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

    My previous comment was too hasty, I should have added this:

    When the Fed was conducting QE, the fair market value (FMV) of it's previously purchased bonds (i.e., before QE started, i.e., "pre-QE") rose as bond prices rose. But the Fed's pre-QE bond portfolio had an average length of maturity of 5 years, which means that today (nearly 6 years later) more than half of the pre-QE (low basis, i.e., low cost) bonds have been redeemed. These pre-QE bonds had unrealized gains during the period the Fed was engaged in QE.

    Over the last 18 months or so, the Fed’s unrealized gains on it's bond portfolio (which is arguably produced solely by the Fed's pre-QE bond portfolio) have been reduced from roughly a $300 billion unrealized gain, to a small unrealized loss. Don't worry, the Fed has unrealized gains on other assets. (For instance, the Fed's 260 million oz of gold are stated on the Fed's balance sheet at $45 per oz, but the market price of gold is much higher, like $1,200 per oz. And, of course, whenever the economy tanks, the market value of gold soars.)

    The Fed does not state it's balance sheet at fair market values, but the Fed does state it's unrealized gains and losses in a separate schedule. (An unrealized gain or loss = the difference between an asset's adjusted basis and and it's fair market value.

    (An easy example: A zero-coupon bond accretes value over time due to earned interest that is NOT received as a cash payment but is received solely as a "official calculation" of increase in value. The owner of the zero-coupon bond is required to report the interest earned as taxable income, and is advised to update his basis.)
    Sep 24, 2014. 09:22 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 The Social Scientist

    You’re spot on: the Fed’s Treasury bonds are assets which were exchanged for newly printed dollars. Thus, the dollars are liabilities of the Fed, evidenced by the words “Federal Reserve Note” on the front, top, center.

    Dollars created by the Fed are liabilities of the Fed: if Fed assets are reduced, while liabilities are unchanged, yes sir, that could spell ‘insolvency’, unless the Fed’s capital (i.e., equity) can cover it. Over the last 18 months or so, the Fed’s unrealized gains have been reduced from roughly $300 billion, to a unrealized loss. But the Fed has other assets.

    But if the Fed had a plenthora of unrealized gains, the Fed is not allowed to “forgive” Treasury bonds, because that would violate the directive of Congress that each dollar created by the Fed must be “collateralized” (i.e., “backed”) by an equal value in high quality assets. In fact, Congress even defined which assets are good enough for the Fed to be permitted to buy. Otherwise, the Fed is barred from buying it.

    Furthermore, the Fed is clearly not allowed to “gift” dollars to the Treasury, because to do so would violate the directive of Congress that each dollar created by the Fed must be “collateralized” in full value.

    << The Fed is also paying interest on those reserves, and intends to raise that interest rate to enable a rise in short-term interest rates at a later date. The interest paid on those reserves presumably is earned as interest paid by the Treasury on their debt. >>

    That’s right. When the Fed’s expenses go up (to pay a higher interest on excess reserves, or IOeR) then less money flows back to the Treasury.

    << I don't understand what MI's issue is with the definition of monetization. >>
    Mac erroneously believes monetization occurs when the Treasury redeems a bond owned by the Fed, and the Fed voluntarily sends both the principal and interest to the Treasury. That’s illegal, as mentioned above. The Fed is only required to send the interest (after expenses) to the Treasury.

    Decades ago, “monetization of the debt” meant a transaction where a central bank purchased bonds directly from the government Treasury, thus 'blindsiding' participants in the public bond market. Since the government’s Treasury is usually the biggest seller, and the central bank is usually a big buyer (and seller) in the bond market, the transaction would not be at arms length (because each party is an agent of the government) and the agreed price cannot be a market parice because no other market participants have hada chance to compete as a buyer or seller and thus affect the resulting price. It can disrupt the market.

    Today, nothing illegal is going on, but the word "monetization" has been thrown around so much that its become a meaningless cliche. Perhaps meaning that "too much" money is being created; what it really means to whoever is saying it is hard to say since its a cliche. But it has obvious negative connotations to my ears.

    << Also forgiveness of the Treasury debt held by the Feds would be a technical default wouldn't it? >>

    I’m no lawyer, but I think not. A technical default would be the fault of the Treasury. Forgivence would be the fault of the Fed. But you’re right, if such forgivence was “forced” by the pending insolvency of the Treasury, then collapse could and probably would result. In other words, the Fed can’t fix it in that manner.
    Sep 24, 2014. 02:15 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

    I've asked you a number of questions, each of which you have brushed off and ignored.
    Sep 23, 2014. 02:37 PM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To RS055

    1. YES-YES- interest on Treasuries owned by the Fed is effectively returned to the Treasury. So effectively, it is zero cost debt to the US Treasury.
    2. ALMOST - If the Fed holds a bond to maturity, then upon maturity, the bond ceases to show up on the asset side of the Fed's balance sheet. The liability side of the Fed's balance sheet [FEDERAL RESERVE NOTES (FRNs)] is correspondingly also reduced. ["Reserves" refer to a commercial bank asset, and a Central Bank liability.]
    3. TOO-TRUE - Unless you believe that the total national debt is BEING PAID OFF ( extremely unlikely ), when Treasuries mature, the US Treasury will issue new bonds to replace the maturing bonds.
    4. ESSENTIALLY TRUE - If the Fed is done with QE for good, these new bonds will have to be bought by the market TO REDUCE THE MONEY SUPPLY AS THE ECONOMY GAINS STRENGTH (BUT REVERSE REPOS CAN REDUCE THE MONEY SUPPLY INSTEAD OF BOND SALES, BUT THAT MIHT NOT REDUCE THE MONEY SUPPLY (I JUST THOUGHT OF THAT)) - and the Treasury will no longer enjoy the effectively zero cost financing it did when the Fed owned the bonds. YES. (BUT IF WE AVOID INFLATION, THAT'S A BIG BONUS.)
    5. ENTIRELY AGREE - Whether or not you choose to call QE "monetization" is a linguistic quibble I will not get involved in. The Fed however, does not consider QE to be "monetization". MANY PEOPLE DISAGREE ABOUT WHAT MONETIZATION IS, BUT EVERYONE SEEMS TO AGREE WHAT QE IS.
    Sep 22, 2014. 07:52 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

    << So it is common sense now, Neil? This means you can't show a law that makes debt monetization illegal. Figures. And yeah, I have shown that it has been done in other countries, read up on India. >>

    Can't I? I've already found what I was looking for. I'm not here to do your homework for you, that's on you.

    India? You haven't shown squat. And if you ever could, what wouldn't that say about India? Your original point still stands? That's only true in the one place you control.

    You're the one slowly turning, not us. You're the one who was saying "this here's policy", but now saying, "it's real a possiblity". Yeah, that's a sleight of hand when we stand still and watch you backpedal.
    Sep 22, 2014. 05:38 PM | Likes Like |Link to Comment
  • The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy [View article]
    To RS055

    Come on, man, taste the Kool-aide. I'm finally realizing the beauty of Mac's monetization -- as soon as I saw those words you wrote "[the Fed wants to get] back to a normal balance sheet by allowing maturing securities to roll-off their balance sheet -- I realized how utterly futile our patheric mideval monetary world has devolved ... Mac's monetization is the sweet savings grace of the economy.

    We don't need no stinking bonds to trip us up. The Fed can just let a $1 billion in bonds mature on Monday, and send that $1 billion up on high to the Treasury players, and then my main man at the Treasury can take that $1 billion and and sq-sq-squeeze it through the wires to redeem another $1 billion on Tuesday. Sure, the Fed don't git all dat money, but no sweat, just rinse and repeat with a larger number and guess what, we'll have both the Treasury's balance sheet and the Fed's balance sheet ship shape inside of 5 years! No sweat, my man. Just swig of this Kool aide and we will all be swinging on easy street.

    Then I woke up.
    Sep 22, 2014. 05:13 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

    << "It would take an Act of Congress for the Fed to return the principal to the Treasury (forgive the debt). It is highly unlikely." Where did you get that from? >>
    Common sense. You gotta get you some. No one can do it for you.

    << 1) Debt monetization is real. >>
    Yes, and quite legal, but only as a toothless cliche, and no, not as you define it. (The wiki quote could be misleading innocently, merely because of sloppy writing, assuming your memory of reading the quote 35 years ago is accurate, meaning the wiki quote is a genuine accurate quote of Dr.Mishkin.)

    << 2) It has been done by other countries. >>
    Are you sure about that? I doubt that it's been done as you define it.

    << 3) It permanently increases the money supply. >>
    Now you're recognizing that it's unbacked money. Good.
    But unbacked money can be withdrawn by taxing or borrowing it out ofthe economy, as awkward as that sounds. It'd also make us look like a 3rd world nation.

    << 4) I personally know not of any laws that makes debt monetization illegal in the USA, but may be you guys do, and I will change my opinion on debt monetizatino once you show me that law. >>

    Whoa, I thought you said the quote was genuine.
    Sep 22, 2014. 03:29 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

    Monetizing the debt is not what you believe it is. Your whole argument rests on an unsourced comment in Wikipedia ... but now you report that the alleged quote is in the book? Great!

    Your previous command to read the book "cover to cover" actually suggests you're aware that the article cites the textbook, but not the page, nor chapter in which to find it.

    Yet, now you assert the alleged quote is in the book. If you found it in the book, please provide the page number. That would definitely make it worth my while to buy the book. And let me know what edition of the book I should buy, as there are 12 editions.)

    However, if you're just relying on your memory, please say so, because if my memory serves, you and I are roughly the same age and I've been out of school a long time. Remembering some passage from 35 years ago is either a great feat of memory or something else entirely.

    And my recollection is that there were only a few ways for the Fed to adjust interest rates: OMO, reserve ratio and, and, discount rate. However, surely I would have remembered "monetization" as you define it, because it's so wildly counter-intuitive.

    Your definition of "monetization" is not confirmed by Investopia.com or definitions found on the internet. So, it's a little early to be calling me mistaken, much less a liar.

    If I'm wrong about something, that doesn't mean I'm a liar. Lying is to disseminate false information knowingly.

    I still believe you're wrong and I'm right, but I'm willing to consider all possibilities, as crazy as they sound.
    Sep 22, 2014. 12:34 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

    << And don't want to consider what new measures the Fed may take. Makes sense. Ostrich syndrome works for you. >>

    Funny how you refer to "monetization" as one of the "new measures the Fed may take." Clearly, you didn't learn about it in grad school. When did you first hear of it?

    If 'monetization' really were a "new measure", it would have been splashed on the headlines, just like the IOeR. Funny, but I don't recall any such headlines for 'monetization' -- do you?
    Sep 22, 2014. 09:27 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 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."

    I wasn't asking you to check the law.
    I was asking you to check to see if Mishkin's alleged quote really is there, if you have the book.

    Do you have it or not?
    Sep 22, 2014. 09:20 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

    << Quote the law that says monetizing the debt is illegal. At least you understand (unlike RS) that monetizing the debt will increase the money supply. >>

    Please define "monetizing the debt" to be sure we're starting off on the same page
    Sep 22, 2014. 09:15 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

    << Neil, You are not buying the book. You know yourself, right? >>
    Very funny. I might. It depends on whether you're going to push it. Let me ask you 3 questions:

    1.) Did you really have Mishkin's textbook in grad school?
    2.) Do you recall Mishkin's (alleged) quote on monetization?
    3.) How long has it been since you read the book? 4.) Did you notice the wiki footnote cites the textbook, but not the pages??
    Sep 22, 2014. 09:08 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

    Do you still have Mishkin's "Economics of Money, Banking and Financial Markets" or not?

    You said you read it in grad school.
    Sep 22, 2014. 08:54 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

    I'm torn between your wikipedia quote and the quote from the NYFed, supplied by RS055. Gee, which would be more reliable? I choose this one:

    "Occasionally, due to portfolio guidelines or reserve needs, proceeds are redeemed, which reduces the size of the SOMA portfolio and effectively drains reserve balances from the banking system."

    Mac, if you're going to berate everyone who disagrees with you (which seems to be everyone) you ought to at least run through the logic of your position to show it make sense for the Fed to do that. (Which it does not.)

    For instance – you say “If the Feds monetize the debt (i.e., pay the principal back to the Treasury), then the money supply won't drop.” That’s true, and could happen if it were to be legal. But it begs the question “How can that not be against the law? And if the Fed can print dollars out of thin air, then who cares where it got the dollars to send back to the Treasury? Why should the Fed be limited to only sending dollars to the Treasury which the Fed received from the Treasury?”

    The line of thinking is Modern Monetary Theory (MMT) which has several adherents at SA (none of whom have a formal education in economics). MMT proponents have put MMT tripe into Wikipedia without disclaimers. Your Mishkin quote is probably just another example.

    I'm willing to bet a small amount at ruinous odds that the Mishkin book does not say what it has been purported to say.
    Sep 22, 2014. 01:26 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

    I'll think about buying the book.
    But if you already own the book, you have no excuse.

    The quote could be in Miskin's book if he's talking about unbacked money or some historical reference. Or the quote is poorly transcribed. Common sense says it's wrong, but I don't think you're up on common sense.

    Bu as you say, this is standard economics textbook material, so it should be discoverable in virtually any textbook, right?
    Sep 22, 2014. 12:26 AM | Likes Like |Link to Comment
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