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  • U.S. Deflation Update [View article]
    snoopy - OK I'll bite. What is the proper balance between credit and debt? Because you see, me, I kinda think that balance is set at 1 to 1. Exactly. As an accounting identity. If you don't see that, you haven't closed the books. But maybe you think it means something else.

    Meanwhile, for those not paying attention, the US financial sector credit market debt outstanding line item is $3.25 trillion lower today than it was at the end of 2008. Meanwhile, loan losses above 3% of total loan book per year at the commercial banks during the recession are back down under 0.5% now. Household sector debt service requirement to income is as low as it has been anytime in the last 30 years. So what was it that didn't "reset", again?
    Jan 29, 2015. 02:38 PM | 3 Likes Like |Link to Comment
  • Initial Thoughts On European QE [View article]
    Neil - basically right. There are separate line items netting to positive $188 billion for net premium on the bonds the Fed holds; the figures listed under the bond totals themselves are principal values. So roughly the portfolio is at 104.5 on the price side. Then on the income statement side, they have about $6 billion in operating expenses (about half salaries, about 20% currency related costs, and rest scattered) and pay about that amount on interest on bank reserves. The gross yield on the bonds is more like 2.6% as a weighted average, and covers those costs before the Treasury gets its yearly income.
    Jan 29, 2015. 02:10 PM | 2 Likes Like |Link to Comment
  • U.S. Deflation Update [View article]
    Mark - um, that's just saying that high total sales are better than low total sales. I am pretty sure all economists understand that at least as well as you do.

    Deflation is not a reduction in the price of this or that item. It is the reduction in the price of all items weighted by what is spent on them, and reflects an increasing value of the monetary unit being exchanged against them all.

    Moderate deflation is not dangerous or bad for anyone. High rates of deflation emphatically are (and this has nothing to do with Mark's total sales based distinction). When the real rate of return available to an investor from keeping physical currency in a mason jar exceeds the rate of return available in almost all operating businesses, everyone is being told by such price signals to stop doing anything they have been doing, save and much as possible and spend nothing, and invest nothing. This creates a bad equilibrium of inaction (and falling demand), which can last as long as the general price level continues to fall at rates higher than what is normally available from investment etc.

    There is only any danger of that if the total price level is falling - not changes in one price or another - and only if the rate of that fall is high - 5% a year maybe, 10% a year certainly - and expected by market participants to continue. The outcome is bad enough to go out of our way to avoid it, even to the extent of policy seeking to avoid rates of deflation half those levels. That's about it.

    For the rest, good prices are free prices, not high ones or low ones...
    Jan 29, 2015. 01:14 PM | 2 Likes Like |Link to Comment
  • U.S. Deflation Update [View article]
    jj1937 - Basel III matters more for broad credit growth that Dodd Frank did. But the more basic thing is that financial sector credit market paper outstanding fell by $3.25 trillion since the end of 2008. That is mostly the asset backed securities market going bye bye, including non agency mortgage securities, asset backed commercial paper, etc. The biggest categories are asset back, down $2 trillion, money market funds, down $1 trillion, and finance companies in the same chains down about $500 billion (with some offsetting moves elsewhere etc).

    In the previous decade, the private financial sector was expanding by over $1 trillion a year. Went it went into reverse instead, it took an epic increase in official balance sheet expansion to cover the same supply of credit to the market at that disappearing, then going backward. Total debt market stuff out is marginally higher since late 2008, but only 15% over 6 years. In the 1990 recession, the last with a real estate bear market, the private financial sector series bottomed at positive 6% growth per year. The last time it actually moved backward was the 1930s.

    Can some of that be described as "tight housing credit"? Tighter than the way too loose it was immediately prior, sure. But it is a much larger scale change than that lets on, in a much larger scale (private market) credit cycle.
    Jan 29, 2015. 09:47 AM | 2 Likes Like |Link to Comment
  • Initial Thoughts On European QE [View article]
    Herve - it is interest on the bonds the Fed owns, some of it the payments the Treasury made during the year to the Fed coming back to it, but also the payments people made on their mortgages that went to Fannie and Freddie and through them to the Fed as the owner of its MBS.
    Jan 29, 2015. 09:39 AM | 1 Like Like |Link to Comment
  • U.S. Deflation Update [View article]
    269 wrote "Where do you think all that QE money went? Stock speculation is my favorite choice." Money created by the QEs is sitting in bank deposit balances for the most part, with maybe 10% of it added to physical cash in people's mason jars and the like.

    There is no where else for money to go. For some reason this blatantly obvious point is insanely hard to people to grasp. Spending money doesn't use it up. Buying stock with money doesn't mean money "goes into stocks", it means money goes to *former* stockholders while their stock goes to new ones, leaving both stock and money unchanged.

    As long as people actually want to hold those bank account balances or that currency in mason jars, no problem at all. Adding money accommodates that desire. If people prefer having those to having Treasury notes paying not very much, they can.

    Money issuance only becomes an issue when nobody actually wants to hold the stuff, at the end of whatever chains of buying or whatever. When people all collectively try to get out of money into other goods, they cannot succeed at it, because (repeat, grock please) no transactions in existing goods uses up the slightest amount of money. It just passes it to another set of hands with the same choices. What people *can* collectively accomplish is to change not the amount of money out, but what it is *worth*. They can make better and better offers to anyone who will take the stuff off their hands for something more attractive.

    That's what inflation is.

    Look around. You see any inflation to speak of? I sure don't. Inflation has not in fact been a serious economic problem in this country since the early 1980s. It has been a minor economic problem only a few times late in business cycles for short periods, between then and now. For over 30 years, an entire generation, inflation has been a nothing issue and the obsession with it completely clueless and beside the point.

    But entire political ideologies were in the past constructed around the problem of inflation and positions about it (blame, recommendations, every variety of allegation tied to the subject), and those stick around for generations, like battered old luggage in the closet that no one will throw away. Long after reality has made them completely sterile.

    In the last 6 years, the demand to hold money balances for safety reasons has been simply epic. Other forms of broad credit went in reverse for the first half of that period, also at epic rates, on huge rates of default and broken business models etc. Government and central banks have expanded their sheets, but the private financial sector has been going the other direction, for little net movement in broad credit, overall. Positive but slower than normal in the second half of that period, again overall. Coupled with epic demand to hold money as already mentioned, the result has predictable (and predicted) been no inflation to speak of, rock bottom interest rates, and sluggish economic growth.

    And all the people fixated on past inflation buggaboos for ideological reasons, and watching only policy levers and not the private financial sector or money demand, have been wrong about their inflation forecasts as a direct result. Half the world piled into high inflation bets that have all busted, one after another. They remain busted and will go on remaining busted. The entire diagnosis behind them was flat out wrong, start to finish.

    Demand for money is not a constant. Ergo, you cannot determine the value of money by exclusively looking at its supply - and the supply of the narrowest rather than broader credit at that. You cannot just pretend that other things are equal. You will get everything completely wrong doing that. And those who expected 20% inflation as a result of the QEs should admit they were utterly wrong and completely missed what was happening, and learn humbly from those who got the call right because they (we) do understand these things. For the sake of their own pocketbooks as investors, if for no other reason.

    One man's opinion.
    Jan 29, 2015. 12:13 AM | 6 Likes Like |Link to Comment
  • U.S. Deflation Update [View article]
    "I'd love to see interest rates go back to 4-5% and see the markets and USD crash!"

    Why? Do you hate people or something? Seriously, what is in that for anyone?
    Jan 28, 2015. 05:19 PM | 5 Likes Like |Link to Comment
  • U.S. Deflation Update [View article]
    Milton Friedman's most important economic work focused precisely on the need for the Fed to aggressively conduct open market operations in response to a falling price level, in the specific case of the 1930s. Those pretending he was in favor of deflation are confusing the man with somebody else.
    Jan 28, 2015. 04:31 PM | 8 Likes Like |Link to Comment
  • U.S. Deflation Update [View article]
    Are there any consumers who aren't also producers? How many?

    One entry accounting is the source of virtually all economic fallacy...
    Jan 28, 2015. 04:29 PM | 5 Likes Like |Link to Comment
  • Initial Thoughts On European QE [View article]
    " the removal of debt you mention is another way of saying that the government's debt was paid with thin air, isn't it?"

    Not really, no, since that debt is still outstanding, just owned by the Fed. At some point it will mature. Then the Treasury will either repay it outright and the money supply will shrink, or more likely it will roll it over and find a new buyer willing to hold a newly issued Treasury, and the money supply still shrinks. Only if the Treasury rolls it indefinitely and the Fed buys new items whenever anything matures - keeping its sheet size expanded or growing it future - was the original debt paid for by money.

    And money that actually holds its value isn't air. If prices rose too rapidly telling the Fed there wasn't really demand to hold the money it issues, then issuing more money wouldn't create any real value. But it the total value of the money supply increases, on high demand to hold money balances that the Fed (and commercial banks etc) actually accommodate, then that is real production of value.

    The real value of the money supply is not a constant. Therefore, issuance of money is not production of air, but actually grows real value, over time. That the marginal cost of new money is zero does not suffice to prove that the value of new money is zero. The marginal cost of another copy of a given software program, or a movie, or a song, is zero, but they have real value. Cost does not determine value; demand does.
    Jan 28, 2015. 01:55 PM | 1 Like Like |Link to Comment
  • Initial Thoughts On European QE [View article]
    Herve - on reserves ($2.7 trillion close enough), sure, the Fed issues them in that form, but after banks have them their customers can withdraw them as physical currency at any point in the future. Currency out has increased over the whole period since the start of the QEs, certainly, by hundreds of billions but not trillions of dollars - from about $900 billion before QE1 to $1.33 trillion now. That's only $430 billion of the increase, material but much smaller than the full QEs.
    Jan 28, 2015. 01:19 PM | 2 Likes Like |Link to Comment
  • Initial Thoughts On European QE [View article]
    Herve - what's to explain? The Fed bought $4 trillion in bonds, split between Treasuries and agency mortgage backed securities, by borrowing $4 trillion from the commercial banks on newly issued bank reserves. Running up deposit liabilities to carry loan assets is *what banks do*, and it is what the Fed did. The deposit liabilities are, in the first instance, bank reserves. The commercial banks in turn issued deposit liabilities to their customers as proceeds to them when those customers sold their bonds to the Fed.

    So the deposit outside money supply increases, the balance sheets of the commercial banks increase with new assets of extra bank reserves and new liabilities of extra deposits outstanding. The Fed carries a big bond portfolio that otherwise would have been in the hands of the public, and makes a profit carrying them because it earns 2.5% on the bonds and pays 0.25% on the bank reserves issued to buy them. The public holds bank deposits instead of those bonds, filling its demand for money balances and reducing its interest rate risks run etc.
    Jan 28, 2015. 11:59 AM | 3 Likes Like |Link to Comment
  • What Can A Far-Left Government Do To Put Greece Back Together Again? [View article]
    No Free Cake - you are correct in your understanding of the meaning of a primary surplus, in its ordinary meaning. But Greece doesn't reach its claims of primary surplus by realistic accounting. It excludes from expenditure charges to recapitalize its banks for example, and treats some borrowings as revenue. It also excludes from expenditure accruals on private sector debt it isn't paying, effectively treating default as an income source.

    As mentioned, they have debt of 147% of GDP, although the rate they pay on it is well below the current 9.5% (since most of it is to official institutions at much that at subsidized, "soft loan" rates). Even as Greece does its accounting, its "primary surplus" was less than 1% of GDP in 2013 and 1.5% of GDP in 2014, enough to pay 1% on its outstanding debt. Since the actual full budget is over 12% of GDP in the red - all representing bonds it actually needs to sell - even that overstates its ability to stand without outside assistance.

    To me the even more damning statistic in my post above relates to those decrying "austerity" and thinking that higher government "stimulus" is needed to help the Greek economy. When the state is spending almost 60% of GDP, calls for larger government to supposedly increase demand are beyond obtuse. A better model of what Greece needs is more like the post WW II US downsizing of government as it left a wartime economy, when the state share of GDP fell over 20% in less than 3 years, dramatically improving productivity and growth in consequence.

    Jan 28, 2015. 11:48 AM | 2 Likes Like |Link to Comment
  • What Can A Far-Left Government Do To Put Greece Back Together Again? [View article]
    No Free Cake - in re primary surplus, their bonds are not yielding 9.5% because they are an investment grade credit, let's put it that way. Last year their budget was 12.2% of GDP in deficit, with debt to GDP at 175%. Government spending is 59.2% of GDP, vs revenues of 47% of GDP. For comparison, in the US total government revenue (all levels, not just Federal) are about 30% of GDP and expenditure is about 33%.

    So Greek taxes are 17% of GDP heavier than US taxes - and Greek government spending is over 25% of GDP higher than US government spending. Half of the excess being borrowed every year. For comparison, social democratic Sweden spends 52.9% of GDP on government, collects 51.8% of GDP in taxes, and has a debt to GDP of only 40%. Greek taxes are 5% of GDP lighter than Sweden and their government spending is 5% of GDP larger. In other news, Greece isn't Sweden and Greeks are not Swedes.
    Jan 27, 2015. 06:07 PM | 1 Like Like |Link to Comment
  • The Real Value Of The US Money Supply [View instapost]
    DigDeep - I am not just dealing with current reality, I am advocating and supporting it as positively good. I deny all the claims from all parties that the present economic or financial or monetary order are broken and require radical change. I claim those systems have brought us the greatest wealth and well being in human history and that those attacking them are not merely wrong intellectually, but also unjust. The system as it is, warts and all, does not deserve the brickbats thrown at it, almost all of which originate in misunderstandings of what it is and how it functions. Those that do originate in a correct understanding of what it is and how it functions are utopian, and the revisions they recommend to those systems are both unworkable, and in most cases would be worse - in many cases, far worse - than those systems are themselves. This is a far stronger set of claims than, "hey, its what we have and we've got to deal with it". I am deliberately making that far stronger set of claims.
    Jan 27, 2015. 12:14 PM | 1 Like Like |Link to Comment