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  • Is Inflation Next? [View article]
    Freed0m, the Treasury should have an account at the Fed, but it's not counted in the money supply. I believe it generally has a balance of about $5 billion. When the government borrows and spends, reserves are transacted on the Fed liability side to and from this account. That is how the government spends, the Fed debits the Treasury's account and credits the banking system in same way it debits and credits banks during the check clearing process.

    In order to accomplish this, the Treasury must have an account, too. When the government issues debt, our bank is debited and the Treasury is credited. This all happens on the Fed's liability side. Then a bond is issued which is a Treasury liability directly (bypassing the Fed) in much the same way holding cash is a Fed liability (bypassing the bank.)

    The process is a little more complicated as taxation, borrowing, and spending affect the level of reserves. Reserves sloshing back and forth between the commercial bank accounts and the Treasury's account (not part of the money supply) causes the level of reserves to change affecting the funds rate. So, the Fed stores reserves in the banking system until they are called upon spending. Reserves fall on that 'call' and are re-credited on spending keeping the level of reserves pretty much constant over time. It's a juggling act, but the Fed is pretty good at it.

    "The US government has to sell its Treasuries to other entities first before the Fed can buy it." Sure. IMO, this is how the government avoids direct monetization of US debt. Yea, they sell to the private sector before the Fed can buy issued debt.
    Apr 23 10:12 PM | Likes Like |Link to Comment
  • Revenue Pattern For McDonald's Matches That Of The Entire S&P 500 [View article]
    "What the Fed can't do is create money..."

    Well, yea, that is kind of what I am saying. It cannot create money or any other net financial asset. What I meant by "previously held dollars" would have been our own deposits. Actually the reserves reserved against our deposit. The Fed did not need to recreate them in order to complete the bond sale, they already existed in the banking system, transferred to the Treasury's general account, then re-spent back into the banking system. The buyer is issued a bond.

    On Fed buying, the Fed must recreate some reserves that once sat as our bank assets in order to credit our demand deposit - to 'repay' our previously held cash. I guess liquefy our deposit is a better way to say it since our deposit still exists as a savings account. Those reserves are exchanged for a bond - an asset swap - in the process. So, it created nothing new.

    The Treasury, on previous debt spending, actually created the additional money as a bank liability credited to the banking system on spending. Borrowed reserves are spent back into the banking system through it's deficit when it bought the bond in the first place. This increase in debt actually created new money for the recipient of that spending while the bond holder's money never disappeared. It simply earned interest until the Fed made it liquid again.

    "The Fed had to get $55 billion from somewhere...Only Congress 'gives birth' to federal reserves ... not the Fed."

    I see your point, but it is the Treasury that creates new money through debt spending with the blessing of congress and still per the constitution. The Fed merely changes the duration of our holdings and accommodates the term structure of interest rates demanded by the free market per it's mandate from congress. All bond sales are voluntary free market decisions. The Fed simply creates reserves from thin air to do so, and as an independent entity can do so without congressional approval - since it does not create new money.

    Okay, cheers.
    Apr 23 09:31 PM | Likes Like |Link to Comment
  • Revenue Pattern For McDonald's Matches That Of The Entire S&P 500 [View article]
    Mitch, I am honored. Thank you.

    Ryan, yea, this is hotly debated. I guess it all depends on how you see it.

    To me, the Fed expands it's balance sheet - the place where federal reserves are born - and they swap them for an existing asset paid for by previously held cash. Your simply getting your money redeemed early. A bond is a financial asset, so is cash. One just has a longer term than the other. So, nothing new is created, only the duration of existing - private sector - holdings changes.

    Government liabilities do not change. So, no new financial holdings are created, the Fed really didn't print anything new. In fact, the Fed cannot increase net financial holdings, only alter their liquidity - which is what easing is.

    In effect, the Fed (being the government's bank) is redeeming the government's debt prior to maturity at least as far as the holder is concerned. They are a savings account, really, as opposed to fiscal funding. The Fed holds the government's debt, which is an interesting thing, and the Treasury is still liable as it pays the Fed. The Fed then covers it's expenses and remits most of the Treasuries payment back to the Treasury. When the Fed holds government bonds, it's almost a wash.

    So, in effect, Fed held government bonds are out of circulation and not subject to market pricing because they were exchanged for a set number of federal reserve (notes.) The price on the Fed's balance sheet (probably) cannot change, otherwise the Fed would be constantly changing the amount of reserves to match the bond price.

    If you sold $1000 bond to the Fed, then the price went to $980, the Fed would bill you for $20 to reduce the size of it's balance sheet? Or visa versa? I doubt it, once it's sold it's price in federal reserves is set as is the balance sheet. Of course it buys at market rates, which is why the Fed does not manipulate the market's demand for cash - it accommodates it. All bond sales to the Fed are voluntary.

    So, I see it as creating nothing new, only enhancing the liquidity of government liabilities (the source of our thin air money: bonds and federal reserve notes) and this influx of cash simply lowers the interest rates based on private sector supply of and demand for cash.

    The Treasury (congress, really) and the Fed work together to supply the nation's cash. Well, and to enable the banks who create the vast majority of /our/ money needing to clear from bank to bank and for us to hold cash (high powered money in our wallet.) But, even then, banks do not need reserves at all to create loans, they just need enough to ensure the payment system functions.

    I'm rambling...
    Apr 23 03:15 PM | Likes Like |Link to Comment
  • Revenue Pattern For McDonald's Matches That Of The Entire S&P 500 [View article]
    I cannot say I disagree with you.

    QE money "printing" (if you must, but it's really just an asset swap), has been the one legged fireman trying to kick down the door. Investors can take their newly printed money and seek higher yielding risk (or reinvest into lower yielding safe assets.)

    Excess bank reserves do not necessarily translate into currency in circulation for the remainder of lower and middle America whose prime asset is non interest bearing home equity and whose revenue stream is a job. With currency in circulation, I'd bet McDonalds would earn more domestically and could even afford the proposed higher minimum wage.

    That being said, I still support the Fed's efforts to (re) make money available for investment and government borrowing. The Fed is pretty much the only game in town and they have a blunt policy tool - some call it a hammer. That's about right, and it has to hammer it's way through the financial system to reach main street mortgage rates.

    As of this point in time, though, I think they are pretty much overextended (not out of bullets, just overly easy on the free money unconventional easing). I think they see this too and are tapering because of it. Forward guidance means loan creation and low rates across the yield curve. That should be fine going forward.

    The prolific US consumer has been left out of the stimulus, sorta. I mean, not everyone is struggling. I know some wealthy retired baby boomers, often two earner households, that are quite well off (and complaining about taxation), but I also know of a lot of youth barely making it in a meager wage as cost push inflation tries to restart our own economy. The economy is not dead, it's just sluggish. This fiscal drag could easily be lifted as Bernanke and Yellen both speak to.
    Apr 23 08:51 AM | 1 Like Like |Link to Comment
  • Is Inflation Next? [View article]
    "The US government can't just issue unlimited IOU's. Every dollar of IOU's has to be bought by someone for the US government to receive the cash."

    I don't think that's entirely correct in principle, however it is in practice. If the government needed $700 billion for a bailout, it could (but does not) direct the Fed to credit it's account and spend the money as approved by congress. The US government is "special" only in that it is the currency issuer. Now, it does tax and borrow because it is sound fiscal practice, but it really does not have to. Bonds and taxes are monetary in nature. This is the inherent nature of having a printing press.
    Apr 23 08:37 AM | 1 Like Like |Link to Comment
  • Revenue Pattern For McDonald's Matches That Of The Entire S&P 500 [View article]
    What does quicksand mean in your metaphor? Debt? Yea, the entire economy, globally and domestically, is built on debt. That's how money is created. Even a paycheck was probably someone's debt somewhere back down the chain of events. That's just how a fiat currency is created by the banking system. Even the government must (by law) issue debt, or at least Fed liabilities, in order for the banking system - rather the payments system - to function.

    This was true under the gold standard, as well. Gold was a bank asset and our money is a bank liability, today reserves backed by government debt are bank assets. So, unless everyone can dig up some gold, deposit it, and trade it, that's pretty much how the system works everywhere. Even Antal Fekete's rather ingenious self clearing gold based monetary system based on credit trading at a discount (rather than debt trading at interest) is a debt based system. That's what credit is. We owe someone and if our credit is worth something it can be traded as money.

    But if the consumers are so "exhausted" they cannot throw down a Big Mac, then the economy just does not have enough currency in circulation (probably velocity being too low and loan growth sluggish, which makes sense coming off a debt crisis.) What is needed is currency in circulation.

    There really are three ways to make that happen: export revenue to return our own dollars, commercial bank credit expansion (loans, of course), or government deficit spending (as the monopoly supplier of the currency.) So, which of those three do you think are really healthy in terms of generating cash? The US is a net importer, loan growth is sluggish on modest wages and finicky unemployment, and the government is simply worried sick over it's own debt. So, none of those are really healthy enough to stimulate domestic growth.

    That being said, many dollars do return home after consumer spending abroad. However, most of those foreign savings (after foreign expenses, like payroll) return to the US financial sector (and US government securities) to earn interest. The money then trickles down into more debt (credit availability), which isn't really happening, mostly benefiting the consumer through housing.

    It's likely QE dollars spend a lot more time circling the globe looking for returns in the form of a global carry trade instead of coming home in the form of exports or low yielding financial assets. So, they way to fix that is to sell the Empire State Building, I suspect already owned by Japan and hope Japan spends those dollars domestically (said generally to express an idea.) Whatever the case, our QE dollars need to translate into currency in circulation to stimulate consumption and investment.

    Barring that, the government will have to step up and borrow some of that cash and spend it directly into the hands of the folks who will consume. Yes, the government will owe a lot of people a lot more money, but the task of supplying the large economy with a sufficient money supply rests with the currency issuer: either through stimulating bank lending at low rates or direct deficit spending.
    Apr 22 10:09 PM | 2 Likes Like |Link to Comment
  • The Event That Will End The Bull Market [View article]
    "Reserves aren't actually for lending, they're a back stop to avoid bank runs."

    And they serve to grease the payments system. That's really all they do, ensure the payments system functions. The Fed will always accommodate it's funds rate (demand for reserves) so long as inflation remains anchored. Banking is no longer reserve constrained, nor really dependent on reserves for lending. They can always get reserves and create as many loans as they see fit. Right now they already have plenty of excess as a consequence of the Fed's asset purchases. Banks are, instead, constrained by credit worthiness (risk) and capital requirements.
    Apr 22 11:00 AM | 2 Likes Like |Link to Comment
  • The Event That Will End The Bull Market [View article]
    "It's the next big bailout you will be asked to fund by our friends in Washington DC..."

    Who says our taxes fund anything? How is it we bailed out the banks while under the Bush era tax cuts? The government neither has nor does not have any money. It has as much as it needs, when it needs it, and when congress approves of it. It does need to be matched by taxation and borrowing. So, I guess we "borrowed" some money to bail out the banks, but that simply leaves someone previously holding cash with an safe (as in will be made whole) interest bearing savings account.

    Truth is, if you follow the money, the government never borrows or funds itself with our (nor China's) money. On taxation our demand deposits are simply debited into non existence (to the amount of the check) as the Fed debits your bank's reserves and a bond is a timed savings account with your money in it earning interest. You just cannot spend it, but you'll "get it" back as soon as the Fed credits your demand deposit, at the direction of the Treasury, with bank reserves as the bond matures.

    In fact, using double entry accounting it's totally impossible for a bank liability (your money) to be made a Fed liability through the payments system. The Fed debits bank assets (reserves), not bank liabilities (demand deposits.) All of this funding is simply the Fed transferring it's liabilities backed by USG debt assets. Bank assets are Fed high powered money, that's what get's "borrowed" and "taxed", as opposed to bank liabilities which are your money.

    Your money is either saved or debited. It pays for nothing the government spends on: bail outs, health care, roads, bridges...nothing. Not any more, not since Nixon closed the gold window.
    Apr 22 10:50 AM | 4 Likes Like |Link to Comment
  • The Event That Will End The Bull Market [View article]
    "If you don't grant power to QE, then why are you a supporter...And if the Fed agrees with you that QE doesn't really have much of an effect on markets, then why so cautious withdrawing it?"

    The Fed must accommodate the market's desire for excess cash and for lower borrowing costs (conventional easing) and to make cash available to re-balance into risk (QE and also at lower longer term rates.) This is all market driven, the Fed accommodates rather than manipulates.

    So, a huge stash of cash is lying in wait for something to invest in for a return. That's fine, that should means factory capacity expands and folks get hired. That hiring, in turn, puts money into circulation and aggregate demand drives growth and inflation. Trouble is, even though the US has been growing, albeit sluggishly for years, there's not enough currency in circulation to fuel a robust expansion especially after a credit bust.

    This is where the government comes in. The government should be borrowing at low rates not for the sake of the meaningless deficits, but for the sole purpose of putting money into circulation through productive asset development or even through some socialist welfare, such as unemployment benefits (until the economy can produce enough jobs and bid up wages.) That money in circulation is stimulus and it's missing from our recovery.

    Hot potato money goes where the growth is or, at least, where the returns are - where it get's treated best. Corporate expansion and credit availability have occurred, but more so through the global dollar carry trade into regions where growth and returns exist than domestically.

    So, the whole idea of bringing borrowing costs across the yield curve down, making cash available (the Fed holding the government's debt, the very debt it owes to itself), and the government borrowing and re-directing some financial system cash back into the economy directly makes sense. It's just not working as intended due, primarily, to the debt ceiling debacles and the falling deficit. The government is afraid of it's own debt shadow.

    As a result of corporate expansion and revenue from global growth, and probably stock by backs, equities might be a bit on the high side in terms of P/E, but I seriously doubt they are dangerously overvalued. Free money does not necessarily mean mal investment or QE inflated bubbles, not for savvy investors looking for a return. There might be some QE induced pressure on asset prices, but I doubt it's significant. Apparently the Fed does not think so, either.

    And that corporate expansion will not dry up unless credit conditions change in global markets. The US will remain accommodating for a long time, including longer term mortgage rates. EM might take a beating when global liquidity, at least the "free money" QE, tightens a bit - globally. That will likely happen with a huge impact when the Fed slowly raises rates by deploying it's reverse repo facility. Rates will rise slowly, however (probably) a lot of excess liquidity will have to be mopped up almost overnight.

    That's all the Fed is doing is tapering the "free money" portion of it's policy easing. It will rely on forward guidance which means we can still borrow at low rates fueling expansion where ever risk and reward are alive and well - like in the EMU so long as Draghi can keep safe peripheral debt in the face of German pressure against OMT and "whatever it takes."

    So, as long as investors are still seeking risk at low rates, the global economy should be fine. One caveat, though, is how EM reacts to the slow down of free money. The Fed has not pulled any money already circulating globally, it's simply reducing the amount probably because it has done all the accommodation it intends to (thanks to the US government not needing to borrow or spend much, apparently.)

    We just need those dollars to return home and do more work domestically instead of circling the globe. Easing and unconventional easing, beyond recapitalizing our own banking system, is the right policy. It's just all the actors are not engaged, they are in gridlock. Yellen, a dove apparently, already told (insulted really) congress to "do no harm to the recovery."

    As a result, QE has been a huge buffet of spaghetti thrown against the proverbial wall leaving the US to lick the stain. Believe it or not, it's largely due to our own government not borrowing, courtesy of the Fed, and injecting money directly into circulation. The US consumer has been pretty much left out of the financial loop leaving hot money to travel the globe, instead.

    So, while I support it, I also know it's not been the panacea far too many people think it has been...for the domestic economy, anyway. After all, US monetary policy is a domestic policy. It just happens to have global reach. I agree with you, the Fed needs to taper before the dollar is relegated to a cheap global funding currency that does the US little good. That will be Japan-like with the world addicted to unconventional easing in dollars.
    Apr 22 08:18 AM | 1 Like Like |Link to Comment
  • The Event That Will End The Bull Market [View article]
    "Looking ahead, the Fed may not be as quick to rush out and provide further support if stock prices start to sink... it's time instead for the stock market to go it on its own..."

    The Fed does not race out to save equity markets. Surely the Fed cares about the wealth effect in markets and home equity, along with credit availability, but it's focus is the financial system not a closed circle of traders betting on price. The latter happens on it's own if the financial markets are functioning and investment and earnings are happening because of global activity (The financial markets can influence this as they are in good shape with rates low.) Equities will rise or fall on earnings and fear and whatever else, but they won't necessarily fall when the Fed tapers to zero. Forward guidance will keep rates low for a considerable time - until such time they need to rise.
    Apr 20 06:31 AM | 9 Likes Like |Link to Comment
  • Is Inflation Next? [View article]
    "I can issue my own note in the form of a promise to pay in future, and my counterparty (last month, an auto dealer) can accept it because they know they can trade it to Chase for a deposit balance at Chase..."

    Jason, I guess the point I was making is if Chase buys your promissory note, you still owe Chase and do not receive any of the profits (directly) after Chase pays off it's operating expenses. You're still on the hook for the payments, but they are not made to yourself A consolidated Chase and Jason balance sheet.) If the Fed buys a government bond, the government (public sector) still owes the Fed. But it owes itself as the issuer of the nation's currency (of course, largely issued through he commercial banking system to which Chase belongs and the Fed does not.)

    In effect, then, when the Fed buys US securities, the public sector is holding it's own debt and the private sector holds cash deposits (either reserves assets/Fed liabilities in the case of a bank or as a bank liability/deposit asset in the case of a deposit holder.) Of course, both must be repaid, but US debt is paid to the currency issuing government and profits remitted to them while our debt is paid to the commercial banks (with some profits remitted on interest bearing savings or equity.)
    Apr 19 11:23 PM | 2 Likes Like |Link to Comment
  • Is Inflation Next? [View article]
    In that case, I agree.

    "The position I am rejecting is that easy money is somehow a special government policy distortion or a peculiarity of the Fed or our monetary system, legally speaking."

    Also agreed.
    Apr 16 01:03 PM | 1 Like Like |Link to Comment
  • Low Inflation Taper Theory [View article]
    SouthGent, yea, it seems we're thinking along the same lines. I am of the opinion most refinancing is done. Excess reseves are a by product of ZIRP and QE.

    Higher spreads can mean more risk taking in the form of lending. Rates are low, one might suppose, because lending is a competitive thing. But, with demand low, rates should stay low or at least be commensurate with one's credit rating. The Fed could keep pressure on longer term rates helping new mortgage financing, maybe along with some fiscal policies. You mentioned HARP, I'm not familiar with it.

    I generally agree we're overextended on monetary policy. I didn't read that anywhere, it's just an opinion formed reading a lot of diverse material. I am retired living in EM, so it really hits home when the dollar plummets 30% sue to a dollar tsunami washing ashore. You kind of want to know why at the same time understanding the Fed is doing what it has to - or had to - and be supportive of a stronger US economy (and investment that goes with it.)
    Apr 16 12:58 PM | Likes Like |Link to Comment
  • Low Inflation Taper Theory [View article]
    "It is interesting that inflation has trended down with the launch of QE3 back in September 2012.

    My only explanation is that the money was not necessary in the real economy and landed mostly in bank reserves doing nothing other than gathering rays."

    Yea, that's a great point. My best explanation is our monetary policy dollars are not really being put to good use domestically. Equities are (or were) at all time highs and not terribly over valued if at all. US bond prices are still pretty good, yet the government failed to divert (borrow cheaply and spend) sufficient amounts of that Fed accommodation into the domestic economy. So, that leaves bank money creation at ZIRP to do the domestic heavy lifting. When that's sluggish, so is growth.

    A lot of excess dollars demanded, which was met very well by the Fed IMO, simply needed somewhere to go. That somewhere seemed to be emerging (and frontier) markets where dollars get treated better. It also means gold and, I assert, the euro area (with Spain's 5yr touching parity with the US 5yr. Go figure that one. Oh, yea, deflation, front running ECB QE, and returns on now safe EMU peripheral debt thanks to "whatever it takes" as opposed to fundamentals.)

    It's not that mal investment is taking place, really, so much as there seems to be a large imbalance of dollars, to some extent, intended for the domestic economy going elsewhere courtesy of a cheaply funded US dollar carry trade. Private capital is perfectly capable of driving that missing inflation and employment as any Fed policy, but we have to be able to attract it: government diverting it through borrowing, increased currency in circulation, or competitive returns (higher rates on lending improving credit availability.) It was striking credit availability spiked during the taper tantrum when rates kicked up.

    I personally feel the Fed has accommodated the US domestic economy about as much as it is going to, for the time being at least. It will taper asset purchases and rely on forward guidance, which seems to mean it will keep short term rates low instead of pumping more "free money" into the global economy. There should be plenty of dollars currently seeking risk (and spuring growth) abroad to jumpstart the US economy if we can get them to be reinvested at home (as unemployment falls and demand picks up. If...and longer term interest rates need to remain low, too, for a while as housing recovers.)

    In the absense of fiscal policy, QE seems to have been as throwing a plate of spaghetti against the wall leaving the US to lick the stain. Bernanke advised congress not to worry about the deficits so that consumption could increase in the US providing a fertile ground for investment thus attracting many of the very monetary policy dollars the Fed made available. Instead, we get low inflation (and a 0.2% increase in March, which is good.) Lately, Yellen basically insulted congress asking them to, "do no harm to the recovery." If you're not going to help, get out of the way, basically.

    So, yea, with demand for cash being met and the US recovery steady but sluggish, and fighting off fiscal drag and grid lock, I think the Fed feels the world has hogged it's share of spaghetti and ours too. It's time for the US to grab a plate, there's plenty to go around. And we might with the latest CPI and unemployment data seeming to shrug off the winter hybernation.
    Apr 16 09:58 AM | Likes Like |Link to Comment
  • Great Graphic - Case Study: San Jose Hiked Minimum Wage [View article]
    "When capital leaves it takes real jobs with it, leaving fake jobs (and localized jobs such as fast food cooks and plumbers) and an artificially high (and fake) living standard maintained by every trick politicians and economists can think of: welfare, deficient financing, artificially lowered interest rates, restrictions on the flow of jobs and money, currency regulations, unemployment payments, government jobs, defense spending, governments buying their own debt…and minimum wages."

    Be that as it may, it is (kinda) what we have to work with. So give a guy a liveable wage, hike your prices 4%, and carry on.
    Apr 16 08:45 AM | Likes Like |Link to Comment