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  • Will They, Could They, Should They? [View article]
    No - remember a deposit is a liability of the bank, against which they have to hold reserves. The reason that there are excess reserves is that the quantity of reserves expanded dramatically more than the quantity of deposits (and normally, with fractional reserve banking, it is the other way around).
    Oct 2, 2015. 12:44 PM | Likes Like |Link to Comment
  • Will They, Could They, Should They? [View article]
    That's not quite true. A bank can shed excess reserves by making loans that require reserves. When the Fed is paying a bank on those excess reserves there is a disincentive to do so. When the Fed is not paying anything there is no particular incentive or disincentive to do so. But if the Fed requires banks to pay for unused reserves, you betcha they will make loans.

    Consider this thought experiment: suppose the penalty rate was 100%. Any bank with excess reserves would have to pay interest equal to the reserves. Then the only way for a bank to survive would be to make loans, so that they were not excess reserves but required reserves. And the bank in fact wouldn't even care very much if the quality of the loans was very good - almost anything would be better than the penalty rate. If a bank makes loans that default at a very high rate, it would still be better than an automatic loss of 100% per annum on those reserves balances.

    It is an often cited "fact" that you can't change the level of reserves in the system as a whole. But that is wrong. In fact, the whole way the Fed operates on the money supply historically is to manipulate the level of reserves in the system - not the level of interest rates.
    Sep 30, 2015. 07:57 PM | 1 Like Like |Link to Comment
  • Credit Where Credit Is Due, Maybe [View article]
    Lowering IOER would tend to raise money GROWTH, but lower money VELOCITY. Low rates tend to lead to low inflation for this reason, unless money growth is so strong it overwhelms the velocity effect.
    Sep 25, 2015. 02:03 PM | 2 Likes Like |Link to Comment
  • Credit Where Credit Is Due, Maybe [View article]
    Well, that's sort of the case I have been making here for some time - monetary policy is ineffective when it comes to influencing real variables, both in practice and in theory. And in 2010 or so I made the argument that doing QE and then paying banks to hold reserves rather than lending was pointless (unless the purpose was to forcibly de-lever the banks, which it did...but I don't think that was the purpose). So ... you're not saying anything new.

    What would I do? Well, I make the case in my forthcoming book, but the bottom line is very simple: all the Fed can do in anything but the very short term is affect the price level. And that's all it should do. It is targeting a variable they cannot control - the unemployment rate - which has caused so much mischief.
    Sep 23, 2015. 04:16 PM | 2 Likes Like |Link to Comment
  • Credit Where Credit Is Due, Maybe [View article]
    I think they need to see a bit more evidence, but I suspect they will keep talking about tightening until a short time before they decide to ease. For some reason, this Fed believes that TALKING about tightening gives them credibility, so they'll keep that up even though right now it's really not in serious discussion. Of course, if PMIs and stock markets reverse then that may change and they may actually tighten, but I am still of the opinion that any tightening will be token.

    I think the chances of actually going back to the well on QE is not negligible, but the "negative dots" are interesting in this way: there are PLENTY of reserves so there is no reason to do QE. Instead, if the Fed wishes to stimulate then they ought to lower IOER to a penalty rate (something that I mentioned first in late 2010, or thereabouts, when QE2 started but there were still plenty of inactive reserves because of the Fed paying interest to keep them that way). But one of those two approaches is likely if the Fed becomes convinced that the economy is turning south. Historically-speaking, of course, the Fed tends to arrive fairly late to that conclusion so I don't expect QE very soon!

    Thanks for recording your recollection of my call! Sometimes it seems that people only remember the bad ones!
    Sep 23, 2015. 09:01 AM | 5 Likes Like |Link to Comment
  • Contour Map [View article]
    Sure. The reason is that historically governments (unlike corporations) don't stop honoring their debts. They merely print money to pay them. Government default is never necessary - and to my knowledge has never happened - when the government controlled the currency the debt is denominated in. (And if the default is in a different currency, it's not clear why it would be deflationary to the defaulting country at all.)

    So, historically speaking, heavy PUBLIC debt tends to result in inflation; heavy PRIVATE debt tends to end up in deflation.
    Sep 10, 2015. 07:37 AM | Likes Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    There are several sources of this disconnect.

    Part of it is old news and comes because the BLS measures the price of healthcare actually delivered by the hospitals and practitioners, and the proportion of that which is actually paid by consumers. In principle, these numbers should parallel over time - if doctors are charging 2% more this year, then your health care costs should rise about 2%.

    But when there are large changes in the cost of insurance, the pass-through is totally screwed up, and that's what is happening now. In practice people pay wildly different amounts and the massive changes in deductibles have made a difference as well. I pay about the same as I did a couple of years ago for insurance, but my deductible went from $500 to $2.5k, and I don't have the option for a smaller deductible within my budget because the ACA doesn't allow it for a plan that's actually priced somewhat close to what I was paying before. How do you pick up the value of that deductible change in a time of transition? It's really hard to do.

    So you're right, I think, and some people are paying lots more for health care in general. But the overall cost of healthcare hasn't risen a lot - it's just that most of us are being forced to shoulder more of it either directly, or indirectly in the cost of higher premiums. BUT this isn't really a higher cost for EVERYONE, because a bunch of people now pay lots less. It's really a transfer program, after all. Find the guy who now is getting his medical paid for. That guy has seen a 50% or 100% decline in the price of his insurance. You see? It all works out, if you're the guy the government favors.
    Aug 20, 2015. 05:54 PM | 1 Like Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    Well, all that is saying is that the TIPS market responds to energy movements in real time, which are reflected in headline inflation with a lag of about a quarter. It would be really weird if that DIDN'T happen. But what is also weird is the order of magnitude - inflation expectations embedded in 5y and 10y breakevens should have only a very small impact, since a movement in energy prices over the next month or two is almost sure to mean-revert over a 5-year period. But in practice, those moves are very pronounced - evidence the plunging breakevens right now, on the back of energy prices which will have almost no impact on 10-year inflation outturns. This means that when we hedge out the energy component, market expectations of core inflation are very correlated with energy. Which is stupid.

    The market way overreacts to energy movements, and this creates trading opportunities that in fact drive some of our strategies.
    Aug 20, 2015. 05:43 PM | Likes Like |Link to Comment
  • How Far From Normal Are We? [View article]
    Well, the supply of credit is a function of at least two things from the bank's perspective: one is the spread earned between the interest rate on the loan (which would probably go up if Fed funds went up; assuming we posit that IOER stays at the prior level), and the other is the general quality of credit (reflected in the bank's expected underwriting loss). So if credit quality improves, and spreads increase, both of those should help the transmission. However, credit quality has already improved a fair bit without M2 accelerating. This could mean that the spread is much more important, at least at low default levels, than the expected default risk (or that banks price the loan based on the default risk so that to them there is no added cost, at least perceived).

    But the bottom line is that we don't really know, because we've never been awash in reserves like this before.
    Aug 20, 2015. 05:40 PM | Likes Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    Good questions.

    1. Most economists today are Keynesians, or NK, or some version of that and believe that deflation or inflation is caused by output gaps or negative output gaps. There is not only no empirical support for this notion, but copious evidence that it is completely wrong (e.g., in the worst crisis in 100 years, core prices not only didn't go into deflation but barely slowed, outside of housing)
    2. I assume the focus on PCE is just because they don't want to tighten. Median inflation is 2.3% and has been rising, which is equivalent to about 2% on core PCE. Core PCE (and core CPI) have been influenced lower by one-off declines that pull those measures (which are averages rather than medians) lower. I ASSUME that the Fed knows this, since the better measures (trimmed mean, median) both signal that inflation is at target, and has been at target for a while.
    3. Absolutely no empirical reason. Academic arguments have been made for as little as 0 and in in the early 1990s some argued for "moderate" inflation a bit higher than 2%. It was originally a matter of artistry. Now the problem is that they can't change their official target without major repercussions (another reason the Fed shouldn't tell everyone what it wants to do). Statistically, 1.5% is indistinguishable from 2% but for "credibility" the Fed needs to get their preferred measure there, eventually.
    Aug 20, 2015. 09:20 AM | Likes Like |Link to Comment
  • Summary Of My Post-CPI Thoughts [View article]
    That's true. But they're both pretty bad forecasting mechanisms.
    Aug 19, 2015. 05:07 PM | Likes Like |Link to Comment
  • How Far From Normal Are We? [View article]
    I am glad so many people say I am an idiot, wrong, etc. It clearly means we can't be far from the breaking point since being lonely is a sine qua non to there being a turn. Of course in retrospect everyone will claim to have seen it coming and probably to having been positioned correctly.
    Aug 17, 2015. 09:21 AM | 3 Likes Like |Link to Comment
  • How Far From Normal Are We? [View article]
    An additional thought based on something another reader posted at my own site. He questioned how the functional form of those curves can be right, if they are going vertical in a way that suggests commodities need to be infinite (in 9.8) if commodities are to be where they are. It's a good point and it is a great warning of the danger of just picking functions that give good R-squareds! The problem is that I don't know what the functional form SHOULD be.

    With 9.7 my suspicion is that it is linear, with commodities prices being too high when the S&P was 500-1000. Then the 1000-1500 area, which looks pretty linear to me, is probably roughly right, and the 500-1000 area shows commodities too high for the level of stocks. Which would make sense when stocks were out of favor in an environment still prone to worry a lot about inflation. Similar answer for 9.8, except that the x axis probably ought to be M/Q, rather than M, which would flatten out the chart.

    I might make some adjustments to the charts in the actual book.
    Aug 14, 2015. 08:43 AM | 1 Like Like |Link to Comment
  • Little Trouble In Big China [View article] the same logic, those commodities became cheaper for US so we should import MORE. And since our economy is substantially larger, using your reasoning that should be a net POSITIVE for commodities.

    Hmmm...I think you're confusing real and nominal quantities!
    Aug 12, 2015. 02:41 PM | Likes Like |Link to Comment
  • Little Trouble In Big China [View article]
    No one, of course. But the point I made above is that if it's 10x as much devaluation, it would still be close to rounding error. And I am doubtful they want to devalue by 20%.
    Aug 12, 2015. 10:30 AM | Likes Like |Link to Comment