of them not moving fast enough).
    Mar 26, 2015. 03:49 PM | 1 Like Like |Link to Comment
  • What Does It Mean For The Natural Rate Of Interest To Be Negative? [View article]
    What does it mean for the natural rate of interest to be negative? It does not mean that people literally "prefer" the future to the present. It means that, despite a real interest rate of zero, not enough money is chasing goods to keep the price of commodities from falling. That's all. Nothing more. People's actual preferences contribute to that state of affairs, but they do not account wholly for it.

    The interest rate at which people can borrow, and the interest rate people can earn by hoarding their media of exchange, influence the extent to which people will chase goods. Those rates determine the opportunity costs for spending and hoarding. If the dollar is losing value (counting interest as value added) sitting in a Treasury bond, then the real rate of interest is negative. If, despite that situation, the price of commodities is not rising, then we say that the "natural" rate of interest - the rate at which the price of commodities would stop falling - is negative.

    When the natural rate is negative, we can SAY that people "prefer" the future to the present, but the use of the word is entirely metaphoric. We have no idea what people want; we only know how they behave, and if the behavior LOOKS like a preference, we use that word as a convenience. But the real world events may be driven entirely by a positive supply shock: people may be spending their fool heads off, yet prices may be falling, and the natural interest rate may be negative. I suspect that we now find ourselves in that position, because, as described below, I do not equate "saving" with "not spending."

    The suggestion that people subjectively "prefer" the future to the past seems to me singularly unhelpful. For one thing, it asks the question that TF17 answers correctly: some people "prefer" the future because the future is demanding more of their attention than the present. But the price of commodities is not necessarily driven by the choices we make to consume or save our incomes. If we are saving our money, and the real interest rate on risk-free investments is low enough, we must take a risk, and taking a risk almost always entails funding a purchase of commodities by SOMEONE. If you buy a bond backed by car loans, you are, in effect, enabling demand for cars, driving up the price of steel, etc. If you buy stock in a start-up, you are funding the purchase of paper clips. Until the paradox of thrift clicks in, and demand falls because of an IMBALANCE between investment and consumption - when there aren't enough customers to justify investment, so demand for commodity inputs falls - falling interest rates may well stimulate demand for commodities, even as what we call "consumer spending" and "saving' remain steady.

    That's why I use the word "hoarding" to describe the relevant alternative to spending. A medium of exchange intermediates barter. I sell you a goat, you give me money, I use the money to buy a violin, I give the violin maker money, and he uses the money to buy your shoes. You have traded your shoes for a goat, I have traded my goat for a violin, and the violin maker has traded his violin for shoes. Is that cool or what? But note that I could have bought bricks to build a house, or inventory for my business, all of which constitute "saving," but not "hoarding." In contrast, I could have "hoarded" my money - put it in a drawer, or "lent" it to the Treasury, or deposited it in a bank that has excess reserves. In that case, the violin maker does not make a sale, and he cannot afford to buy your shoes. The price of commodities falls because the interest rate paid on hoarded money is too high - i.e., I would rather hoard my medium of exchange than exchange it for something real.

    Clearly, we can engineer a consequence of hoarding money that would discourage it. Demurrage is the best example. Demurrage is a negative real risk-free interest rate. If a demurrage tax exists, and inflation is not occurring, then the natural interest rate - the rate implied by the demurrage charge at the ZLB - is negative. Common sense - no math required - tells us that there is a demurrage rate high enough to get us to buy SOMETHING with our money, which may be capital goods. (Again the issue is not consumption vs. saving; it is spending vs. hoarding.) Thus, there always exists a natural rate of "interest," so understood, and that rate may be a negative number.

    In what he have come to regard as "normal" times, people are not inclined to hoard their money; demand for goods outstrips supply, and prices rise. In such times, a positive interest rate is needed to cool the economy, to keep prices from rising. But when a positive interest rate is not necessary to slow demand, the natural rate of interest becomes a negative number. The solution is to impose a demurrage tax, which our libertarian streak will resist, because self-styled libertarians don't understand that coordination (compelled cooperation) and voluntary cooperation are at times more alike than they are different.

    Alternatively, we can drop money from helicopters to stimulate demand. Of course, the hard-money types will tell you that money dropped from a helicopter is the same thing as a demurrage fee, because it dilutes the purchasing power of the existing money. And so it is. And yet, helicopter drops are doable if (i) the money is dropped on people we like, and (ii) inflation does not happen as a consequence. In that case, the purchasing power of the money has not, mirabile dictu, fallen after all, because the new money is buying excess capacity, and everyone's happier because people we like have more money, and they are spending it in a way that keeps us employed and our businesses profitable.

    All of this is contingent on the natural rate of interest having become negative because a supply shock has occurred. Otherwise, the helicopter drop is inflationary, i.e., the natural interest rate is positive. Understand that the "natural" rate of interest is not ipso facto the optimal rate of interest. Policy makers prefer an inflation rate of 2% or so. In other words, they believe that the real risk-free rate of interest should be lower than the natural rate of interest. You can see how problematic that is when the natural rate below zero.
    Mar 26, 2015. 09:21 AM | 1 Like Like |Link to Comment
  • CEFL And YYY: Are These CEF Alternatives Worth Owning? [View article]
    "Well, if you "let it ride", then you'll pay a hidden fee,"

    If you let it ride, you are betting the wrong amounts. I agree that letting it ride can be disastrous unless you hit a run of consecutive wins, and it may well be that the prospectus should discuss that fact; I'm just saying that it is a mistake to think of these instruments as bad investments when they should be thought of as good term bets.
    Mar 26, 2015. 01:21 AM | Likes Like |Link to Comment
  • CEFL And YYY: Are These CEF Alternatives Worth Owning? [View article]
    "But the decay is still there."

    The decay is an illusion. Yes, if the underlying asset goes from $100 to 90, and then back from 90 to 100, the leveraged tracking note will not return to $100. It will drop to 80 and rise to 97.777... But so what? After round 1, you have only $80 of your leveraged instrument. You have lost $20. That game is over. Now, if you want to get even when the underlying returns to $100, do the algebra and buy some more of the ETN. (Ditto if the underlying has risen to $110. You have won $20, and you should take some money off the table so that, if the underlying falls back to $100, so will your leveraged ETN.)

    The problem is not that the value of what you bought "decays." The problem is that you did not "buy" anything: you made a bet with respect to the rebalancing period of the leveraged instrument. When that bet is over, you should treat yourself as having cashed out. You must now decide whether to make a new bet, and, if so, in what amount. You can "let it ride" if you want, to save commissions, but it's still a new bet, and the appropriate size is not the amount you have left after the last bet.

    When you go to the race track, and your loses, you have to buy another ticket to bet in the next race. If he wins, you do not automatically bet your winning on the next race. Leveraged ETF/ETNs work the same way: you have to replace your losses and should think twice before pyramiding your winnings.
    Mar 26, 2015. 12:28 AM | 1 Like Like |Link to Comment
  • A Little Asset Price Inflation Is A Good Thing [View article]
    I think it is unhelpful to use "inflation" to describe a rise in the price of a single good or class of goods. "Inflation" is most usefully said to occur when the nominal price of most things rises faster than the real price of most things, that is, when the currency loses value generically. Nominal price rises, per se, to the extent that they reflect relative changes in real prices, are not usefully called "inflation." Indeed, "asset price inflation" strikes me as its own term for a phenomenon that looks like inflation, but isn't - like "fool's gold."

    Of course, people can use a word any way they like, so if CR wants to use "inflation" to mean a rise in the nominal price of any particular thing, he is free to do so, just as those who call the price implications of economies of scale in a particular good "deflation." But anyone who has a view of what "inflation" portends from a policy perspective, or whether "inflation" will ensue from a particular policy, needs to use the word in a way that makes clear what the relationship is between the policy and the word. In an era of "inflation" targeting by central banks, common sense suggests that we should all use the word as the Fed uses it, not because the Fed is "right," but because the Fed is making the policy whose outcomes we are measuring.
    Mar 25, 2015. 08:39 AM | 4 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "Common sense says that if the Fed would double the total amount of money in our system, and everything else is constant, then the purchasing power of the $ should be cut in half (again assuming constant output - i.e. no growth)."

    But we cannot even pretend that everything else is constant, because under our system, the Fed has to BUY something to issue money, and there will be less of that something BY HYPOTHESIS. If, as is mostly the case, the Fed is buying highly liquid securities that people regard as "money in the bank" when they think about what they can afford to buy, the exchange does not increase nominal purchasing power nearly as much as if money were just dropped from a helicopter with no financial assets removed in the creation. That's why fiscal stimulus is so much more powerful than so-called monetary stimulus.
    Mar 23, 2015. 05:06 PM | 2 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "I was just kidding/snark about paying people for sitting around."

    It's not paying people to sit around, exactly, but it's not to compensate them for risk, either. The rate on Treasuries is the "risk-free" rate, plus an allowance for inflation, which may best be thought of as a return of principal in real terms. The Monetary Sovereign pays that interest for one purpose and one purpose only - so that the money borrowed will not chase goods and cause inflation.

    The government pays people to not spend their money. That's not quite the same thing as paying them to sit around, but neither is it the same thing as paying them a return on their "investment," as the Treasury buyer is not making an investment.

    The bond buyer does take the risk that the economy will collapse while he is waiting to get his principal back, but that's really an inflation risk - the money losing purchasing power because there is nothing to buy - one of the unique aspects of MS debt, including cash. But "investment?" The real rate paid on Treasuries is simply compensation for not spending, including not spending on capex, i.e.. not investing. The government has decided to consume certain resources, and it recognizes that such consumption will exert upward price pressure. Taxation and paying people not to spend offset that pressure. Paying people a return on investment has nothing to do with it, which is why, in the absence of inflationary pressure, the real rate of return on Treasuries should be no greater than zero.
    Mar 23, 2015. 09:26 AM | 3 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    " Your generation is taking it from the next generation in exchange for the wonderful country you are leaving them."

    "You are not taking from them. You are selling them your share of public good that you participated in creating."

    Take your pick, Paul. I'm not feeling the inconsistency.
    Mar 22, 2015. 05:33 PM | 1 Like Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "But it is not just whether something is 'wise' or not. It is whether it is wise to have reduced future value, for immediate needs."

    You mean it would be unwise to spend money that we will regret spending? How on earth can you interpret my use of "wise" not to include that possibility?

    "If you try to tell me government expenditures do not entail risk you will be talking to a wall. It is the very premise of my being."

    Thanks for the heads up. One always appreciates an open mind. But I have never suggested that government expenditures entail risk. Are you saying that government's failure to spend does not also entail risk? Life is risk. Every choice entails a risk that the other choice would be better. Why is spending a risk and not spending not a risk? Next time you get sick, think about whether there is more risk in spending money to see the doc or more risk in not spending money to see the doc. My definition of "wise spending" is predicated on the decision, by whoever has the responsibility under our system of governance, that the risk of spending is less than the risk of not spending. What's yours?
    Mar 21, 2015. 06:30 PM | 2 Likes Like |Link to Comment