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  • A September Rate Hike Would Be A Mistake  [View article]
    So, the whole idea of being crazy to raise interest rates means more debt at low interest rates. If debt is the problem, then cool off debt accumulation by hiking rates.

    Here's the thing. Debt to GDP ratio not only fluctuates with debt, but also with GDP. The current debt levels would be lower, as a ratio, if GDP were much higher. And visa versa. So, what do those stats really mean? Are they really pointing to causation?

    "across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes."

    So, are those outcomes falling GDP ("lower growth outcomes") or rising debt?

    So, how do you suppose we're to fight deflation, then. By deceasing debt? Debt is what creates the money we all spend, earn as wages, and even to pay off our own debt. So, as we create debt and consume, it depends a lot on how revenue is distributed in terms of wages and earnings. We need higher wages, otherwise we are overcome by the very debt the US needs to defeat deflation. Those higher wages circulate back into corporate profits soon enough, anyway.

    "Their ability to earn capital has been constrained by an economy which has shown no real increase in wages in over 20 years."

    True. But that simple statement belies so much more than what that simple statement simply says. Higher minimum wage anyone?

    From Treasury debt residing on the Fed's books to commercial bank lending, debt creates money. Treasury debt redistributes income leaving the creditor holding a bond and no net loss of financial wealth. Savings get's spent. We actually need more debt, but we also need wages to service it. That's true. What we do not need in a deflationary environment is supply side stimulus in the face of low demand. That's deflationary.

    Actually, so is staying at zero with a massive balance sheet for too long. Pretty soon you become afraid of your own currency strength, which is a sign of capital inflows which are stimulus. So, you fight those off with additional easing. The reason the dollar inflated by 30% against EM, and the yen and euro fell on quantitative easing, too, is because the economy needed stimulus and cannot provide returns or a descent yield. Not because the central banks printed too much money changing the nominal price of everything.

    There is so much about the slant this article sees the problem, it'd take a book to argue it. Just gonna leave this comment as is, for what it's worth.
    Aug 23, 2015. 12:02 AM | 2 Likes Like |Link to Comment
  • A Work Around For The Fed's Knowledge Problem  [View article]
    "There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed- inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation."

    It has been my assertion, based on foreign exchange rates and visible construction and infrastructure living in EM, the effects of QE depend on where one looks. It's been my assertion massive easing beyond the zero bound flees an ailing, low return, low yielding economy in need of such massive easing. It happened in Japan with the development of the yen carry and now the dollar carry trade. Capital outflows are not stimulus, capital inflows are.

    This is not the Fed's fault, the Fed simply makes money available cheaply so we can invest in low returns. However, higher returns are already in waiting abroad in growth regions. These decisions are private market decisions, the markets are making decisions just as they should. And these decisions bolstered US equities on earnings abroad, along with buybacks. It also explains the contagion in US equities as China buckles. It's not so much the US economy, but earnings abroad on China fears that are dragging on US equities.

    The US economy is diverging in terms of slow but resilient growth and monetary policy. Such divergence may prove to be stimulus after an 8 year monetary lag as our monetary policy sought global yield outside of shale production which was profitable on cheap borrowing and high prices. If divergence and growth bring some capital into the country, instead of out of it, we may actually see some results of our own monetary policy.

    If capital investment capital (QE) flows back into the US, we can actually get back to normal and avoid becoming Japan locked in a war against it's own currency. We should avoid that fate. A strong dollar is not only a sign of divergence and fear, but of much needed capital inflows and purchasing power.

    Evidence or not, the comment above makes sense. Again, inflows can be inflationary along with a low funds rate, wealth effect, and aggregate demand if our own stimulus finally trickles down in the domestic economy finally reaching main street as it should have done.

    It's time to lift off and pay savers to save again as the Fed gradually withdraws it's Fed funds in favor of private savings allowing the latter to do the heavy lifting. That's a return to normal.
    Aug 22, 2015. 09:45 PM | 2 Likes Like |Link to Comment
  • Federal Reserve Continues To 'Tighten Up,' Getting Ready For Raising Rates?  [View article]
    "The war on retirees and the saving class waged by this administration continues..."

    "The government cannot support paying realistic interest rates as they give trillions out to urban slackers, illegal alien schemes..."

    "This is income redistribution by any definition, and a philosophy of this administration since taking office."

    TAS, compared to your "naive" diatribe, Mr Mason's article is a work of art. Did it really take 3 master's degrees to come to your conclusions that sound like sound bites from FOX news?
    Aug 22, 2015. 09:10 PM | 1 Like Like |Link to Comment
  • Federal Reserve Continues To 'Tighten Up,' Getting Ready For Raising Rates?  [View article]
    “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals for the Fed – inflation and real economic activity.”

    When the crisis broke, the first thing I noticed was the exchange rate with EM as the dollar began to plummet until it lost 30% over time. The sting of inflation. The next thing was visible growth of infrastructure, construction, and investments. This was a clue that hot money was fleeing the ailing US economy and seeking risk where growth and returns were already healthy. This was proof of dollar inflows to EM and a global carry like the yen. Inflows to EM are stimulus, outflows from the US are not.

    Investment in shale happened as the price of oil rose, then burst when the price fell. Even though it's cheaper to invest in low oil prices, not sure many want to invest in falling prices as cost quickly overwhelms profit. I am just not sure investors are keen to invest into deflation. So, it seems our own QE has some impact, just not so much domestically. That leaves pure resilience and maybe some wealth effect to explain much of the growth in the US since the recession.

    Bottom line is, there can be a stimulus effect if dollars flow back into the US much like investment inflows did pre crisis when the economy was humming along nicely. I mean, arguably we have not had a $4.5 trillion dollar recovery. That's nearly 25% of GDP, best we can do is about 2%. Only when dollars flow back into US growth, and possibly policy divergence, will growth accelerate bringing with it inflation and improved labor participation. We may be in for such a ride even as the Fed tightens.
    Aug 22, 2015. 09:04 PM | 1 Like Like |Link to Comment
  • Federal Reserve Continues To 'Tighten Up,' Getting Ready For Raising Rates?  [View article]
    "...but can effect liquidity and speculators."

    I think this is the biggest impact of the "rate hike." Generally speaking, maybe it's about time we get away from the Fed funding the financial markets and allow private savings to take on a larger role as normal. We need to sell our MBS to the world instead of our central bank, for example. I short, I think the Fed is winding down stimulus by slowly draining it's Fed funds in favor of private savings. If savings are available, there may be sufficient liquidity as the Fed gradually winds down. I think the liquidity drain is the major impact of gradual tightening, not so much the lift off of the funds rate.
    Aug 22, 2015. 08:49 PM | Likes Like |Link to Comment
  • Federal Reserve Continues To 'Tighten Up,' Getting Ready For Raising Rates?  [View article]
    "This makes these payments just another form of transfer payment, and since it comes with an increase in the deficit, it is really just another form of Keynesian stimulus to the economy."

    That IOeR can be stimulus is interesting. It probably is. You're right, the government has always been on the hook for remittance to the private sector when the private sector holds it's debt or Fed's tools. When the Fed itself holds them, profits are remitted to the government. When the Fed offers instruments to the private sector, the government owes the private sector. This was true with the original bond coupon, too, before the Fed bought it and took in payment. I think it's just another way to pay savers to save again and earn a tiny bit of interest doing so for short terms and rolling them over.

    In any case, the government has always been on the hook for it. The debt will rise as a result, it was always intended to rise, after a reprieve on the Fed's books, whether through cheap fiscal borrowing, interest on the original bond, or through interest paid on Fed instruments.

    It has always been my understanding the IOeR was to be an interest rate floor. The idea being, you have to bid above 25bps to borrow. It's always been a silent mystery why the EFFR is below 25bps. I figured without much demand for borrowing being hugely in excess reserve condition, the rate would fall toward zero. Anyway, the Fed did a pretty good job keeping the EFFR between zero and 25bps.

    Your referenced article is most excellent, for those who missed it. Lots of good information, well written, and thorough. I am still digesting it.
    Aug 22, 2015. 08:42 PM | Likes Like |Link to Comment
  • Why The Fed Is Wishy-Washy  [View article]
    "But this isn't the case for the international data. Whether it's Europe and Japan or emerging markets, the numbers there clearly point to a weakening global economy and, accordingly, would suggest more policy caution."

    True, but other nations have central banks. China obviously has one. US federal Reserve policy is US domestic monetary policy with a mandate of employment and price stable inflation.

    To suggest the Fed needs to act on weak commodity prices or a flailing equities on China's slowing and currency devaluation is to suggest the Fed must gear policy to a global slowdown. Commodities respond to supply and demand, not the plethora of dollars looking for yield. There isn't much yield in falling commodity prices on weak demand. No amount of money will change that, even if we borrow more cheaply to invest in an oversupply of commodities that demand cannot account for.

    The Fed is a monetary super power and US financial markets have global reach, but Fed policy is domestic - not global. The Fed does not chase inflation by cheap dollar investment in fracking and high gas prices nor debased currency with higher prices on everything else. The Fed funds rate is low, and will remain low for an extended period. That's where inflation will come from.

    The Fed is well aware of it's global impact and will act slowly. That's what forward guidance is telling us to be aware of based on domestic developments.
    Aug 21, 2015. 11:17 PM | Likes Like |Link to Comment
  • Federal Reserve Continues To 'Tighten Up,' Getting Ready For Raising Rates?  [View article]
    "If they raise rates a little and the roof caves in..."

    pdtor, here's the thing. Rates are already rising on their own. Mortgage rates are over 4% and the Fed had nothing to do with that. The funds rate is still barely in double digit basis points. For consumer lending, it's not about the funds rate, it's about the market rate. No consumer ever borrows at 11bps.

    The term deposits and reverse repos John talks about is tightening some excess in $4.5 trillion liquidity. She's tightening the financial markets and probably following the market upward with the funds rate.

    Inflation will not come with a cheap dollar debased on capital outflows against global growth currencies (nor fall on a cheap yuan.) If so, we'd have our fill of inflation right now. It will come by low cost commercial bank lending as employment improves further. It will come from the aggregate demand side and some from the trickle down and wealth effect.

    The US has shown resilient growth. Sluggish, but resilient. I actually think the US will look better in terms of sustainable growth than the wild ride in China even though the US cannot compete with the higher returns in China. The US should gradually become the destination of choice for a larger chunk of the dollar liquidity.

    Even if US consumers tend to save, those savings should slowly supplant the need for Fed liquidity. The Fed is tightening /it's own/ liquidity paying savers to save again instead of buying their savings assets. The funds rate will remain low for an extended period even into the rake hike. But, the big moves are not in the funds rate, they are in liquidity. That's what the tools John talks about do.
    Aug 21, 2015. 08:13 PM | 1 Like Like |Link to Comment
  • A Work Around For The Fed's Knowledge Problem  [View article]
    "Too bad he did not succeed in stimulating the economy."

    I might agree any stimulus was likely small, a fraction of the $4.5 trillion (~25% GDP) made available. As Larry and I were bantering on another thread, much of that money flew the coup seeking global returns (almost ironically stimulating growth in higher yielding EM.) But, as measured by the inflation rate, including the deflationary pressures of falling energy prices and fiscal drag, I think the Fed got it just about right.
    Aug 21, 2015. 07:34 PM | 1 Like Like |Link to Comment
  • The Economy Is Not Ready For Higher Interest Rates  [View article]
    I'm with you on low domestic rates. The funds rate will remain low for a while even as employment reaches a new level of full employment given the labor market slack resulting from the recession and period of slow growth. If we believe there has been some capital destruction, including negative real rates, then it's possible this new level of full employment can rise to meet a falling supply especially with productivity being somewhat less. At some point we should see renewed capital and productivity investment, made available by large sums of liquidity, and more trickle down from the flush capital markets onto main street.
    Aug 21, 2015. 07:26 PM | Likes Like |Link to Comment
  • The Yuan Is The Chinese Monetary Panic Button  [View article]
    "Capital flight to where?"

    The euro has gained, gold is up, and US treasury yields are down, for example.
    Aug 21, 2015. 07:05 PM | Likes Like |Link to Comment
  • A Work Around For The Fed's Knowledge Problem  [View article]
    Yea, I don't disagree, though as David argues one might also argue easing to ZIRP is a bit unconventional. It really is business as usual monetary policy going all the way to zero, plus some forward guidance in these unconventional times.
    Aug 21, 2015. 09:09 AM | Likes Like |Link to Comment
  • The Economy Is Not Ready For Higher Interest Rates  [View article]
    Yes, I understand the aggregate demand of easing the Fed funds rate. My question was more toward easing beyond the zero bound - the part I see as QE. The horse has not refused to drink from the liquidity created by QE, it's been driving growth in EM for a long time.

    I'm trying to argue the Fed is tightening that quantitative easing and excess liquidity beyond the reserves required to reach zero. While, at the same time, leaving the funds rate basically untouched. This is why EM seems to be reeling on the taper and on the "rate hike." It does not explain China, though.
    Aug 21, 2015. 09:05 AM | Likes Like |Link to Comment
  • The Fed Talks And The Market Tanks. That's Different  [View article]
    This crash is not on the about 50% chance of a rate hike in September, this is China slowing. What in the heck does that have to do with US monetary stimulus, domestic growth, and employment?

    China has it's own central bank and it feels the need to act, our companies are sitting on $1.5 trillion. China may feel the need to pull the nose up on a rough landing, but the US is growing.

    Can't stay at zero for too long, or risk staying there trying to stimulate lagging growth and falling inflation. Ask Japan. Hike rates, already. We've gotten about as much from our monetary stimulus as we're going to get without becoming Japan.
    Aug 21, 2015. 06:55 AM | 1 Like Like |Link to Comment
  • The Fed: Much Ado About (Pretty Much) Nothing  [View article]
    "Basically, it all boils down to one question: how close is the economy to normal? "

    I get the impression people are wanting to see the economy back to pre crisis levels before expecting the Fed to act. The US economy took a pretty big hit during the crisis, the recession, and the period of slow growth that followed. We are growing below trend and labor market participation is low, as can be expected. We are not the same economy going into the recession as we are coming out of it.

    There seems to be a new, lower normal. I think the Fed will tighten as the labor market firms to the new normal trajectory instead of waiting to see pre crisis inflation, full employment, and growth. We may not see more normal pre crisis growth until the full impact of our own monetary policy hits home instead of abroad. That should begin happening on slow, but resilient, growth and policy divergence.
    Aug 21, 2015. 05:32 AM | Likes Like |Link to Comment