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  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    << What I quoted above is standard economics text book material. >>
    Where, oh where, have I heard that before?

    I think what has happened here is that you are relying on wikipedia and wikipedia is not always a reliable source of information. I could edit wikipedia and change that quote if I wanted to.

    If you have the book, check it, because if the Fed did as you say, it would be creating unbacked money, and that's against the law. THe Fed is required by law to issue money solely by buying high quality assets. Once the Treasury redeems a bond owned by the Fed, the Fed has cash but cannot re-issue the cash except by buying high quality assets. Common sense.
    Sep 22 12:04 AM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    If you've had Mishkin text book since grad school, then you can find the page and verify that the wikipedia author didn't make a transcription mistake, or quoted the wrong source. Or you lost the book.
    Sep 21 11:51 PM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    << If government bonds that have come due are held by the central bank, the central bank will return any funds paid to it back to the treasury. Thus, the treasury may 'borrow' money without needing to repay it. This process of financing government spending is called 'monetizing the debt'. >>

    Sounds like the crackpot Warren Mosler, or some other idiot who doesn't know what they're talking about.

    Who did you quote?
    Sep 21 11:39 PM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    << Neil, I quoted Say. >>
    1.) No, you quoted Wikipeidia.
    2.) Like I said earlier, that's not all that Say said.

    << I don't even know what your point is ... >>
    Not surprising, not my problem

    << You would rather take all accepted terminology and redefine it, and expect others to use your redefined terminology. >>
    1.) I used your terminology for monetization and showed that it's a meaningless cliche.
    2.) There is a definition of Say's Law that says more than your feeble wikipedia quote, or your superficial jingle: "supply creates it's own demand"

    It's not unusual to be blind to one's own ignorance. Myself included, that's why I try to keep an open mind, and that's your invitation.
    Sep 21 09:49 PM | 1 Like Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    << That, actually, is not true. The monetary base will only shrink if the Feds sell the bonds back to the market. >>

    I'm absolutely sure you're wrong about that. Is there a link or a book or some logical train of thought that can demonstrate that it is true, other than your unfounded say-so?

    If you read my 21 Sep, 11:17 AM post in its entirety, you might be convinced that I'm right.

    Alternatively:
    Can you explain how the Fed reduces the money supply (or monetary base) by selling bonds? I think I could convince you that redemption does the same thing by starting at that point. But first, you really have to know how sellling a bond reduces the money supply (ceteris paribus).
    Sep 21 09:18 PM | 1 Like Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To The Social Scientist

    Thanks. I hope my explanation (21 Sep, 11:17 AM) leaves no doubt that Macro Investor is mistaken.

    Caveat: I wrote a little too quickly, I should have said "monetary base" instead of "money supply" or sprinkled "ceteris paribus" (all other things unchanged) liberally thoughout.

    Good catch, thanks.
    Sep 21 08:57 PM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    << As for debt monetization, of course there is no debt monetization if the Feds sell the bonds. But the Feds plan to - and are on record as to their plan - hold the bonds to maturity. That's clearly debt monetization. >>

    → “monetize” and “monetization” have no special meaning. Decades ago they did, but today they do not. They are merely clichés that refer to the fact that the Fed buys assets to increase the money supply. (Sales of said assets are ignored by said clichés.)
    → The Fed uses reverse repo’s to allow the Fed to hold T-bonds (and/or MBS) to maturity while reducing the money supply as needed. IF the Fed sells bonds before redemption (to reduce the money supply), the Fed will incur large losses, which creates unbacked money in the economy. Even if the Fed successfully avoids realizing losses, there are unrealized losses that could conceptually cause the Fed to be judged insolvent (defined as liabilities being greater than assets) by our trading partners, or U.S. politicians with an axe to grind.
    → (This is because the Fed drove up bond prices during QE, and thus most bonds have a high basis. When interest rates rise, the values of those high-priced bonds fall, creating unrealized losses. The Fed will minimize realized losses (and minimize unbacked money) if the bonds are held to maturity, which is when the market value = 100 = face value. By the way, MBS have the longest maturities. And long maturities get hurt more when rates rise, and MBS get hurt more than a pool of T-bonds of similar maturities. That’s because when rates rise, homeowners tend to keep their low rate mortgages.)
    → The average maturity of the Fed’s bond portfolio was about 5 years back in 2007. After QE, the Fed’s average bond maturity (including MBS) is about 10 years.
    → I said “conceptually” above, because the Fed’s balance sheet is not presented on a “fair market value” basis. Unrealized gains and losses are “off balance sheet” but duly reported in a schedule provided by the Fed. Unrealized gains of roughly $300 billion 2 (?) years ago, have been steadily falling. I stopped tracking it right before it went negative.
    --> I’m not sure if unrealized gains on the 260 million oz are offsetting the reported losses or not, but they should be, in my opinion. But the price of gold has also been falling.
    --> If there’s someone to ready to take-up Ron Paul’s quest in Congress, they could have a field day lambasting the Fed. Rand Paul is a likely candidate. (BTW, I believe Rand was named after the author/philosopher Ayn Rand, who wrote Atlas Shrugged, and attended Greenspan's 1st swearing-in ceremony.)

    << There is no mystical quality in the Treasury selling directly to the Feds - that's a minutiae. The end result is the same. >>
    → Minutiae is your opinion. And your opinion does not explain why it is illegal for the Fed to buy directly from the Treasury. (Just read my entire 21 Sep, 01:26 AM post, and do so slowly.)

    << You seem to claim that QE is just regular business. >>
    → It is now. Do you really think it will never be used again? Do you think this was the first time it was ever used?

    << Then why are you and other doom and gloomers so agitated about it? >>
    → I’m not convinced we’re going to hell in a hand-basket, but if you don't recognize any QE risks, then I have to wonder who pulled the wool over your eyes. There is no free lunch.
    Sep 21 05:19 PM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    << In other words, supply instantly creates its own demand. That's total BS. I will leave it at that. >>

    Again, you have reduced "Say's Law" to the superficial jingle I mentioned in my previous post. A superficial jingle is, by definition, horsefeathers.

    You have beaten a straw man argument. Congrats.


    << I am sure you will try to say that you know Say's Law better than Say. >>

    A few weeks ago, I provided a rendition of Say's Law that you now chose to ignore; presumably you cannot remember anything beyond a 6-word jingle.

    I don't think J.B.Say ever labeled anything "Say Law". I believe it was his followers who tried to erect something in his name, perhaps that's why there's different opinion on what Say's Law actually is. Just my guess.
    Sep 21 03:14 PM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To the Social Scientist

    << I asked [him]… where the money would go if the Fed did not roll-over their Treasury debt. >>

    The redemption of any bond is treated like a sale of that bond from the bond-owner’s point of view (but not necessarily from the bond-issuer’s point of view). The Fed reduces the money supply by selling bonds. The Fed increases the money supply by purchasing bonds.

    If the Fed receives the redemption as “physical cash”, the Fed must place the cash in it’s vault. Vault cash is well known to NOT be part of the money supply. But technically, the cash could be reported as an asset, if and only if the “FRN liabilities” of the Fed have not been already reduced by the redemption. What are “FRN liabilities”?

    If you look money creation from the debit & credit point of view, money is always a liability of a bank. Every dollar bill (look in your wallet) have the words “Federal Reserve Note” on the top-center of the front-side, evidencing the Fed’s liability because a “Note” is a debt. But it’s an asset to you if you own it, which you do, since it’s in your pocket.

    If the Fed comes into ownership of a dollar bill (ie, via a redemption of a bond), then it’s an asset owned by the Fed … but it’s also a liability of the Fed, which means it should cancel itself out. (Same as if you had written an IOU to your brother in law to buy a car. When you re-pay your brother in law, he gives returns the IOU to you. You can either destroy the IOU, or try to re-use it to buy another car, assuming you can find someone to accept it. If you’re successful at re-using the old IOU, you could argue that your IOU is a form of money; If not, it’s just an “piece of paper” that few people are willing to accept in exchange for something of value.)

    << But Macro suggests they will give it right back to the Treasury. >>

    Macro Investor is simply wrong when he says “they will give [the proceeds of a bond redemption] right back to the Treasury” … Remember, redemption proceeds are comprised of a small amount of interest and a large amount of principal.

    If the Fed did send the principal back to Treasury as described by Macro, the Fed would have issued money in an illegal manner. (Such redemption principal returned by the Fed to the Treasury would be “unbacked” money.)

    If the principal received by the Fed from a redemption is in the form of “physical cash”, the “physical cash” can be re-issued by the Fed’s purchase of another T-bond, or MBS, or other qualified asset, but that’s not at all what Macro described.

    (However, in today’s world of electronic debit and credits, there’s virtually no “physical cash” involved in a redemption, as creating new money out of thin air is more efficient than accounting for cash received, placed in a vault and then re-issued.)

    << … but he is right that it could happen. Did it happen after WW2 when the Feds owned a lot of Treasury debt and the Treasury steadily paid it off? >>

    No, he is not right that it “could” happen. No, it could NOT happen unless laws were broken.

    No, it did not happen after WW2. Back in those days, all we had was “paper money” so the paper money was reused until it was worn out. The Fed re-issued the principal (redeemed by the Treasury) by purchasing more bonds on the open market, but not purchased directly from the Treasury.

    << The implications of the Fed returning that money to the Treasury are unfathomable … >>

    Don’t worry, Macro is simply wrong, wrong, wrong.

    << … but it would mean that the Treasury could greatly reduce their deficits or run a surplus. >>

    No, think about it. If it principal were returned to the treasury, the Fed would have issued “unbacked” money, and the money supply would have grown faster than it did, and produce inflation quicker than it did … but only if the Fed allowed the inflation to persist.

    We’d have inflation quicker than we actually did have inflation, but whether or not the Fed would have acted upon that quicker inflation, and to what extent, can never be known.

    We only have inflation when the Fed allows it, or if some how the Fed has rendered itself impotent to stop it, such as too much QE, or not being an independent entity as it has been since the 1950's.
    Sep 21 11:17 AM | 1 Like Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    << Neil, How many times do I have to teach you how monetization of debt works? When the bonds are paid off to the Fed, the Fed in turn turns around and deposits that money back in the Treasury. >>

    Mac, your post above was just plain wrong, and hardly responsive to anything material in my previous lengthy post, so I assumed this was some nuance you erroneously thought I missed. So, taking your implicit lead regarding nuance, I explained why ‘principal’ is not returned to the Treasury by the Fed.

    Then, rather than admit your non-nuanced oversight, you double-downed with renewed vigor in a woefully non-nuanced retort:

    Your retort: << Monetizing debt is a two-step process where the government issues debt to finance its spending and the central bank purchases the debt, holding it until it comes due, and leaving the system with an increased supply of money. >>

    Mac, that’s not news to me, nor anyone else, and you’ve left out some mission-critical details, which belie your state of cluelessness.

    Yet again, you're relying on a superficial description after posting assurances that “debt monetization [is] a well understood process”, similarly as you previously bastardized Say’s Law as a superficial jingle, “supply creates its own demand,” purposed as the straw man for you to knock down with relish and zeal. Never mind that Say’s Law is a bit more robust when stated in full.

    So, let me “nuance” your response (yet again) because the vagueness you wallow in makes others vulnerable to your disingenuous misinformation.

    In other words, the torture starts here:

    "Monetization of the debt" used to mean strictly that the Central Bank was buying bonds directly from the government's Treasury. Monetization in this context has always been illegal in the USA because there can never be an arm's length transaction directly between the Fed and the Treasury, obviously because both are agents of Uncle Sam.

    There may be countries where “monetization of the debt” is either legal, or was done in spite of the law. In this case, the problem is that any agreement "struck in private" directly between the government's Treasury (arguably the biggest seller of bonds) and the central bank (arguably the biggest buyer of bonds) can never impact, nor be impacted by movements in "the current market price" and therefore there's a distinct potential to disrupt the bond market. Need more?

    The "market price" is determined by all interested market participants as each has the opportunity to make competing offers to buy or sell in the market, basing their decision on what they can see going on in the market, like the current price moving up or down. That's how market prices are determined (i.e., reactions of participants competing as buyers or sellers), and that's how the market price "clears the market" i.e., equating demand and supply (at the market price).

    Because Uncle Sam and the Fed are lawfully required to sell or buy T-bonds in the public bond market, all market participants can compete as buyers or sellers, and competition within the market determines the market price, which clears the market (meaning no excess demand, no excess supply).

    Some people (especially those following Warren Mosler MMT or Cullen Roche MR) overlook the simple fact that Treasury Auctions have always been successful because the Treasury is literally forced to pay higher interest rates if demand for T-bonds is too low to buy all the bonds that the Treasury must issue. After all, the Fed is NOT always a buyer.

    (The Fed can buy bonds in the bond market with “newly printed money” to lower interest rates, until inflation results from a bloated money supply. But inflation only occurs when demand is strong enough to outstrip supply, or there's something holding supply down, such as high taxes or supply shocks, which can result in inflation and stagnation, a.k.a. stagflation.)

    CONCLUSION
    In today’s parlance (as you use it) “monetizing the debt” has nothing to do with the Fed buying directly from the Treasury. This renders "monetization" as a toothless old cliché that has no real meaning in our economy.
    After all, it refers to nothing more than the well-known fact that the Fed buys and sells T-bonds, in the bond market, in the ordinary course of business, as well as in the extraordinary course of business that we call “QE.” Nothing to see here folks, nothing illegal, nothing untoward, move along.
    Furthermore, “monetizing the debt” subtly ignores the well-known fact that the Fed also "monetizes" mortgage backed securities (MBS).

    In other words, in today's parlance, the Fed monetizes not just Uncle Sam’s debt, but commercial debt as well. In fact, every asset owned by the Fed can rightfully support statements such as -

    “The Fed monetized a lot of U.S. Federal Debt” and
    “The Fed monetized a lot of U.S. Mortgage Backed Securities” and
    “The Fed monetized 260 million oz of gold (50% held in Ft Knox)”
    So, pick your poison.
    (Yes, I'm vaguely aware that the Fed does not own the gold per se. The Fed only has certificates representing 260 million oz of gold, which is held by the Treasury, which bars the Fed from selling any of it. My conclusion that the Fed can claim "constructive ownership" of the gold, is based on the simple observation that the Fed includes the 26 million oz of gold on it's balance sheet at $45/oz.)

    Your obsession with “monetizing the debt” is worrisome because it suggests you’re missing the big picture: the Fed's monetizing of anything is meaningless in today's context that you’re using it in.

    P.S. -

    << the central bank purchases the debt, holding it until it comes due, and leaving the system with an increased supply of money. >>

    Two more mistakes in the quote above:
    (1.) No central bank holds every bond to redemption, and
    (2.) any bond redeemed, or sold, contracts the money supply, not "leaving the system with an increased supply of money."
    BTW, it is obvious now that your pants have fallen down to your ankles.
    Sep 21 01:26 AM | 2 Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Michael Clark

    Thanks for your support. On a tangential note, I was surprised to learn that Greenspan started his career as an accomplished musician, if I am not mistaken. How he then got into consulting and then the Fed is a real mystery.

    The mystery deepens by the fact that Greenspan, in his early consulting days, was highly critical of the Fed, and was a gold bug to boot.
    Sep 20 10:27 PM | 1 Like Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To RS055

    I was just playing with you. For some reason your post reminded me that at university I chose "Poetry" to satisfy part of my requirements. I presumed there was less reading, less homework, more time to study math. Big mistake. Poetry is dense with levels of meaning that you have to read, reread and research.

    That reminds me that as a math major, I was half in the school of A&S, and half in the school of Engineering, so when I graduated I was surprised to be literally given the choice of either a BS or a BA. Apparently, it doesn't happen often.

    And that reminds me that, years ago, I learned that one of the hardest pieces of information to unearth about someone is "where they went to school." It's harder than getting medical records, which is harder than getting someone's social security number. Years ago, my identity was stolen, the perpetrator did bad things, the FBI interrogated me, clearly assuming I was the guilty party, since the perpetrator knew so much about me, even setting-up false addresses (using apparently abandoned abodes near places that I frequented, as well as my ex-wife) for nefarious purposes. The FBI are not nice people, but they did give me a few facts about identity theft, inadvertently.

    And finally, NO, I'm not writing from jail.
    Sep 20 07:32 AM | 2 Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To RS055

    uh oh, Are you saying I should have been poetry major? Well, OK, may be you're right, perhaps it would've helped my ability to communicate my distain on several levels. (I minored in economics.)
    Sep 20 03:55 AM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor

    Actually, Mac, it is you who does not understand:

    The principal of the bond held by the Fed goes nowhere when it is redeemed by the Treasury. The principal literally ceases to exist, just as if the bond had been sold by the Fed prior to redemption, instead of being held by the Fed to redemption. Only the interest gets paid to the Treasury; the principal disappears back into the thin air from which the principal previously originated as "newly printed dollars."

    This is not the erroneous tripe that you're trying to teach:
    << When the bonds are paid off to the Fed, the Fed in turn turns around and deposits that money back in the Treasury. >>

    Think it through, my friend, and take your time.
    Sep 20 02:45 AM | 1 Like Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To Macro Investor
    To Michael Clark

    << Michael, You do realize that the trillions spent on QE are not tax dollars? How can you waste something that was created out of thin air? >>

    Actually, Michael Clark is spot on: He does have a good point that many people might overlook:

    Dollars were printed outta thin air and ended up being exchanged for newly issued Treasury Bonds, which must be paid off (by taxes) or rolled over.

    Sure we can keep rolling over the Debt, but not if it keeps growing and growing. So, the the trillions (spent by QE) bought bonds that must be paid off with taxes. We all can deny such logic, and drive the economy into the ground.

    Michael Clark said << The FED has paid trillions to keep interest rates down. We all will see if this worked when interest rates rise. >>

    Michael Clark meant "The FED has [printd] trillions to keep interest rates down. We all will see if this worked when interest rates rise."

    Macro said << Plus the Feds got tangible assets in exchange that pay interest. That's not really a waste, now is it? >>

    Yes, it certainly could be waste, but focusing on the interest earned by the Fed is clearly a waste of time because the Fed gives the US Treasury (nearly) all of it's profits.

    What the money was spent on will answer whether or not it's a waste; the payment of interest is a non-event.

    A waste of years in a slow recovery, a waste of misallocations due to an artificial interest rate, and/or a waste of dollars that must be paid back. Your choice.
    Sep 19 09:07 PM | 3 Likes Like |Link to Comment
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