Today’s FOMC Meeting: A Step Towards Elastic Deficit Targeting….

Lots of people are talking about how today’s change in FOMC guidance is a move towards NGDP Targeting.  They might be right.  And while I don’t think NGDP Targeting is all bad, it’s definitely not my preferred approach.  I’ve recently started to discuss something called “elastic deficit targeting”.  I explained it briefly here:

“What I did here is sort of like Mike’s TC Rule. I’ve always used 2 for Okun’s law, but maybe that’s not as precise as you like.

I also didn’t target inflation in here. I am just using nominal GDP. No population adjustment either. Just a flat NGDP calculation using the unrate:

(unrate-unrate_target) * [(0.01*current_NGDP)*2] = $1.184T

If we wanted to put this into policy form you take it on a quarterly basis and slap a name like “elastic deficit targeting” on it. Let the Congress vote on it each quarter via specific tax cutting policy. Bam. Let the Fed mesh their policies with it. I rather like the Fed’s current stance of remaining accommodative until “at least” 2015. Let congress work with that. How can we not pass something like this? It seems like a win win.”

Mike Sankowski’s TC Rule is essentially a form of elastic deficit targeting.  My calculations are a bit different than Mike’s but similar thinking.

But the funny thing to me is that we probably have to go through another monetarist economic experiment before we would ever actually get something like this going.  In other words, the Fed goes on a 15 year experiment with NGDP Targeting, we find out it doesn’t work quite as well as some might expect and then we all agree we like lower taxes, attach an elastic policy measure to tax cuts and implement a full bore elastic deficit targeting program.  Of course, we have to let the experiment with NGDP Targeting play out first.  We’ll get to the fiscal targeting.  Just don’t hold your breath.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Bernard

    Cullen, you need to read “New Paradigm in Macroeconomics” by Prof. Richard A. Werner. I don’t mean to be insulting, but I believe you could learn a lot from Werner.

    If you have access to the journal “International Review of Scientific Analysis” – a quicker intro to is his well-written article “Towards a new research programme on ‘banking and the economy’ — Implications of the Quantity Theory of Credit for the prevention and resolution of banking and debt crises”, but which costs $40 to download.

    Regards – Bernard Super

  • Anonymous

    NDGP targeting is disastrous!

  • http://www.orcamgroup.com Cullen Roche

    Bernard,

    I haven’t read his stuff. Can you please elaborate? Why is this a must read. I am definitely open minded to reading new things so thanks in advance.

    Cullen

  • http://www.orcamgroup.com Cullen Roche

    This Amazon review actually makes it sounds a lot like my work. Do you agree?

    A superb treatise on money and banking and its relationship to the wider economy. It combines rigorous scholarship, accessible arguments and sane ways out of the financial turmoil and slavery we find ourselves in. Werner reworks macroeconomic theory through the lens of credit, finding that the supposed ‘puzzles’ of macroeconomics, such as why the velocity of circulation of money appears to bear no stable relationship to real economic activity, dissolve. The key point is that banks create money (credit, debt) out of nothing, they do not act as intermediaries channelling savings to investment. One can then distinguish between credit created for productive purposes and credit created for speculation on rising asset prices in the financial sector. Having done this you find that productive credit creation predicts the path of economic activity remarkably well.

    The abandonment of credit controls with the advent of neoliberal ideology has meant that productive activity has been increasingly starved of funds to the benefit of the financial sector, also causing the latter to spiral out of control. We also learn why conventional fiscal policy cannot counter recessions. Unless new credit is created to finance it, all that happens is that investment funds are diverted from non-bank financial institutions. Werner points out that instead (and here he joins a long line of distinguished commentators) money can be created by the government, independently of the banking sector, interest-free. It can be literally spent into existence in the public interest.

    These arguments are bolstered with convincing empirical analysis from Japan, where the author has worked in financial institutions. He therefore has an inside view on the money markets and can speak with an authority born of working knowledge, rather than, as is unfortunately the case with most academics, the armchair. The empirical story charts the housing bubble in Japan, the inevitable bust and then failed attempts to stimulate activity. Sounds familiar? There is political insight too, as we learn that the working practice of central banks differs from the ideology they publicly espouse. The current orthodoxy is exposed as effectively a facade behind which rentiers extort the rest of the population. Unusally for such a radical work, the statistical analysis will pass the exacting standards of even the pickiest academic economist. It’s technical in parts but justifiably so, and repays the effort many times over. The technicalities refer to real world entities and processes, unlike those of conventional theory, which means that if you dig hard enough you will find your way through.

  • http://www.nowandfutures.com bart

    QE3+4 = $85 billion per month of raw money creation/printing. That’s 44% more than QE2… but wait, there’s more! It’s open ended!

    Happy days are here again, housing and stocks etc. will *boom*!
    All hail creative economics!

    /sarc

  • The Undergrad

    Cullen Roche, being channeled via Germany.

  • leftcoast

    Tell me again how money is being printed…

  • The Undergrad

    Cullen, I don’t understand how the Fed could possible target NGDP for I always thought they lacked a transmission mechanism.

  • http://www.orcamgroup.com Cullen Roche

    Well, the transmission mechanism is there. It just needs proper implementation. For instance, let’s say we’re not in a balance sheet recession and the Fed wants to stimulate. They could target the 10 year bond at 1%. Mtg rates collapse, credit becomes easier, etc. That’s just one example. The way they’re doing it now though is all wrong.

  • Tyler

    Ok ok, money created out of thin air by computer entries. Is that better?

  • http://www.nowandfutures.com bart

    Many won’t even believe that, or believe that the Fed does it – even when explained & proven via baby steps.

  • Pierce Inverarity

    It’s an ASSET SWAP. The money is already in the system. The Fed is exchanging outside money for inside money, which have the same numeraire.

  • http://www.orcamgroup.com Cullen Roche

    We should be very technical about this. What the Fed is doing is swapping outside money (bank reserves) for Treasury bonds and MBS. The result is no change in private sector net financial assets. Also, you and I can’t use bank reserves to transact business. So the swap from securities to outside money is not adding money to the system in the same sense that a new bank loan does.

  • Tyler

    Does the increased amount of reserves provide more cushion for banks to make new loans to any degree?

  • http://www.orcamgroup.com Cullen Roche

    Well, banks aren’t reserve constrained as you likely know. So banks aren’t able to lend more because they have more reserves. But one could argue that this gives banks more confidence to lend since they’re trading bad assets (like MBS in 2008) for good. But I think that impact is likely overstated. Especially once we’re in an environment like today where MBS is pretty stable.

  • krb

    Cullen,

    Are the reserves that the fed exchanges for the MBS/treasuries “created out of thin air”? krb

  • http://www.orcamgroup.com Cullen Roche

    Yes. Like any bank, the fed creates its deposits “out of thin air”. But bank reserves are special. Think of them as deposits in a special market that are held outside of the private sector. So they don’t actually float around and get used to buy things, etc.

  • Pierce Inverarity

    Yes. Just like the MBS and Treasuries were. It’s a swap of a certain type of air for a different type of air.

  • http://www.orcamgroup.com Cullen Roche

    Better description. :-)

  • krb

    Ok, then…..

    If primary dealer (PD) total reserves before QE = x
    If total new reserves via QE = y
    Then PD total reserves today should be z = x+y

    I have consistently argued that current total PD reserves will NOT equal z. With the fed providing billions of newly created reserves each month for them the PDs have the ability/freedom to release prior reserves for other uses….namely speculation in equity and commodity markets via a reserve shell game……and it is only a 1:1 asset swap if you don’t look at the picture in its entirety…..i.e. look at fed/bank activity with blinders on. If this can NOT happen, please explain to me why? krb

  • Pierce Inverarity

    How does the shell game work? I’m asking in good faith.

  • Anonymous

    Let’s see.

    The Fed buys Treasurys with invented dollars. Unlike earlier versions of QE, no asset swaps are involved.

    These invented dollars are credited to the US Treasury.

    Congress spends the money.

    Money flows into the accounts of unemployed people, SS recipients, States (who similarly pass it on), foodstamps, etc. I.e. “outside money” becomes “inside money”.

    In many of these cases people receive this money without any productive activity taking place.

    Presumably they spend it.

    How is this not “printing money”? At $42 billion a month this turns into roughly 1/2 trillion a year.

    Which step do I have wrong?

  • krb

    Reserves aren’t some entity that is put away in a lock box never to be touched again. Businesses adjust their reserve levels every accounting period for a variety of reasons….preparing for future expenses, future losses, smooth earnings, etc…..the point it that they choose the level. If banks have a steady flow of new reserves “created out of thin air” coming in every month, and have been told they can count on those handouts to continue far in to the future, they can release some level of reserves they had set aside in prior times…….and speculate away. krb

  • Pierce Inverarity

    All of them.

    “The Fed buys Treasurys with invented dollars. Unlike earlier versions of QE, no asset swaps are involved.”

    Which treasuries? The Fed cannot buy Treasuries directly from the Treasury. It can only do it through the secondary markets, which is what the Fed is still proposing. All QE versions are asset swaps. In this case, they’re swapping reserves for Treasuries & MBS. All are assets.

    “These invented dollars are credited to the US Treasury.”

    1) All dollars are invented at some point
    2) They are not crediting to the U.S. treasury in QE. They are crediting to private sector banks.

    “Congress spends the money.”

    Nope.
    1) Congress doesn’t spend money in the first place, that’s the Treasury’s job. Congress just tells the Treasury what to spend on
    2) In QE, no government body is getting more money.

  • http://www.orcamgroup.com Cullen Roche

    No, you skipped a step. The banks buy the t-bonds in step 2 using private sector funds (money that already exists). The fed buys the bonds on a secondary market. You can’t just skip the funding step. It’s like saying that your purchase of MSFT today funded the microsoft IPO in 1983. That’s just silly.

  • http://www.orcamgroup.com Cullen Roche

    Reserves don’t get “released”. They are held on reserve at the Fed. I think you’re misunderstanding what reserves are. Think of them as bank deposits tied up in a banking system on Mars. They don’t circulate on planet earth’s economy.

  • Johnny Evers

    The key question:
    What is a T-bond?
    Is it money? Is it a bond? Is it a certain type of air (fantastic description.)
    If it’s money, then the QE asset swap makes sense. You trade money for money.
    If it’s money, the monetization occurs at the point of deficit spending, when you spend tax dollars and create the bond.
    If it’s a bond, you have a problem, because you have this financial asset that is a claim on a future taxpayer.
    We can’t have a $16 trillion (and growing) claim on future taxpayers, so the best way to get rid of that is to get that asset onto the Fed’s balance sheet. Practically speaking, the Fed a) is never, ever going to demand the public give it $16 trillion so it can incinerate it (unless we have incredible inflation).
    But we seemingly have to pretend this isn’t happening, because we must at all times pretend that the debt isn’t being monetized.

  • Anonymous

    As reported minutes ago in the WSJ:

    The moves came after the Fed said after its regular-scheduled December meeting that it would buy $45 billion in Treasurys each month, in addition to the $40 billion in mortgage-backed securities it purchases each month. It said that it would keep interest rates at near-zero rates as long as the unemployment rate remains above 6.5% and inflation remains in check.

    And the difference between congress spending the money and the treasury is roughly the difference between me and my wife writing a check out of our joint account.

  • http://www.orcamgroup.com Cullen Roche

    A Treasury bond is a security. It is a claim on underlying cash flows via output. It is not money in the same sense that your bank deposits or cash are money. It’s a pretty decent substitute because it is liquid and safe, but it’s not money. No more so than Berkshire Hathaway’s overnight loans are money. Those are securities of a very high grade which are claims on underlying cash flows via output. I call these “money like” instruments. But they’re not money.

  • krb

    Cullen,

    I disagree with you, coud you please confirm……that is NOT the case in non-bank reserves that I have first hand knowledge of. Secondarily, it is illogical….

    Reserve levels are suppose to be contingent on something else…..projected loan losses for instance. A bank’s loan portfolio can vary up or down in its condition……are you saying that if a bank’s loan portfolio improves it is totally unable to reduce the necessary level of reserves for protection? I don’t think they are untouchable, or “on Mars”. I willing to be corrected and learn on this……my personal experience is in non-bank business ownership and use of reserves. krb

  • http://www.orcamgroup.com Cullen Roche

    We’re talking about bank reserves though….

  • krb

    I understand….and said I was willing to be corrected and learn something. Are you SURE that banks are NOT able to adjust their reserve levels even if their loan portfolio and other reserve purposes are changing? That seems unbelievable to me, but I could be wrong. Thx, krb

  • Johnny Evers

    Maybe, but under no circumstances will those claims be actualized. Can you envision a situation in which future taxpayers will be buying back these bonds, unless we have incredible inflation?
    Also, you do have the implicit promise of the Federal Reserve that if you don’t find someone to exchange your bond, that the Fed will buy it back from you, (soverign currency) and tear it up (or just carry it for years and years.)
    That makes it money.
    Seems like you are going to extreme length to avoid conceding that deficit spending creates net financial assets.

  • Pierce Inverarity

    I think you’re confusing loan loss reserves with Fed reserves. Loan loss reserves are actually inside money (not outside money, which is what Fed reserves are) set aside to offset projected loan defaults (with a cushion) which helps save the bank from having to take these losses against equity. They’re different items on a bank’s balance sheet. One the bank can control (loan loss reserves: inside money) and one they can’t (reserves held at the Fed: outside money).

  • Pierce Inverarity

    It’s buying the treasuries from banks that already exchanged inside money for those treasuries. The fed is not directly buying these treasuries from the government. See Cullen’s comment above for an illustrative simile.

  • http://www.orcamgroup.com Cullen Roche

    JE,

    Come on. I’ve been saying for years that deficit spending creates net financial assets. It doesn’t create new money though….Unless you want to change the definition of securities to money. Securities are money like. Take a bond (Treasury or corporate) in paper form into a Wal-Mart and see if they accept it for payment. Then give them cash and see if they like that better. That’s all you need to know.

    Bonds are money-like. But they are not the same thing as money (cash and bank deposits).

  • Pierce Inverarity

    The specifics are important. I’ve been chastened here a few times for being lax, so I speak from experience.

    The difference between Congress telling the Treasury to spend is important to the flow of money, and to know where the power resides. If you’re unclear on the fact that the Treasury does the actual spending, then you’re probably unclear on how the Treasury gets that money to spend which can lead the confusion you’re showing about the Fed’s QE operations.

  • Geoff

    You guys seem to be using different definitions of money. It appears that JE sees “money” as equivalent to NFA. Cullen has a narrower definition.

  • http://coppolacomment.blogspot.co.uk Frances Coppola

    krb

    sorry, couldn’t resist joining in….

    The balances in individual banks’ reserve accounts do vary, but across the banking system as a whole reserves can only be increased or reduced by the central bank. Reserves do not leave the banking system – so if one bank reduces its share of total reserves, another must increase it. I hope that makes sense.

  • http://www.nowandfutures.com bart

    Horse puckey and completely wrong (unless New Math is involved), per the Fed’s balance sheet and many other simple and incontrovertible facts.

  • krb

    Thanks PI.

    Can the fed-held reserves serve as protection for the bank against their losses from loan portfolio losses, asset degradation, and other reasons a bank would hold inside money reserves? If they can, then my view of reserve adjustments due to fed-held reserves availability isn’t affected (the “shell game” I described).

    I have heard it said here that the fed could influence bank behavior by changing the interest rate it pays on the fed-held reserves…..that implies a bank ability to change the fed-held reserves level. Do you know that fed-held reserves are out of bank control or think they are out of bank control? Again, I’m willing to learn. krb

  • Johnny Evers

    It’s money because the Fed will exchange it for cash.
    The Fed will not exchange your Coca Cola stock for cash, or any other kind of security.

  • http://www.nowandfutures.com bart

    As CR said – “Yes. Like any bank, the fed creates its deposits “out of thin air”.”

    Bingo.

  • http://www.nowandfutures.com bart

    Indeed, and the Primary Dealers are most frequently the “secondary market” and also get their vig.

  • http://www.nowandfutures.com bart

    And there is zero change in reserves or “total money” at the Primary Dealers. The Fed buys those Treasuries from them with brand new “created-from-nuttin'” money during the QEs (but not during Twist, which are nothing but swaps).

  • krb

    Thanks Frances. That makes sense…..is it a byproduct of fed facilitating inter-bank transactions?

    Still, if fed-held reserves improve bank health, for instance by being used in calculating capital ratios and what not, then my suspicions about reserves shell games hasn’t been refuted…..no matter if inside money reserves or outside money reserves.

    I’m appreciating the education from all 3 of you….Cullen, PI, FC….thanks, keb

  • Pierce Inverarity

    Reserves increase during QE. The Fed credits each bank’s Federal Reserve account with reserves in exchange for the securities.

  • Pierce Inverarity

    Me: Yes. Just like the MBS and Treasuries were. It’s a swap of a certain type of air for a different type of air.

    Cullen: Better description. :)

  • http://www.orcamgroup.com Cullen Roche

    If we use JE’s definition then high grade corporate bonds are also money. That’s not right.

  • http://www.orcamgroup.com Cullen Roche

    So what? A corporation also says it will exchange their bonds for cash. That doesn’t make their bonds the same thing as money.

  • Anon

    good comments Pierce…

    I actually thought this whole fiscal cliff thing would assist people in putting the pieces together, but still not quite (I respect that these concepts are incredibly complex so no offence intended to anyone).

    People still want to insist that QE = new money printing. So, really roughly, the FED has announced $45B x 12 months = $540B “new money” for next year. This more than offsets the fiscal cliff so what are we worried about?

    BECAUSE QE ISN”T NEW MONEY FOR THE GOVERNMENT (OR ANYONE ELSE) TO SPEND – its just fiddling with the mix of “cash”/bonds that already exist in the system…

  • Tyler

    The more I read, the more questions I have. If QE is just an asset swap, then what is the point of QE?

  • Pierce Inverarity

    Ding ding ding. You got it. It’s just changing the private sector’s financial asset make up. Like you shifting your 401k to bonds instead of stocks. No new financial assets are introduced, no one has new money to play with, alas.

    If only I could rejigger my 401k and have more money!!

  • http://www.orcamgroup.com Cullen Roche

    There are many goals. And layers here. First, we have to recognize that the credit markets are not normal due to the low demand for credit. So this makes monetary policy rather impotent. These policies usually work through the credit channels. Make credit less expensive, demand increases, economic activity increases, etc. That mechanism isn’t fully functional.

    So the fed is trying to influence the economy through different effects. One is the wealth effect. The other is a psychological effect. Another is an interest rate effect. In short, by buying govt bonds and MBS they can force investors out of low risk assets and into other assets like corporates or stocks. This has a wealth effect according to the Fed by making people feel wealthier and inducing business borrowing. The psychological effect is mostly just a “hey baby, I’ll catch you if you fall” sort of thinking. Nonsense in my opinion. The interest rate effect is essentially a broad market effect that hopes to reduce rates by buying the bonds thereby putting downward pressure on long rates, inducing borrowing and easing the burden on debtors.

    Hope that helps. Also see the QE section in the tools and resources tab.

  • krb

    Bingo! There’s more to the story. I’ve been trying to get at it myself….the string above is my attempt at getting at the mechanism Bernanke is pursuing. As I’ve said above, I could be wrong but then what is the rest of the story.

    Taking the asset swap explanation perfectly literally makes even less sense…….”the banks are replacing an interest bearing asset for reserves at the fed earning less (0.25%).”…..so we’re now to believe that Bernanke’s bank rescue strategy is actually harming banks? Come on!

    My feeble attempt above is simply an attempt to figure out what the rest of the story is……there HAS to be more. krb

  • Geoff

    Agreed

  • Johnny Evers

    My suspicion: Ben is trying to get Treasuries onto the Fed’s balance sheet because he knows what is coming — trillions of new T-bonds must be issued in the next 5 years and where will that money come from? Can the secondary market put $15 trillion into new Treasuries in the next 5 years? And even if they can, is that the best use of the public’s savings.

  • Hoffa

    Read his book Princes of the Yen. A lot of interesting ideas, however, he does not care about equality. He understands that a central bank can buy all the bad depts in the economy, and even tomato ketchup, vastly overprized until all dept has disapered. In the end the Yakuzi would own all of Japan. Recepy for injustice and corruption.

  • Anon

    Oh Johnny, you’re still not thinking about this hard enough.

    You’re right in that its likely trillions of bonds will be issued in coming years. But you need to ask yourself why. Because of the government deficit correct??

    So the answer to your question of “where will that money come from” to buy the new treasureies is that it will in essence be spent into existence by the government! When the governemnt runs a deficit it adds net financial assets to the private sector. Unless that money disappears somehow (and it won’t), it becomes “trapped” in the USA banking system. Banks will gladly buy treasuries with it – that’s what they do.

    The Fed doesn’t need to somehow clear the way for the coming issuance by buying existing bonds and creating heaps of “money” to ensure the money is there in the future.

    Its getting a little frustrating – what don’t you understand. Do you not accept that deficit spending creates the money from which bonds will be purchased?

  • http://www.nowandfutures.com bart

    False. The credit matches the value of the securities.

  • http://www.nowandfutures.com bart

    Only partly true.

    Twist is an asset swap. QE is money printing, as CR himself admitted as noted elsewhere.

  • http://www.nowandfutures.com bart

    wow… the defective and tortured and complex (and even partly circular) “logic” that goes by the name of economics.

    At least now I know why so many don’t care for MR. Money creation via QE, etc. is just way too simple for most to understand. It has to be made more complex I guess.

  • http://www.orcamgroup.com Cullen Roche

    It’s not money printing in the sense you’re implying. It doesn’t actually add net new financial assets to the private sector.

  • DanH

    No, that’s MMT. MR doesn’t say the money comes from the government. MR says the money comes from private banks and gets recycled by the government.

  • DanH

    No new net financial assets are created in QE. And reserves aren’t money in the same sense that bank deposits are money because the private sector can’t use bank reserves like they do deposits.

    Not that hard to understand.

  • Anon

    have you ever met someone who has been the recipient of some of this newly-printed money? You know – someone (or a business etc) who now has more money then they had last week because they have been given some of this money? “Thrown from helicopters” – all that stuff??

    Your answer of course is no… There are certainly people (banks) that in some sense have been given more money, but they didn’t get it for free – they had to swap some of their existing assets (treasuries) to get it!

    The reason why this is all so contraversial is because of differing perceptions of “money”. If you believe (like most of us in this space) that cash and treasury bonds are fungible, our views make more sense. If you believe money is money and treasuries are treasuries, then we’ll never agree…. and that’s fine – no hard feelings…

  • Anon

    yeah, fair enough (expect you’re probably right). Although as I think about it a little harder, your description would mean that the banks then have to “create” a pile of money via loans in the years to come to recycle back to the government to “fund” their deficit.

    I’m not an absolute expert here, but that doesn’t sit well with me – I prefer the general concept of govt deficits “spending money into existence” (whether that’s MMT or MR or MMA or whatever!)

  • http://www.orcamgroup.com Cullen Roche

    Well, it might be uncomfortable, but it’s wrong to say that the govt spends by crediting bank accounts. The govt spends by debiting bank accounts and then crediting other bank accounts. They issue a security in the process that is a t-bond and adds net financial assets (in the case of deficit spending). MMT doesn’t get this right. They claim the Fed is the same as the Treasury and that the taxes destroy the money and the spending creates the money. That’s just blurring the actual transfer of payments that really goes on here. It’s wrong and it shouldn’t be described as such.

  • http://www.nowandfutures.com bart

    The actual facts and simplicities show that new money is created in QE, but not Twist.

    Anyone is free to make it much more complex and tortured and false or even “magic” than that, but it doesn’t make it true.

  • http://www.nowandfutures.com bart

    No, my answer is yes. I have met many someones like that but you can’t or won’t believe it – no worries though.

    Simple logic proves it – there’s more money in the system now than there was x years ago. And I probably mostly use “money” in the same broad sense as most here, the primary and simplest definition being a “medium of exchange”.

  • http://www.nowandfutures.com bart

    CR:
    “The result is no change in private sector net financial assets.”

    Yes, but there is a change in *total* net financial assets, assuming that you consider that the Fed is not part of the private sector.

  • http://www.nowandfutures.com bart

    You’re adding in “to the private sector” which changes the area, which falsely limits the scope.

    I’m talking about *total* new financial assets.

  • Johnny Evers

    Silly.
    It’s like you’re pretending to not even understand your own definition of being sovereign in a currency.
    Coca-Cola has a AAA-rated bond, but Coca-Cola doesn’t have a printing press. GM used to be AAA-rated, but when GM when out of business, guess what, it didn’t have a printing press.
    Why can’t Greece raise money? Because it can’t pay it back.
    Why can the U.S. raise money? Because it doesn’t have to pay it back! Its only constraint is that it issues too many Treasuries and those start gets spent into the economy.

  • Johnny Evers

    Anon: Who owns the Treasuries?
    If the public is exchanging its savings for treasuries (so the government can deficit spend), then we run the risk that the public runs out of savings or that the public becomes net spenders rather than savers.
    But if the banks themselves are ‘buying’ Treasuries with inside money, obviously we can issue as much deficit spending as we want, barring inflation. In that case, we are adding money to the system (deficit spending), but the bond is essentially a non-issue. It will never be repaid or circulated. If that’s what we’re doing, why bother with this exercise that panics the public. Why not just spend directly?.

  • http://www.orcamgroup.com Cullen Roche

    If you remove bonds from the private sector balance sheet and still include them in your economic calculations then that’s your prerogative. I don’t do it because the bonds are no longer held in the private sector and have no influence on the spending transactions that will occur in the private sector (aside from the interest passed to Tsy). What the Fed holds on its balance sheet is similar to a black hole. If you want to call that “money” in circulation then you might as well include Mars and Pluto as money in circulation also because it’s basically the same thing in terms of economic impact.

  • http://www.orcamgroup.com Cullen Roche

    Sure, US govt bonds are safer than corporates, but that doesn’t mean they have no risk. Which is what you’re implying. The 10 year Treasury lost 25% in 2009. You seriously want to call that instrument a cash equivalent????

  • Johnny Evers

    No, I’m saying you do not have a solvency risk with U.S. Treasuries.
    You have said the same.

  • http://www.orcamgroup.com Cullen Roche

    Of course you don’t. But that doesn’t mean they’re cash instruments that have no price risk. You can always exchange a bank deposit for a bank deposit at par. You cannot always exchange a govt bond for a bank deposit at par. In fact, there have been years when you’ve lost HUGE amounts of money in govt bonds. 2009 proves my point. You lost 22% in govt bonds. Bank deposits didn’t lost a dime. You cannot possibly call those instruments the same thing!!!

    I’ll agree with you that the moneyness of bonds is higher than, say, corporates. But still, these are securities. They are not money in the same sense that bank deposits or federal reserve notes are.

  • Johnny Evers

    Like Cullen says, the Fed’s balance sheet is a black hole.
    Once something goes into a black hole, it never comes out.
    Also, the normal laws of physics (economics) don’t apply in black holes (the Fed.)

  • Pierce Inverarity

    Saying that doesn’t make what I said false. Of course the crediting of the Reserve account matches the agreed upon value of the securities or the private entities wouldn’t do the exchange.

    The Fed credits the private bank’s Federal Reserve account with the amount of the value of the securities the Fed receives and then holds on its balance sheet. not sure how you can say this is false since this is explicitly stated by the Fed.

  • Bernard

    Yes – the relationship to your work is why I recommend it – but I believe he goes further in some areas. He exposes the misuse of the term “quantitive easing”, he proves the uselessness of interest rate tinkering on economic growth, and (most importantly in my opinion)introduces the concept of “credit disaggregation” – i.e. separating credit (meaning new money created by banks making loans – the majority of it)into (1)credit that is used for productive investment, thereby creating an income stream to repay principal and interest, and (2)credit that is used for speculative purposes, involving asset purchases that rely on ever increasing nominal prices and rollovers for repayment thus leading inevitably to exponential price inncreases – i.e. are Ponzi schemes that must inevitably crash. There’s more – for example, that neoclassical economics is based on fallacious assumptions such as that the ‘market’ has perfect knowledge so that they clear – he proves (what is now obvious to me!)that the never do. All his work is supported by empirical research. You could contact him directly at R.Werner@soton.ac.uk.

  • Geoff

    Bart, the bonds that the Fed buys under QE are taken out of circulation. There is no increase in financial assets, net or gross. Are you concerned that the Fed’s balance sheet has increased under QE? If so, don’t be. The size of the Fed’s balance sheet is basically meaningless.

  • http://www.nowandfutures.com bart

    If you want to assert with no proof that I remove bonds like that, then be my guest and travel as far down that road as you like – but that type of “dog” won’t ever hunt. It will never work in any discussion or debate, even with sheep or idiots or the ideology bound.

    If you also only count as money the quantity that’s in the private sector, then again you’re welcome to do that but it’s the same as calling one donut a baker’s dozen. It’s just plain a false count and falsely pretends that no money exists elsewhere.

    And calling the actual trillions on the Fed’s balance sheet a black hole is not only nothing but a totally unproven assertion, but ignores all the affects it has created – and more. That comment reminds me of Austrians who count checking account balances as money but when the balance is moved into an MMF, it’s no longer money – i.e., completely bogus and (silly) economics, much like using another very off analogy about circulation. Do you seriously believe that all money must circulate at some minimum speed in order to be considered money?

    Lastly, the topic is actually about the Fed actually *creating* money during QE (not Twist), and the actual flows throughout the entire system, not just the private sector. Other sectors do exist.

  • http://www.nowandfutures.com bart

    Bogus yet again.

    If that’s true, then *any* bonds held for a long term anywhere of by anyone should never be counted, and that’s just plain silly.

    Asserting that the balance on the Fed’s balance sheet means nothing is yet more silliness like the über odd Austrian TMS money. The SOMA drop of billion$ a few years back made a huge difference in the economy and actual real total money supply etc, but I expect that you can’t or won’t admit that either.

    Making artificial constructs and restrictions and odd money definitions etc. that don’t reflect the actual reality of what happens dooms most economic schools to continual failures when applied in the real world… and cause horrific effects.

  • http://www.nowandfutures.com bart

    You either intentionally or not have completely missed the point. The “inside” money mostly already exists and is 100% offset by the payment from the Fed.

    The Fed is the *only/first* one that creates brand new money during QE (but not Twist which is a swap).

  • http://www.nowandfutures.com bart

    The Treasury can issue all they like, but when the Fed does QE via the Primary Dealers, brand new money is used for the purchases which increases total money in both the private and non private financial sectors.

  • http://www.nowandfutures.com bart

    By the way and to hopefully be clearer, the new money in the total system is indeed created by both the Fed and other banks, including both other central banks and foreign banks.

  • http://www.orcamgroup.com Cullen Roche

    The fed is then buying the bonds in the secondary market. Not at auction. Important distinction. Saying that the Fed is funding the Treasury is like saying that you’re funding microsofts IPO in 1983 by buying stock today. Nope.

  • Johnny Evers

    The new money in the system is the increasing pile of Treasury bonds.
    The realism of the current situation is that Uncle Sam can spend our savings, and then give us a credit to redeem our savings at a later date.
    The problem may come when we decide to spend those T-bonds.
    Or maybe it won’t be a problem.

  • http://www.orcamgroup.com Cullen Roche

    Again, an asset (security) that fluctuates by 20% in any given year is not money in the same sense that a bank deposit is.

  • Pierce Inverarity

    how do you spend treasuries?

  • Johnny Evers

    Cullen: Remember when Fannie Mae bonds were trading at 60 cents on the dollar a couple of years ago. My clients were panicking but I told them, ‘It’s a government bond, they will buy you back at par.’ Sure enough, the did.
    Government bonds are principal guaranteed. You tell me another security that has that guarantee.
    As for T-bonds losing purchasing power, CASH loses purchasing power, too.
    Pierce: How do we spend them? Right now, we exchange them for cash any business day. But this is the key factor — if that market dries up, I call up Ben and he exchanges my bond for spendable money, no questions asked.
    And with $15-plus and rising T-bonds out there, that day will come.

  • http://www.orcamgroup.com Cullen Roche

    JE,

    That’s another false analogy. You can get annuities with principal guarantees. That doesn’t mean they involve no risk or that an annuity is the same as cash. That’s patently absurd. These things are securities. Securities are a claim on money. You’re confusing two distinctly different things. Besides, if we included bonds in the money supply as you claim, then the money supply has been increasing by 10% every year since 2009. But real GDP has been in the low 2% range and CPI has been barely above that. Are you really comfortable claiming that the money supply has expanded by 45% since 2009, but that there has been almost no inflation? At some point a bit of common sense needs to come into this discussion since well grounded definitions appear to make no difference….

  • http://www.orcamgroup.com Cullen Roche

    Here’s something else that proves my point that bank money (deposits) are the only real form of money that matters for economic purposes. Total bank credit has expanded at a rate of about 2.8% per year since 2008. Does that number sound more in-line with stagnant economy than your rate of change which is 10%? It should….

  • Pierce Inverarity

    The Fed creates reserves. Reserves come “from nowhere”. Of course. And yes, the total USD balance sheet, private and public combined, increases as a result of QE. But Reserves are not money in the traditional sense. That’s where we’re disagreeing. Reserves created ex nihilo by the Federal Reserve and credited to private banks in their Federal Reserve accounts are not money that ever get spent into the private economy.

    If your whole point is to say that the Federal Reserve expands the total USD balance sheet with QE (apart from twist) then fine, I don’t disagree. But the specifics of the operation matter because it is not an inflationary operation as Reserves don’t get into the private economy. It’s not “printing money” in inflammatory sense of that phrase because the only material impact QE has (Twist or no Twist) is to depress interest rates.

  • Pierce Inverarity

    He’s not asserting anything without proof by the way. That’s pot calling the kettle black. He has cited the Federal Reserve directly on how these operations work. You can look up videos of Ben Bernanke explaining in plain terms what the purpose of QE is.

    You misunderstand how reserves work and the fact that they are, for all intents and purposes, dead money for the private sector.

  • Geoff

    Johnny, just for my own edification, what is your point? Is it about inflation? Are you saying that Treasuries are money, and therefore inflationary? If so, I respectfully disagree. Treasuries are a savings vehicle, not a spending vehicle. If I swap my Treasuries to the Fed for cash, I’m not going to go out and buy a bigscreen TV with the cash. I’m going to find another savings vehicle like a corporate bond or a stock etc. QE might cause inflation in those types of assets, but not in consumer prices.

  • Johnny Evers

    Geoff: I would like to see us make the definitions exact.
    I honestly don’t know what Cullen is trying to do here. He’s hammered home the point that the U.S. is not Greece because we are sovereign in our currency (which I agree, which everybody agrees) but for some reason won’t accept what I see as obvious, that since the Fed will — if it needs too — redeem Treasuries as cash, that makes them cash.
    His fixed annuity argument is bizarre. A fixed annuity is backed by an insurance company NOT the federal government. We’re not going to AIG to fund the U.S. government.
    Your next point: We have $15 trillion in Treasury bonds out there, and growing — you may say that those are savings, but savings are nothing more than future spending. Eventually, those savings will be spent, especially if the economy doesn’t grow.
    Perhaps you are right and those T-bonds will never be spent. But that brings up another interesting question: Does it make sense to have a growing pile of dead assets in the system? We need to circulate money, not pile it up at the financial houses.
    It is interesting that as Cullen says, bonds are growing at 10 pct per year but the economy at 2 pct. All this lending is not growing the real economy. What we hear endlessly is that the real economy is starving for money, but the financial economy is awash in liquidity.
    Eventually, those T-bonds and other debt instruments are going to be turned loose. I’m not making a guess as to what will happen when it does, just asking us to look out a few years and speculate.

  • http://www.orcamgroup.com Cullen Roche

    The t-bonds are going to be “turned loose” into what? Money? :-)

  • Johnny Evers

    Turned loose = spent (after the Fed cashes us out.)
    Not saying that’s bad, or inflationary — just probable.
    For most of, getting money out of the financial system and into the real economy would be a good thing.
    But as we saw in 2008, when institutions all want to cash their bonds at the same time, you have a crisis.

  • http://www.orcamgroup.com Cullen Roche

    I think you’re misunderstanding a fundamental point about securities. All securities are held by someone else at all times. They represent a claim on someone else’s cash. If I sold my company today to the public I would issue securities called stock. The new owners would pay me cash and they would have a claim on my prior ownership stake. Securities are a claim on money. There’s no such thing as everyone cashing out of their securities because all securities are held at all times. If my new shareholders wanted to cash out of Orcam stock they would have to sell their shares….FOR CASH to someone else who will now be the new owners of the stock!

  • Johnny Evers

    Cullen: A Treausury is ultimately a claim on the Fed printing you a dollar. There is no other security like that.
    We can argue that it won’t come to that.

    You have described a system in which bond and debt issuance is growing much, much faster than the real economy.
    This is my analogy.
    You and I each loan the other $1 million. If neither of us has the cash to pay that back, then we’re in a game of chicken. Eventually, both of us are going to want money, that we can spend. If we can’t sell our debt security, then we’re both cooked.

  • Cowpoke

    Is the interest the FED pays on reserves payed in the form of Inside or Outside money?

  • http://www.orcamgroup.com Cullen Roche

    The Fed does not redeem t-bonds by printing you a fresh new dollar. The Treasury will pay you back at par with the money you loaned them. JE, you don’t even have the very basics right here and you absolutely refuse to try to understand. It’s impossible to discuss this stuff with you….I am trying to help, but you seem intent on misconstruing what is actually going on here.

  • http://www.nowandfutures.com bart

    Factually untrue, again.

    You’re apparently completely unaware of SOMA history, etc.

  • http://www.nowandfutures.com bart

    Well, we seem to be getting closer at least.

    I completely reject this though:
    “Reserves created ex nihilo by the Federal Reserve and credited to private banks in their Federal Reserve accounts are not money that ever get spent into the private economy.”

    That basically assumes that private banks let money sit around and do nothing – no investing with it, no lending with it, no use of it for collateral, etc. etc.
    That’s completely unreal and “in-the-ozone” economics.

    I also on the whole reject wildly different types of money. It’s (too broad but hope it makes my point) either a medium of exchange or not – period.
    Even company stock, when used as part of a buyout of another company, is (by definition) money.

  • Geoff

    Thanks for your reply, Johnny. I don’t think an agreement on the definition of money will ever be reached. It is one of the most slippery concepts in the world. You ask 10 people what is money and you’ll get 10 different answers. BTW, I think your definition of money as NFA is a legitimate one. Many people would probably agree with you, especially MMTer’s. But many others, like Cullen, have a different definition that is also perfectly valid, and makes a lot of sense intuitively. After all, who carries around a T-bond in their wallet? I mean besides those drug dealers in Beverly Hills Cop.

    But the definition of money is beside the point. You can call Treasuries money if you want (even Cullen agrees that Treasuries have a significant amount of “moneyness”) but it seems what you are really getting at is saving vs spending. What will happen if the private sector dissaves? That’s a good question. Our problem right now is that the private sector has too much savings. Check out the sector balances. The good news is that this trend appears to be reversing. Hopefully the dissaving continues!

  • http://www.orcamgroup.com Cullen Roche

    You have to look at money on a scale of moneyness. Sure, my underwear can be money, but who will accept that as a medium of exchange? No one except my dog. Corporate stock has a lower moneyness than bank deposits. This is the point you seem to be missing. The only things that are pure money (in USD terms) are bank deposits, coins, cash and bank reserves. But you have to consider bank reserves in their own special form because only banks can use them.

  • http://www.nowandfutures.com bart

    “The fed is then buying the bonds in the secondary market. Not at auction. Important distinction. Saying that the Fed is funding the Treasury is like saying that you’re funding microsofts IPO in 1983 by buying stock today. Nope.”
    No way.

    In order to prove a bogus point, you ignore the actual end points and net effects of the transaction. You also used time in your example as a wild and assignable variable, when it’s not – that’s a horrible and just plain wrong example. Those dogs just plain will never hunt.

    It’s like basic accounting – lots of T accounts, but when you total them, you ignore a bunch of them and then assert that it’s all fine. You may even balance everything if you have enough “special” accounts, but it’s still 100% incorrect.

  • http://www.orcamgroup.com Cullen Roche

    You’re just saying things are wrong without actually showing why they are wrong.

    Why don’t you explain your thinking rather than just claiming my thinking is wrong?

  • http://www.nowandfutures.com bart

    And in QE, the net and simple effect is that the Fed created the money to buy those Treasuries, via the Primary Dealers.

    Forcing it to be more complex than it is in *actual reality* with tortured logic and worse doesn’t make it right in any way.

  • http://www.orcamgroup.com Cullen Roche

    If the money supply is exploding as you and JE keep claiming, then why is inflation so low? According to your definitions the money supply has exploded almost 50% since 2009. Surely something doesn’t sit right in your theory. So what gives?

  • http://www.nowandfutures.com bart

    And in QE, the net and simple effect is that the Fed created the money to buy those Treasuries, via the Primary Dealers.

    Forcing it to be more complex than it is in *actual reality* with tortured logic and worse doesn’t make it right in any way.

    “You’re just saying things are wrong without actually showing why they are wrong. ”

    Either your economic theory stands up to criticism and facts and real world examples and real world flows (as cited) or it doesn’t.

  • http://www.orcamgroup.com Cullen Roche

    The Fed doesn’t create the money to buy the bond! I provided you with a quote from the guys I’ve spoken to PERSONALLY at the NY Fed’s Capital Markets Group. You come back by just saying “you’re wrong” and then describe your own theory supported by nothing but your own typing skills and a total misunderstanding for how secondary markets work.

    You can believe what you want. It doesn’t much matter to me. I can’t teach people who are totally unwilling to try to be open minded and learn.

  • http://www.nowandfutures.com bart

    “This is straight from their capital markets group so it’s absolutely positively correct:”

    I reject that the Fed always tells the truth, the whole truth and nothing but the truth – whether intentionally or not.
    And please don’t jump off into or use “conspiracies” as a point, it comes across like a personal attack or worse.

    Greenspan is one of many examples that perfectly illustrates my point. There are many others

    Another is the underlying assumption that the repo example is the *only* way that Treasuries are financed (or bought outright – one of the missing ways) via the PDs. They at least do use “primary way” but my point is that’s as far as they (and you) go – and it’s misleading.

    “BUT, there is a net financial asset in the t-bond because the govt has issued a bond that is now held by the private sector. So, the private sector has the deficit spending AND the t-bond.”

    What?!?!
    We’re talking about QE here – the Fed adding Treasuries to its balance sheet. And now you’re saying that the private sector has the Treasury???
    Do you consider the Fed as part of the private sector perhaps?

    I won’t argue or debate about Treasury Direct flows, the flows are indeed different… and in no way shapr or form the same as QE flows.
    QE is the Fed buying Treasuries via the PD intermediaries – it’s just that simple.

    And yes, the concept of inside money is valid and probably helpful to some, and does strongly illustrate that (amongst other things) that the Fed is not all powerful etc. But in QE, inside money and the PDs are nothing more than an intermediary (perhaps like a bookie who gets his vig for the service?).

    By the way, we’re running out of reply space it’s getting awfully skiiny. Anything you can do to help?

  • Anon

    Cullen, this is where the whole “…oh just you wait…” line comes in.

  • Anon

    Thanks Cullen – I need to go back and review some of this a little closer.

    (I’ve been visiting your site for some time and I did however pick up some of my views from you! I do recall you used to describe things the way I have above!!)

  • http://www.orcamgroup.com Cullen Roche

    Well, Primary Dealers have also confirmed the same story for me. So, you’re either wrong or the people in the know are all liars. I’ll let other readers decide who to believe. Personally, I trust the people I’ve talked to because they’re extremely reputable sources. Well known sources….

  • http://www.nowandfutures.com bart

    “The Fed doesn’t create the money to buy the bond!”

    The facts I’ve cited prove otherwise, and your dog about ‘you’re wrong’ doesn’t hunt when you can’t directly address my points (most recently about the Fed quote and how they *only* gave the repo example – and that the hole about them always telling the full story was not in any way addressed by you either), facts and very simple flow illustrations, **especially** including that PDs are ONLY an intermediary during QEs.

    You can call all my points and facts a narrative too, just like I could do the same, but you simply have not directly addressed the points I keep bringing up.

    ***
    PDs are an intermediary and that’s it. It doesn’t matter whether they use inside money or whatever – they’re only an intermediary – per the literal and real world flows.
    ***

    “You can believe what you want. It doesn’t much matter to me. I can’t teach people who are totally unwilling to try to be open minded and le…”

    The other side even applies more strongly. I keep coming up with examples and actual facts about QE (and SOMA etc.) and how the Fed creates money and uses PDs as nothing but an intermediary but you reject them all categorically, and then add in personal attacks.

    The fact that you can’t deal with them or directly address them (especially on PDs as intermediaries and the full end point to end points flows, Treasiry on one end and the Fed on the other) in any substantive way doesn’t say much for the MR theory portion about QE.

    As I said, inside money is a valid concept and theory, but has virtually nothing to do with the real world flows of QE, and the Fed’s newly created money during the full process.

    It’s quite odd to me too, given that you do clearly admit that the Fed can create money from thin air.

    The main thing that concerns me greatly about MMT (and to a much lesser extent MR) is that horrifically uneducated politicians and powerful portions of the populace can easily cherry pick them and do horrific things to the various economies and people of the world… not unlike they did with Keynes by failing to practice it all, especially the part about paying it back in good times.
    I can’t imagine anyone to truly believing that we’d be in the mess we are now if payback would have occurred during better times.

  • bart2

    The fact that CR refuses to deal with the simple fact that PDs are nothing but intermediaries during QE between the Treasury on one end and the Fed on the other tells enough of the story for anyone who can view the full picture to make up their own mind about the quality and correctness of the QE portion of MR.

    Inside money is a valid concept, but makes virtually zero difference during QE.

  • http://www.orcamgroup.com Cullen Roche

    I’ve addressed all of your points, provided you with quotes from Fed officials themselves and confirmed that the (majority) of the funding ops are done the way the NY fed described to me. These are irrefutable facts that can only be deemed “wrong” by claiming that the person I spoke to is a “liar”.

    Also, this statement “PDs are an intermediary” is totally false. Saying that is like saying that you’re an intermediary between Microsofts 1985 IPO and the purchase on the market today. Obviously, secondary market purchases don’t provide initial funding. But you fail to understand this point. The banks are funding through intra-day loans, repoing out into the money market and then on-selling the bonds like they always do on the secondary market. The Fed just so happens to be a buyer now. Big deal.

    The facts aren’t on your side here.

  • Pierce Inverarity

    So your whole point is to argue that your definition of money is better than ours? Fine. You can believe that all you want, but you have no definitive proof that this different kind of money has any material impact on what we care about from a macroeconomic perspective.

    Reserves do almost NOTHING in the private economy. You can believe whatever you like, but the mechanics are what they are and your distrust of them doesn’t make them any less true, unless you can prove otherwise. There is more than ample documentation to prove Cullen’s, and my, point out there: not only produced by the Fed, but also other participants in banking operations.

  • bart2

    Oh good grief…

    Precisely where do you think I claim that inflation is SO low?
    And why are you attacking me on that and 50% money supply growth since 2009?
    Did money supply (however you may define it, why may be different than mine and will probably explain whatever difference there is between 50% and your data) grow 50% or not

    Do you really want to go so far off the basic topic I’ve been posting about(QE and Fed money creation)?

  • bart2

    Even though Friedman is anathema with some here, there’s a simple explanation:

    “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

  • http://www.orcamgroup.com Cullen Roche

    Frankly, I don’t know what you’re saying because you haven’t actually put together an explanation of what you think. You basically just keep saying “I didn’t say that” or “you’re wrong” or “the people you talk to are liars” or “MR is fine and all, but wrong”. It’s fine to have opinions, but you’re not actually contributing any knowledge or original thought here.

    Can you actually explain, in your own words, why QE adds money? In 4 sentences? I can explain why it doesn’t….

  • Pierce Inverarity

    From what I gather, he’s saying that we’re inaccurate in saying the Fed doesn’t create “money” when it does QE (ex Twist) because it produces reserves to purchase these securities.

  • bart

    “You have to look at money on a scale of moneyness. Sure, my underwear can be money”

    False and bogus analogy, and has zero to do with my real world example of stocks being money (ny the medium of exchange definition ) during a buyout cycle.

    ” Corporate stock has a lower moneyness than bank deposits.”

    Of course, but again it has little to do with my criticism of the ‘non working reserves in that post about how reserves are “dead” which is just silly. Here it is again:

    “That basically assumes that private banks let money sit around and do nothing – no investing with it, no lending with it, no use of it for collateral, etc. etc. That’s completely unreal and “in-the-ozone” economics.”

    And it remains completely unaddressed.

  • http://www.avondaleam.com/ Scott Krisiloff

    How does MR treat the idea of reserve requirements and capital requirements for private banks that are government (and logic) imposed restrictions on their ability to create credit/deposits “out of thin air”?

    I think that a flaw in some reasoning here is the absolute steadfast belief that Fed Reserves or outside money does not facilitate some sort of multiplication of net assets. I think empirically an increase in the stock of outside money allows for more net financial assets to be created in society because it allows banks to buy more assets (or loan more money) without affecting the private institution’s leverage. Here’s a simplified example:

    ABC bank balance sheet:

    $100 in loans, $90 deposits, $10 equity

    If there is a 10% capital requirement, then this bank cannot lend anymore money even if theoretically it can create deposits out of thin air. Another $100 increase in loans would result in a similar $100 increase in deposits, at which point the bank would only have 5% capital and would have a problem with its regulator.

    On the other hand, if the Fed replaces the loans with “outside” money, the bank’s balance sheet now looks like this:

    $100 cash, $90 deposits, $10 equity.

    The bank can now use this cash to purchase a newly created net financial asset (e.g. a treasury or create a new loan) without affecting its leverage/capital ratio. If it buys a treasury its balance sheet now reads:

    $100 marketable securities, $90 deposits, $10 equity.

    The fact that the Fed was the one who purchased the loan with outside money allows for new net financial assets to be created, and increases the aggregate level of purchasing power in the economy. If another bank were to buy the asset then it’s only shifting the capital constraint to another private institution. The Fed doesn’t have any sort of capital or reserve constraint though so it can lever as much as it wants. This is really what the concept of “printing money” gets at.

    I think a problem with the line of logic that “reserves are meaningless” is that the analysis is being performed in a non-normalized reserve environment. Right now there are so many excess reserves that they don’t really provide any sort of check on lending growth but in a normalized environment when reserves only make up a tiny fraction of outside money (as they did pre 2008) then the reserve requirement is a real lending constraint. The fact that interest rates are usually set in the market for these reserves demonstrates that there is definitely a function for reserves at the Fed (because otherwise why would banks trade them between each other).

    While reserve requirements may not be a constraint on lending today, capital requirements certainly are. QE helps to facilitate new credit creation while maintaining the capital ratios of the private system.

  • bart

    “Well, Primary Dealers have also confirmed the same story for me.”

    I could quote stuff (and cite people I know) and then fail to respond to it.

    The primary issue remains – that the PDs are only intermediaries between the Fed & Treasury during QE, and inside money is basically irrelevant and/or an added inapplicable point.

  • http://www.orcamgroup.com Cullen Roche

    Reserves are an asset. Banks are capital constrained….I’ve always said that.

  • http://www.orcamgroup.com Cullen Roche

    Your example is the same as claiming that you’re funding Microsofts IPO in 1985 because you bought their shares today on a secondary market. No matter how many times you say it your claim that the Fed is funding the govt will always be wrong. You are still misunderstanding a fundamental difference between primary markets (where the actual funding I explained in the NY fed quote comes from – the “lie” as you said) and secondary markets (where the Fed buys).

  • bart

    “Also, this statement “PDs are an intermediary” is totally false.”

    Nothing but another assertion, and again – completely false and misleading.

    You admit that the PDs ARE the secondary market to whom the Fed goes to buy Treasuries (with newly created money out of thin air – as you also admitted).

    And the PDs do buy Treasuries direct from the Treasury.

    Connect the two end points and ipso facto, my point is 100% proven.

    I’ll also let other readers decide who to believe.
    Simple or super duper complex and tortured etc., or just A-B-C.

    The simple facts and actual flows are completely on my side, and without even “appealing to authority”.

  • bart

    “You can get annuities with principal guarantees.”

    Of course one can, but one must also take into account the dollar value at maturity will be quite a bit less or even hugely less.

    Inflation matters a great deal. 2% inflation causes the dollar to be worth 50% less after around 30 years.

  • bart

    “bank money (deposits) are the only real form of money that matters for economic purposes.”

    I’ll ask you the same question I asked of the extreme hyperinflationist folk that think the dollar is worthless.

    Will you send me all your cash?

    “stagnant economy”

    Yes, stagflation.

    Also, total bank credit is less than about 20% of total credit.

  • bart

    “the Fed will — if it needs too — redeem Treasuries as cash, that makes them cash.”

    Indeed, and as it actually did in huge volume per the actual history of the SOMA account in the last few years.

  • http://www.orcamgroup.com Cullen Roche

    Actually, you’re blurring the whole point and back pedaling, but whatever.

  • bart

    I did answer, many many times, the most recent one very near the bottom of the page. Feel free to accept it and directly answer it, or not.

    In the meantime, please address my answers to your personal attack above:

    Precisely where do you think I claim that inflation is SO low?
    And why are you attacking me on that and 50% money supply growth since 2009?
    Did money supply (however you may define it, which may be different than mine and will probably explain whatever difference there is between 50% and your data) grow 50% or not?

  • http://www.orcamgroup.com Cullen Roche

    Okay, I’ve said all over this thread that cash is of the highest moneyness, but you caught me slipping in that one comment. Nice catch.

  • bart

    “You basically just keep saying “I didn’t say that” or “you’re wrong” or “the people you talk to are liars” or “MR is fine and all, but wrong”.”

    OMG – I ask YET AGAIN where I said those things, without explaining or backing them up?

    Are you trying to tick me off so that you can then ridicule me?

    I have made one primary point throughout this thread and taken dozens of side tracks to try and clarify side issues (like SOMA and the Fed actually selling Treasuries which no one seems to even vaguely recognize that contradicts one of your points about Treasuries) … no one has directly (and with facts) addressed that primary point.

    And as I noted 2 days ago, the actual way that QE works is apparently way too simple for many to grasp.

  • http://Avondaleam.com Scott Krisiloff

    So would you agree that QE helps to relieve capital constraints then?

  • bart

    You said above
    “If the money supply is exploding as you and JE keep claiming, then why is inflation so low?”

    Simple, it isn’t – when calculated more correctly.
    Anyone, please feel free to use the C word (conspiracy) to prove your ignorance and inability to look at actual facts. And no, I’m not taking about John Williams work.

    ” In which case I think maybe you need to go read more Zerohedge and less pragcap?”

    The standard and classic response of someone who can’t deal with being busted for failing to deal with the simple truths, especially the one centering around PDs as intermediaries – especially when he admits all three points I’ve been making in his own words.

    But I won’t stoop as low as a series of heinous and completely unsubstantiated personal attacks.
    I’ll leave it to the other readers to judge MR etc. on its merits and lack of them when CR (in his own words) agrees with my points about QE and PDs as proven in a post near the bottom of the page.

  • http://www.orcamgroup.com Cullen Roche

    Depends on the environment, I guess, but yeah. Swapping reserves for MBS definitely helps in that regard. But lending is more a function of demand than supply. Banks don’t run out of supply. They do, however, run out of demand from creditworthy customers.

  • http://www.orcamgroup.com Cullen Roche

    Bart,

    I am not ridiculing you, but I don’t know how many times I can explain the same point to you before I just give up and realize that you either won’t understand or don’t. The Fed buys on the secondary market. Like you buying shares of MSFT today. The PD’s buy on the primary market and provide the actual funds. Like you buying MSFT at IPO in 1985. They’re two totally different transactions. And the PD’s ALWAYS on-sell their inventories. So the fact that the Fed is a buyer there is much less significant than most presume. And your assertion that the reserves are funding the govt is totally wrong. As I showed above. That’s like saying that your purchase of MSFT is funding their IPO. Obviously, that’s wrong.

    The PD’s are not just intermediaries. They are THE funding source. They are performing fiscal policy. The Fed is performing monetary policy. They’re TWO TOTALLY SEPARATE THINGS! If you don’t get all this then I give up.

  • krb

    Halleluja! Halleluja! Halleluja! Halleluja! Haleeaa luja!

    We finally have a break through!! Thank you Scott for introducing the possibility that there may be a possibility of jumping the impenetrable wall everyone wishes to put up between fed-held reserves and private bank reserves. krb

  • Pierce Inverarity

    What is the proper calculation for inflation?

  • krb

    Would this help their ability to practice other-than-lending activity? krb

  • http://Avondaleam.com Scott Krisiloff

    I agree in today’s environment, demand is probably the more important side of the equation, but I wouldn’t say that’s always the case.

    Even just a few years ago, without QE we might have been in an environment where banks were extremely capital constrained as loans went bad and ate into equity. Banks were only able to recapitalize by selling equity in spring ’09 after the Fed pumped huge amounts of liquidity into the system (mostly this was a function of what it did to boost confidence).

    Many banks are still not allowed to pay dividends as they shore up their capital to probably overly conservative levels. In that environment, QE is extremely helpful in allowing banks to continue to purchase treasuries–remember net financial assets have continued to grow because government borrowing has eclipsed private sector de-leveraging! This implies that we continue to lever on a fixed capital base, which couldn’t happen without QE. In this sense the Fed is helping to increase net financial assets.

    I think even in a more normalized environment banks probably the supply/demand balance may tip more in favor of a supply constraint. Most banks operate pretty close to the maximum line of supply allowed by their capital. You could argue that one of the causes of the financial crisis was that banks were pushing the limits on leverage.

  • Cowpoke

    Anyone want to comment on this?:
    “Dealers send securities to the Fed over
    an electronic network, and the Fed adds money to the reserve accounts of the
    banks of the brokers or dealers. The banks, in turn, credit the accounts of the
    brokers and dealers, thereby increasing the amount of money and credit available
    in the market.”
    http://www.dallasfed.org/assets/documents/educate/everyday/ev4.pdf

  • Johnny Evers

    ‘The Fed does not redeem t-bonds by printing you a fresh new dollar. The Treasury will pay you back at par with the money you loaned them.’

    Really, I don’t understand that at all. Because the money I used to buy the bond was used for deficit spending.
    My savings went for deficit spending, and I was given a T-bond. The Treasury doesn’t have my money anymore.
    You can call a T-bond ‘money’ as I do, or a net financial asset, as you do, but even granting that it’s a net financial asset, someday it must be spent back into the system. After all, the purpose of savings is not to grow net financial assets, it is to accumulate net financial assets to someday spend.
    If the economy grows, then future savers will buy the bond. That’s what you are pinning your hopes on. Or, if we have inflation, the bonds will be worthless. But if these net financial assets grow at the rate they are now, then the Fed will have to redeem them because we will be issueing so many T-bonds that there won’t be enough savings out there to redeem them. So the Fed will have to buy them. Or, the Fed will do what it’s doing now — buy existing bonds on the secondary market to clear inventory for the new bonds coming out.

  • http://www.orcamgroup.com Cullen Roche

    basically the money multiplier. Apparently it still exists in some Fed documents….

  • Cowpoke

    Cullen, I know a guy (friend of family wife’s side) who works for the FED, He was at my wedding (friend of wife side) for what that’s worth. I am going to call him with some questions but I want to be able to get to the correct party and don’t wan’t to sound like an Idiot, so can you suggest a couple questions I can ask him with regards to reserves that I can then post links to that are basically from the horses mouth so to speak?

  • http://www.nowandfutures.com bart

    Recap, simple as possible mode.

    1. QE is the Fed buying Treasuries. The two parties (end points) to the transaction are the Fed and the Treasury.

    2. The Fed creates money out of thin air (CR quote: ” Like any bank, the fed creates its deposits “out of thin air”.”

    3. The Fed buys Treasuries mostly from the Primary Dealers (the secondary market).

    4. The Treasury doesn’t sell directly to the Fed but does sell to the Primary Dealers.

    5. Therefore, the Primary Dealers are the intermediary between the Fed and the Treasury.

    Again, the basic transaction (aka, final end points) is only between the Fed and Treasury. It uses the Primary Dealers as an intermediary.

    The Fed creates money (per CR) and the Treasury gets the money for the Treasuries from the Primary Dealers.

    Therefore, the inside money issue is irrelevant and inapplicable.

  • http://www.orcamgroup.com Cullen Roche

    You can’t just cancel out the PD step because it ruins your theory. That’s like saying “water flows through a river onto a water wheel which creates power for my house, but the water wheel doesn’t matter because it’s just an intermediary between the flow of water and the power creation”. That makes zero sense.

  • hangemhi

    +1 Anon. And notice no “bogus” comment from Bart. Too bad Cullen is right and Bart is wrong since the Fed would have already gotten us out of this mess.

  • hangemhi

    as a Realtor I can tell you the low interest rates are working – my local market is booming, so are many others.

  • http://www.orcamgroup.com Cullen Roche

    Yep, definitely becoming more effective because the BSR is subsiding. I think monetary policy works great outside of a BSR….

  • Cowpoke

    Cullen, from what I read, his post doesn’t say anything about “Canceling” out the PD. What part of that post do you see that? I am confused now..

    Seems he is basically saying that there is a game going on here behind the scenes that is really just a flipping game and means nothing, which is what I am starting to think. Heck, if reserves mean nothing, then the whole FEDand bank reserves concept is a joke. What’s the point of Reserves then (OTHER THAN CONFUSION)? They mean NOTHING at least from what I am gathering from this thread

  • Cowpoke

    Then What’s The POINT? Why SWAP? I recall us (Prag cap community) going over this a couple years ago when the FED was stuffing banks with reserves. The thought was (from what I recall) in case there was a run on the banks. Well, I don’t think that is possible now so what’s the reason, Just a B.S. game?

  • Pierce Inverarity

    He’s saying inside money is “irrelevant and inapplicable.” Unless, of course, you realize that the primary dealers use inside money at a treasury auction. The Fed takes this inside money and gives it to the Treasury. The Treasury then spends that back into the system with inside money. It’s a key step that he’s glossing over.

    I share your confusion over reserves, however.

  • http://www.nowandfutures.com bart

    Except that’s the way it works in the real world, regardless of whether you or others think it makes sense.

    And yet again, I notice that you very carefully avoid the actual facts in the post and only “answer” with a bogus and unrelated/false analogy (and of course a false analogy doesn’t make sense).

  • http://www.nowandfutures.com bart

    Unfortunately incorrect yet again. As CR even noted and I quoted, the Fed creates the money from thin air to pass along to the PDs.

  • http://www.nowandfutures.com bart

    The primary issue with CPI accuracy:

    The simplest evidence that CPI substantially understates inflation is the decrease in standard of living and purchasing power of seniors who have lived for a few years with their total income only based on Social Security payments.

    And we’re probably about to replace CPI-W for SS adjustments, which tracks fairly well with inaccurate and low CPI-U, with another and even less accurate & lower “chained CPI”.

    Anybody want to try the C word (conspiracy)?

  • http://www.nowandfutures.com bart

    Even considering the sometimes odd accounting rules that apply to central banks, when the Fed adds Treasuries to their balance sheet they do have to pay for them.
    They create money from thin air to do that.

  • http://www.orcamgroup.com Cullen Roche

    The point of reserves is to implement monetary policy. Bart is confusing monetary policy and fiscal policy. And yes, he is saying the PD’s don’t matter. Which totally misconstrues what’s going on.

  • http://www.orcamgroup.com Cullen Roche

    No, the PD’s absolutely positively do not use reserves to buy the bonds. They create an intra-day loan, repo the tsy out and the money market serves as funding source. The reserves don’t even come into play in any of this until the funds get transferred into the Tsy’s account at the Fed. You are misconstruing all the details….

  • http://www.orcamgroup.com Cullen Roche

    Well, this was inevitable. So you think it’s all a big conspiracy. No wonder you refuse to understand how the t-bond auctions actually work. Look, I am really happy to try to help you understand how this all works, but if you can’t eliminate the deep seated skepticism then there’s no way you’ll ever get it….

  • Cowpoke

    Bart, I do share your confusion and frustration in gaining a mutual understanding with these concepts. If I may though add, I have been reading/ posting on this blog for years since it was the “Pragmatic CAPITALIST” and I can honestly say Cullen and company are open to change with regards to truth in learning. The Prag Cap has never been Dogmatic in it’s learning process and has always been open to challenging questions. Now, not that the Prag Cap has always had the correct answers, But it has/does strive to be forth right and honest in seeking the truths that can be based on verifiable fact’s.
    But tha’s the biggest issue I have noticed over the years.. finding VERIFIABLE FACTS…:) haha

  • http://www.nowandfutures.com bart

    As I’ve said already numerous times, it makes no difference at all how the PDs buy the Treasuries (repos or twinkies or gold or whatever), the new money comes from the Fed for QE.
    Look at the balance sheet

  • Pierce Inverarity

    At a Treasury auction, when the Treasuries are FIRST PURCHASED, they are purchased by Primary Dealers using inside money. You are flat out wrong to suggest otherwise.

  • http://www.nowandfutures.com bart

    I’m only saying the PDs don’t matter as money creators in QE – the Fed creates the brand new money from thin air. The PDs are nothing but fancy intermediaries between the Fed and Treasury.

    Please stop using ridiculous generalities and putting (incorrect or bogus) words in my mouth!

    And again:
    “… when the Fed adds Treasuries to their balance sheet they do have to pay for them.
    They create money from thin air to do that.” (and via the PDs)

    It’s not at all complex, and has virtually nothing to do with “inside money”.

  • Pierce Inverarity

    Look at the billion prices project by MIT. It matches very closely the CPI number. Though I suppose they’re in cahoots with the government too?

    If that’s your take, you really aren’t going to find a receptive audience here. You operate in a different world from the rest of us.

  • Johnny Evers

    Where does that money go?

    When I buy a Treasuries from the primary dealer, where does my money go?

  • http://www.nowandfutures.com bart

    I’ll totally drink to that on verifiable facts!!

    It gets tougher and tougher as the years have gone by since I was the 1st one on the planet (~4 months before John Williams at shadowstats) to reconstruct M3 when the Fed discontinued it in 2006, etc. to find and verify the good & reliable stuff.

    And I’ve been far from totally correct every time too.
    WWW = caveat emptor.

  • http://www.nowandfutures.com bart

    Sorry, it makes no difference who buys them first.

    It’s the actual final transaction between the the two final end points (Fed and Treasury) that is the only things that matters – and that’s Accounting 101.

  • Pierce Inverarity

    If you buy treasuries from a primary dealer, your demand deposit account gets debited and the primary dealer’s account gets credited (asset). Your custodian account gets credited with the treasury and off of their books. It’s like buying any security on the open market.

  • http://www.nowandfutures.com bart

    Feel free to spew about conspiracies, while yet again completely ignoring the state of purchasing power drops of seniors only on SS.

    Good grief man, LOOK AT THE FACTS!… or not, your call.
    Do you really believe it’s skeptical to note the actual declines in purchasing power from SS only???

  • http://www.nowandfutures.com bart

    And I repeat, since it continues to be avoided.

    Recap, simple as possible mode.

    1. QE is the Fed buying Treasuries. The two parties (end points) to the transaction are the Fed and the Treasury.

    2. The Fed creates money out of thin air (CR quote: ” Like any bank, the fed creates its deposits “out of thin air”.”

    3. The Fed buys Treasuries mostly from the Primary Dealers (the secondary market).

    4. The Treasury doesn’t sell directly to the Fed but does sell to the Primary Dealers.

    5. Therefore, the Primary Dealers are the intermediary between the Fed and the Treasury.

    Again, the basic transaction (aka, final end points) is only between the Fed and Treasury. It uses the Primary Dealers as an intermediary.

    The Fed creates money (per CR) and the Treasury gets the money for the Treasuries from the Primary Dealers.

    Therefore, the inside money issue is irrelevant and inapplicable.

  • http://www.nowandfutures.com bart

    BPP holes and potential or probable issues

    BPP only surveys online prices, which is the most price competitive market place around since it’s so easy to do price comparisons. That hints at possible undervaluing of price increases.

    BPP only surveys goods, not services. Services, depending on where you look, are about 70% of the economy. I have substantial trouble giving much credence to an index that only measures about 30% of prices.

    BPP can’t survey anything in the medical field, where the highest inflation frequently exists.

    Which housing index do they use? There’s a huge difference between Case Shiller and Dataquick for example. Do they always see the whole transaction (in a swap for example)?

    How do they pick up health insurance paid by the company? That’s not exactly always public knowledge available on the internet, let alone how accounting for coverages changes isn’t simple too (yes, the BLS is far from perfect too)

    BPP does not and can not survey many high end items where a login or similar must occur. Inflation is always higher on high end and very high end items, aka a potential bias… and a more closed methodology.

    Is collecting 500k prices per day really all that different than 100k, in the sense that does anyone really believe that with all the variables in measuring inflation that it matters much to it’s accuracy?

    Who owns BPP and who and what are their connections and possible vested interests?

    I haven’t looked as deeply as I’d like and the BPP methodology is over 90% opaque, but what about bias for recording specials vs. everyday prices or software bugs that pick up data from the wrong column on a dynamic page (and yes, I’m sure they do their best and I’m not accusing them), or how about postage and handling “creativity” where higher prices are hidden in P&H.

    And then there’s a biggie – how the big and medium sized sites can and do tailor make prices depending on who you are in their database? A truly almost wild variable.

    We know nothing about the weights. Is housing a 41% equivalent? How do they weight alcoholic vs. non alcoholic beverages?

    Yes, the BPP can be a bit helpful since it comes out a month earlier but it doesn’t make any difference to regular folk. It’s primarily for weird inflation freaks like me, or corporate models.

    Where are the precise numbers published (they’re not, just charts)?

    Where’s the BPP history prior to 2009? CPI goes back to 1913, and extensions back into the 1700s.

    BLS related

    There’s nothing wrong with using a survey method that’s based in the 50s (I’m older than that anyhow ;-). The huge majority of BLS surveys since the 50s are eyeballs on, and they can see actual ingredients lists to see any “hidden” inflation or any other games that are hidden to a computer only based approach.

    Yes, BLS misses cell phones but not only is that temporary, I also believe that only misses about 10% overall, considering all the other ways surveys are done.

    How do we know that BPP survey methodology is even as good as the BLS? The BLS at least does tell us some thing about its methodology.

    I have no clue where the data about no big-box stores existing in BLS surveys comes from. The BLS can be slow but not that slow. I’d love to see a link or proof, I think James Surowiecki is incorrect (article is from early 2011) but am willing to apologize if I’m out of date.

    One huge example is BPP’s possible inability to take quality “adjustments” into account. Yes, size or weight is comparable and adjustable when it changes but what about switches to or from cane sugar, or to or from steel to pot metal, or the actual ingredient balance in concrete. They’re not there in person like BLS reps and their eyeballs are.

    We know that there are issues with BLS stuff like hedonics or medical CPI being 7% index weight while medical is 17% of GDP, but we know even less about BPP methodology than we do about the BLS.

    And again, I’m not accusing nor do I want to impugn BPP. I’m simply pointing out a few things off the top of my head where the BPP index has large holes and potential issues.

  • http://www.nowandfutures.com bart

    LOOK AT THE FACTS:

    The simplest evidence that CPI substantially understates inflation is the decrease in standard of living and purchasing power of seniors who have lived for a few years with their total income only based on Social Security payments.

  • Pierce Inverarity

    You’re trying to have it both ways if you say the inside money is inapplicable. You just tacitly agreed that the primary dealers use inside money for the first transaction. That step cannot be glossed over. That inside money is recirculated back into the economy via the Treasury, and the Primary Dealers’ participation in the process gives the currency in use what MR calls an acceptance value (is that right Cullen?). It’s an important step in the process that you want to ignore.

    If you’re only wanting to discuss QE, then yes, the Fed expands the USD balance sheet. But then we get back to the discussions of what use Reserves are to banks and how they can or cannot use them.

  • Johnny Evers

    Thanks, Pierce:
    But that makes it sound as if the PD winds up with an asset but not a debit.
    Uncle Sam: Deficit spending (asset) and must redeem the Treasury.
    M: Asset (T-bond) but debit from my checking account.
    PD: Asset from the buyer. Where is his debit?

  • Pierce Inverarity

    It’s a swap between you guys. You’re swapping assets. They make their money charging you a commission or marking up the asset over what they paid for it. They debit themselves the Treasury, credit themselves your cash. You’re debited cash, in exchange for the credit of the Treasury.

  • Pierce Inverarity

    In the original Treasury auction process the PD is debited $$ to get the Treasury asset. They then on-sell this to you. The debit for the PD is at the original auction.

  • http://www.nowandfutures.com bart

    By the way Pierce Inverarity, I’m fascinated by lots of things in your post like:

    * the implicit and heinous assumption that I’m trying to find an audience. I thought that real facts and real logic would be more important to most.

    * the complete failure to deal with what I said, and complete failure to even vaguely address it.

    * the biased and again heinous assumption accusing me of thinking that the BLS and BPP are in cahoots.

    * the ridiculous underlying assumption that unconscious conspiracies don’t and can’t exist (see http://viridia.org/2007/08/16/unconscious-conspiracies/ ) or that actual conspiracies don’t exist… like the Pueblo incident or the Pentagon Papers examples, and many many more that can easily be found via a real study of actual history.

    * using the “Black PR” word *conspiracy* to try and spin your lack of education and awareness into something that allows you to look like you know something just plain doesn’t work.

    EPIC FAILS! nice job… no points and so much more.

  • http://www.orcamgroup.com Cullen Roche

    The final transaction in QE is between the Fed and PD’s on the secondary market. So you’re contradicting yourself.

  • http://www.orcamgroup.com Cullen Roche

    Yes, and I bought MSFT which means I funded their IPO. That makes no sense of course.

  • Johnny Evers

    Why is the Treasury a debit for the PD and the Treasury. Are you suggesting the PD has to redeem the T-bond, but not the Treasury Dept?

    Is the whole point of this exercise to move the inside money into the real economy, and exchange money for a money-like security — why this latter step?

  • http://www.nowandfutures.com bart

    My points have always been about QE alone (except on side trips like correcting the completely wrong assumption about SOMA and the Fed never selling Treasuries), and that inside money makes no difference to the overall transaction, that is only between the Fed and Treasury but with the PDs as intermediaries.

    If you only want to focus on partial and/or incomplete transactions, count me out. It’s worthless to do that.

  • Pierce Inverarity

    I never used the word conspiracy.

    It was a rhetorical question. I appreciated your thorough analysis of BPP.

    I’m not throwing around loaded words like heinous, bogus, failure, FAIL, or accusing anyone of a lack of education. I merely informed you that if you’re going to fall back on being skeptical of absolutely everything, you’re going to have a hard time engaging us in meaningful discussion. That’s simply an observation based on the amount of time I’ve spent here.

  • http://www.nowandfutures.com bart

    Congratulations! *yawn*

    And I repeat, since it continues to be avoided.

    Recap, simple as possible mode.

    1. QE is the Fed buying Treasuries. The two parties (end points) to the transaction are the Fed and the Treasury.

    2. The Fed creates money out of thin air (CR quote: ” Like any bank, the fed creates its deposits “out of thin air”.”

    3. The Fed buys Treasuries mostly from the Primary Dealers (the secondary market).

    4. The Treasury doesn’t sell directly to the Fed but does sell to the Primary Dealers.

    5. Therefore, the Primary Dealers are the intermediary between the Fed and the Treasury.

    Again, the basic transaction (aka, final end points) is only between the Fed and Treasury. It uses the Primary Dealers as an intermediary.

    The Fed creates money (per CR) and the Treasury gets the money for the Treasuries from the Primary Dealers.

    Therefore, the inside money issue is irrelevant and inapplicable.

  • Pierce Inverarity

    QE isn’t between the Fed and Treasury though. It’s between the holders of Treasuries that were already issued and the Fed. The Fed is acting as a market maker for Treasuries in order to achieve certain policy goals.

    Nevermind…

  • http://www.orcamgroup.com Cullen Roche

    Bart, is this 2009 hyperinflation warning based on “monetization” and “facts” your version of understanding how the system works?

    “There’s a possibility of something similar (but not as severe) happening in the U.S. – we’d rather at least mention it than not.

    The parallel to the German war reparations is the derivatives area today.

    Don’t shoot the messenger, we didn’t invent the facts below.”

    http://www.nowandfutures.com/us_weimar.html

    Can you explain to everyone here why this thinking was utterly and completely wrong? Why your “monetization” talk was wrong? Why your thinking today is any better?

  • Pierce Inverarity

    We have to be clear here, the transaction between the PD and the Treasury only happens at the auction. And even then, it only happens via the Fed as the intermediary. The PD gets debited it’s $$ which gets credited to the Treasury in exchange for the Treasury security (debited from the Treasury and credited to the PD).

    The PD then, in a separate transaction, sells the Treasury security to you as any other brokerage transaction (stock, bonds, futures, whatever).

  • http://www.nowandfutures.com bart

    Fair enough, and to the best of my knowledge I’ve used facts and simple logic to make my points… although I do fire back when attacked with ridiculous or wrong assertions or implications.

    The real and basic point since my first post is that both my QE points and now my CPI and BPP points have never been truly and directly addressed.

    PDs are only intermediaries during a QE cycle and the Fed prints new money to buy the Treasuries. Inside money doesn’t apply except in the extreme micro area (and not to the full and complete transaction).

  • http://www.nowandfutures.com bart

    And by the way, “they’re in cahoots with the government too?” most definitely implies conspiracy.

  • http://www.orcamgroup.com Cullen Roche

    I addressed all of your points. But you refuse to listen. You just keep saying it’s all a conspiracy or that the intermediaries don’t matter. You’re not debating. You’re not trying to learn. You’re regurgitating some conspiracy you bought into on conspiracy sites and refuse to admit was wrong.

  • Johnny Evers

    You can believe that the cost of living is going up, based on looking at prices and median wages. Doesn’t believe you’re crazy or a conspiracy theorist.
    Being skeptical of the government figures is a good thing, imo. Being skeptical in general is a good thing.
    Dig deeper. Look at all the data. Most of us are in financial services and benefit from policies that put money in our sector; let’s not forget the working class.

  • http://www.orcamgroup.com Cullen Roche

    I agree. Which is why I provide independent inflation gauges all the time. Thing is, they all say Bart’s conspiracy theories are wrong.

    http://pragcap.com/independent-inflation-gauges-begin-to-move-higher

  • http://www.nowandfutures.com bart

    And again, a failure to deal with the WHOLE transaction picture – as I have stated again and again and again.

    The Fed takes those Treasuries away from prior holders, primarily the PDs. The Fed can’t buy direct from the Treasury so they do the next best thing.

    The total effect after all minor and inapplicable details have been applied, is that net net – the Fed buys Treasuries direct from the Treasury Dept (and yet again, using the PDs as an intermediary).

    So many want it to be super complex, but it’s not – as proven. But interpret it in as complex a way as makes you happy.

  • http://www.orcamgroup.com Cullen Roche

    You’re a classic case of confirmation bias. You’ve predicted 25% inflation for years.

    We do not expect anything even closely resembling the Weimar experience in the US in magnitude. We do expect inflation of well over 25% though.

    But your predictions about 25% inflation were wrong and your understanding of monetization was wrong.

    Look, I get things wrong all the time. But I don’t scream at people on the internet trying to make everyone think I am right even though I am wrong. If I am wrong I study the facts and try to understand why I was wrong. I recommend you do the same. But I am not here to twist people’s arms….

  • http://www.orcamgroup.com Cullen Roche

    The Fed ALWAYS implements monetary policy through the PDs. If you understood what you were talking about you’d know that these operations are the way the Fed ALWAYS implements monetary policy. The Fed always increases reserves when it wants to ease. That’s how it’s always worked. But for some reason it wasn’t until 2009 that all you inflationists started screaming about open market operations destroying the world….

  • Pierce Inverarity

    The funny thing is, if the Fed were actually to buy directly from the Treasury they wouldn’t have the Debt to GDP argument to fall back on any longer…

  • http://www.nowandfutures.com bart

    I see you’ve apparently admitted that you’ve completely lost on the PD and QE issues and are now reduced to misrepresenting and attacking me AGAIN!

    *good grief!*

    If you want me to leave and not post here, just say so.

    If you want me to leave and not post here, just say so.

    If you want me to leave and not post here, just say so.

    And you STILL haven’t even attempted to even vaguely commented on my recent posts on the ultra simple proof on why CPI is low, let alone dealt directly with QE issues and inside money having virtually nothing to do with QE, as well as the SOMA proof about Traesury sales.

    But you sure have tried to slime me with ZH references, etc etc.

    If you want me to leave and not post here, just say so.

  • http://www.orcamgroup.com Cullen Roche

    I don’t mind that you’re commenting. It’s no skin off my back. But I do want you to explain to everyone why your 25% inflation prediction and “monetization” thinking was wrong in 2009. And no, I certainly haven’t admitted to being wrong about the way this stuff works. After all, I’ve been explaining for YEARS why this wouldn’t be inflationary. So one of us has a track record of being right and the other has a track record of being wrong. You can scream about this and that and all the conspiracies, but that doesn’t mean it’s right….

  • http://www.nowandfutures.com bart

    “You’re a classic case of confirmation bias. You’ve predicted 25% inflation for years.”

    Congratulations!!!
    Yes, now you’ve finally attacked me personally and not answered my points enough times that you can say that I’ve called you a LIAR, and maybe even ban me. Your conclusion is just plain PURE BULLSH*T and a LIE.

    For one thing, WHERE DO YOU SEE A TIME PERIOD specifically and unequivocally named? I’m NOT John Williams who has called for hyperinflation (but at 50%/month) in specific years and has been incorrect?

    Good grief man, quote it all at least so others can see the full and complete context, and that it’s a **prediction**! Predictions are about the future!

    Parallels DO exist with Weimar and Argentina, and if you can’t see the actual facts and parallels – well, I can’t help that.

    Is hyperinflation (the 25%/year variety AS CLEARLY STATED, and based on the definition from the IASB) a guarantee – h*ll no, and nowhere and in no way, shape or form can you find anything I’ve EVER stated that guarantees it.

    Even the title of those two pieces clearly states “Troubling similarities”.

    And again, if you want me to leave and not post here, just say so. You need not continue the attacks and “propaganda” or logical fallacy based lies etc.

  • http://www.nowandfutures.com bart

    Please continue the attacks that have nothing to do with the basic topic of QE, PDs and inside money.

    Please especially ignore that there is and was no time period attached to that 25% prediction… and of course, please tell us that you will 100% guarantee that we won’t possibly have 25% inflation within say 10 years.

    You hammered me, so put up or back off – do you have the courage of your convictions to guarantee that inflation won’t hit 25%?

    Congrats too, you have successfully avoided dealing directly with QE & PDs, CPI accuracy issues, SOMA and the Fed selling Treasuries, etc. etc. by changing the subject… but I believe that you have done a huge disservice to the various readers by having done so.

    And yes, one of us has been wrong but spin that all you like. It doesn’t hunt either, and not only because you’re cherry picking and spinning and lying.

    You of course 100% neglected my call for deflation in 2007-8 too – yet another inconvenient truth. Oh, you didn’t know that? How shocking. And then there’s my call in March 2009 about inflation resuming… and dozens and dozens of other items, like having first bought gold at $303 etc.

    Sorry man, hammering me and running and hiding from (and implicitly admitting you’re wrong on QE & PDs, CPI, SOMA, etc etc by changing the subject to bogus and false and lying attacks on me and my site) the specifics I’ve noted in the sense of completely failing to deal with them just don’t work nohow – ever… and regardless of any undereducated sycophants here.

  • http://www.orcamgroup.com Cullen Roche

    And this conversation has officially ended.

  • http://www.orcamgroup.com Cullen Roche

    Bart, we’re done. Have a good night.

  • http://www.nowandfutures.com bart

    Consider this post to say the exact same things and then some about your inability to see or even vaguely grant the simplicity. Simply, you’ve failed.

    Shifting to personal attacks is just one of many proofs.

    You obviously have nothing but assertions to specifically address that the full transaction between the Fed and Treasury (with PDs as the intermediary) isn’t 100% real world, etc. – and even after you fully granted that the Fed creates new money.

    And all you have about CPI accuracy issues (I remind you that you brought up CPI – I didn’t – and it was another failed diversion on your part) is another vapid personal attack trying to falsely associate me with ZH zealots.

    I especially love how many times you and others have brought up the C word – conspiracy… yet another failure to deal directly with simple facts and logic (like on how seniors lose massive purchasing power when on SS)
    Instead you try and substitute spin and try and paint me as some wacko conspiracy nut… and completely ignore the link about unconscious conspiracies or absolute historical facts like the proven conspiracy about the Pueblo or the Pentagon Papers.

    As far as actually and factually addressing my points about QE, why don’t you actually address them one by one? You’ll find that you can’t, since they’re all based on things with which you’ve already agreed but apparently didn’t realize.

    Until you have that courage or whatever and also have the courage to guarantee (as in protect everyone with your own money) that we won’t have 25%+ inflation in the next 10 years or so (we hit about 17% in 1980 and more than that in 1921)- well, the conclusions are obvious.

  • http://www.orcamgroup.com Cullen Roche

    I know. I failed. I was wrong. You were right. You know how everything works. Great. I get it.

  • http://www.nowandfutures.com bart

    And not one of them even vaguely deal with how seniors on SS alone, which is “adjusted” by CPI continue to lose purchasing power year after year after year.

    In other words, they’re incorrect.
    The seniors issue is the elephant in the room (or the emperors clothes), whether anyone sees it or not

    And I strongly suspect you don’t deal directly with or just ridicule (in ZH mode) things like the lack of reverse hedonics, etc. – or even better, totally believe what the BLS says — when they publish zero/nada/nothing specific and detailed about the adjustments – or even just raw results from any of their surveys.

    And I notice too that you haven’t addressed any of the many faults that I documented on the BPP/MIT so called inflation measure. Do you really trust an inflation measure that only counts 30% of prices (as in they admit that they don’t and can’t cover services)?

  • SS

    We should all start using your indicators so we can also make bad hyperinflation predictions.

  • http://www.nowandfutures.com bart

    You must now now down to the great bart and beg forgiveness.

    After that, go back to spewing about conspiracies while ignoring inconvenient facts like the Pueblo and Pentagon Papers, ignoring all the documented and linked facts, the QE bogus conclusions and the failure to address my QE points one by one (and falsely pretending that you have while the sycophants stay silent), that you’ll hammer me about 25% inflation while not having the courage of your convictions to defend your own assertion that it won’t happen, etc etc etc etc – literally almost ad nauseum.

  • http://www.nowandfutures.com bart

    SS said “We should all start using your indicators so we can also make bad hyperinflation predictions.”

    Do what you will, especially the running and hiding and sycophant portions. Do you have enough courage to guarantee that there won’t be 25% inflation within the next 10 years? No?… I thought so.

    I’ve had a ball shattering so many falsehoods, while being amazed that so many people (not all, thankfully) can fail to see the nose in front of their faces… aka, NIH so nothing else could be true.

  • http://www.orcamgroup.com Cullen Roche

    I’ll do what I do with all the other hyperinflationists who have visited the site over the course of the last few years. If you’re right about hyperinflation (or 25% inflation) I’ll write a post specifically apologizing to you and citing you as the “great” genius that you are. If not, you’ll slink away into the shadows like all those who have come here over the last 5 years making the same dire predictions.

  • http://www.nowandfutures.com bart

    NIH = Not Invented Here… so if some things are inconvenient and proven truths but not part of the ideology, then ignore and attack them.

  • http://www.orcamgroup.com Cullen Roche

    Bart,

    I’ll only warn you once. Call anyone besides me a name and you’re done here. It’s all good when you lash out at me. Everyone else is off limits though.

  • http://www.nowandfutures.com bart

    It would help if right now you stopped with the crud like “dire predictions”… or even maybe get very daring and also recognize my correct deflation predictions and correct inflation turn predictions… and maybe even get a vague clue that I’m as much of a hyperinflationist as you are an Austrian or Monetarist.

    It’s not trivial by any stretch but the huge majority of countries survive 25% inflation intact, and end up booming and doing very well. Examples abound for those who who just look.

  • http://www.orcamgroup.com Cullen Roche

    You really need to stop being so sensitive. I didn’t call you any names. And I didn’t say anything “crude”. I said you looked like a case of confirmation bias and that you have made some pretty dire predictions. Your 25% inflation prediction has been pretty fantastically wrong so far. And for a pretty long time running. I think you should revisit why it’s been wrong instead of trying to confirm prior biases. But I am not going to twist your arm.

  • http://www.nowandfutures.com bart

    What name and which post? Sycophant perhaps?

    Does the same rule apply to all posters?
    What are the parameters for it being a “name”?

    Perhaps I should review what I’ve been called here by others, depending on your parameters…

  • http://www.orcamgroup.com Cullen Roche

    Bart, you’re the only one screaming in caps, calling people liars and saying that my content is “pure bullshit”. Anyhow, I don’t really care if you continue to post here, but stop behaving like this is your personal school yard or the internet police will have to reprimand you in timeout for conduct detrimental to calling yourself a grown man.

  • http://www.nowandfutures.com bart

    Aren’t you the one who kept emphasizing the long term on stocks, when I pointed out how gold has blown them into the weeds during the last 10 years?

    And now you’re switching to the ever so much more convenient short term view on my 25% prediction?
    Sorry, another fail on top of dozens.

    Did you ever hear about the logical fallacy about accusing somebody of something that they didn’t do, and how successful it can be with the severely under educated or ideology bound?

    You do have my email address and I’ll be looking forward to a link to your likely abject apology post about 25% inflation in the next 10 years, but I think the chances are very good that you’ll redefine inflation in some way so it’s only 15-20% or so. But we’ll both know the real truth.

    I again offer congratulations on how you managed to change the subject away from the actual QE & PD boogie and how incorrect you are on the inside money issue for QE, but over the months I’ve seen you do it time & time again.
    C’est la vie… c’est la ger…

    Maybe you can take another cheap shot about how I’m an mo’ better excitable ZH dweeb now? That would be special.

    You really need to work on that issue of pretending to have directly addressed things when you haven’t though, or just ignoring inconvenient facts… or not – your call as always.
    Regardless, I’ve thoroughly enjoyed the QE, CPI, BPP, SOMA, etc. takedowns/smackdowns.

    I guess you must know some hyperinflationists who correctly predicted deflation a few years ago?

    Or know a whole bunch of magic seniors on SS whose purchasing power is stable or increasing after a few years?

    ooops…

  • http://www.nowandfutures.com bart

    I repeat since you failed to answer –

    What name and which post?

    Does the same rule apply to all posters?

    What are the parameters for it being a “name”?

    New ones now too…

    Specifically, who besides you did I call a liar?
    Specifically, which content of yours did I call BS? (you mean where you failed to quote the full applicable content on the 25% inflation prediction perhaps?)

    Is there a rule on not using caps when you lie or spew proven falsehoods?

    As always, you can answer or avoid or both… and I still admire the boxes built!

    Is there a nuclear device that will be inserted into my shorts when teacher says I been bad?… whether the actual rules are public and known or not? and whether the chela has asked for them nicely or not?

  • http://www.orcamgroup.com Cullen Roche

    Takedowns/smackdowns? I wasn’t aware that was what we were doing here. I know you think this is your personal school yard where you get to scream and yell, but it’s not.

    I’ve tried, nicely, to explain why you misunderstand many things and why your 25% inflation prediction in 2009 was wrong. But you obviously aren’t here to learn. You’re here to act like a troll and “smackdown” others. You’re not welcome here.

  • http://www.nowandfutures.com bart

    By the way CR, thanks very much for your deep concern about whether I’ll continue to post here or not.

    I’ll carefully consider the plethora of options…

  • http://www.orcamgroup.com Cullen Roche

    I can’t teach you how to be nice on the internet. But I can teach you how the monetary system works so you don’t make silly 25% inflation predictions. :-)

  • http://www.orcamgroup.com Cullen Roche

    Yes, maybe you should date other websites. This one is not fond of people who scream and beat their chest for no reason.

  • http://www.nowandfutures.com bart

    Touché… and perhaps one future very lucky day for you, I’ll continue your instruction and basic eduication on QE and PDs, the bogus nature of CPI and BPP, SOMA, etc.

    At least I did manage to get you to agree on doing the abject apology on 25% inflation in the next 10 years or so. I’ll have my daughter frame it… probably in gold. Can I get one of your old Enron or PETS stock certs to go next to it?
    *rimshots du jour*

  • http://www.orcamgroup.com Cullen Roche

    10 years? You’ve already been wrong for 3. Lets split the difference on 5 & 10 and just call it a cool 7.5 years. Not that you’ll be back to discuss it. Every other hyperinflationist is long gone just years after making their dire predictions. I presume you’ll be gone by 2015 when inflation is still low. It’s all in good fun anyhow.

    And no, no Enron stock. If you were remotely familiar with my work you’d know how silly that sort of comment is….

  • http://www.nowandfutures.com bart

    And if you were even vaguely familiar with my actual track record in trading, investing and predictions, you wouldn’t dare treat me so poorly and unmannerly…. zot!

    No hedging your bets, that’s for losers.
    10 years it is!

    Every other amateur since 2004 in the prediction area has completely given up in the face of my awesome brilliance and kewl/rad/bodacious and über numerous completely correct calls.

    I have the place all picked now out to frame your post and on-your-knees apology about 25% inflation, and I even have an IASB stamp of approval to make it even more official…

  • http://www.nowandfutures.com bart

    After being so close and for so many hours, you mean we’re not even engaged yet?!?!

  • http://www.orcamgroup.com Cullen Roche

    10 years is the ULTIMATE hedge. You’ll either be wrong or no one will remember. Man up and make a shoter-term bet.

    Say, 10% inflation in the next 3 years? Then you’ll actually be held accountable. Batter up!

  • http://Avondaleam.com Scott Krisiloff

    Just a thought on the Primary Dealer issue and treasury issuance.

    Technically when a bank underwrites a company’s public debt/equity offering it uses its balance sheet to buy the whole offering and then sells it to its clients, so it’s technically an intermediary there too. You’re not actually funding MSFT at its IPO either, the underwriter is.

    I agree with Cullen in spirit but wanted to throw that out there!

  • http://www.orcamgroup.com Cullen Roche

    Which is PRECISELY how the PDs work. They buy the whole Tsy auction via intra-day loan and then on-sell their inventory….

  • http://Avondaleam.com Scott Krisiloff

    Right, so to the extent that you agree that the retail customer is funding the MSFT IPO you can see how someone could argue that the Fed is funding the treasury.

    In the securities market value chain an investment bank is like a retailer. When Best Buy buys a TV from Samsung to sell to you who is Samsung’s true customer? Similarly when JPM buys a bond from Treasury to sell to the Fed, who is Treasury’s ultimate customer?

    I’m not explicitly disagreeing, just giving some food for thought.

  • http://www.orcamgroup.com Cullen Roche

    I see your point. Maybe I am being too vague simply referring to the IPO as I was. Thanks for clarifying Scott.

  • krb

    Cullen,

    Thanks for providing this forum!! When hot topics degenerate into personal competitions and attacks its easy to lose perspective……and I’m aware I’ve come after you at times in the past too.

    You’re providing an invaluable resource in attempting to apolitically educate people to our system’s operation, which is akin to peeling away the layers of an onion as we learn more and more.

    Thanks also to Scott, Pierce, Johnny, Investor, Frances……even you Bart, though it got a little distasteful at times…….I for one learned a great deal during this topic’s discussion! Thanks all! krb

  • http://Avondaleam.com Scott Krisiloff

    I’ll second that sentiment. Nice work Cullen.

  • http://www.nowandfutures.com bart

    Thought so. You’re obviously virtually totally uncertain about 10 years.

    You in no way have to accept the bet of course.

  • http://www.nowandfutures.com bart

    These are Treasuries and the Fed we’re talking about, not IPOs and underwriters. The flows are quite different.

    And I’m still awaiting an even vague refutation of my very simple steps and list of how QE really works, but expect no complete or even substantive answers – probably just more diversions about inside money or repos or some such totally inapplicable data or assertions.

    Recap, simple as possible mode.

    1. QE is the Fed buying Treasuries. The two parties (end points) to the transaction are the Fed and the Treasury.

    2. The Fed creates money out of thin air (CR quote: ” Like any bank, the fed creates its deposits “out of thin air”.”

    3. The Fed buys Treasuries mostly from the Primary Dealers (the secondary market).

    4. The Treasury doesn’t sell directly to the Fed but does sell to the Primary Dealers.

    5. Therefore, the Primary Dealers are the intermediary between the Fed and the Treasury.

    6. Again, the basic transaction (aka, final end points) is only between the Fed and Treasury. It uses the Primary Dealers as an intermediary.

    7. The Fed creates money (per CR) and the Treasury gets the money for the Treasuries from the Primary Dealers.

    Therefore, the inside money issue is irrelevant and inapplicable.

  • http://www.orcamgroup.com Cullen Roche

    I am happy to accept your 10 year bet. Why don’t we just make it a million years while we’re at it. We both know that’s a ridiculous time for an economic prediction. You’ve hedged yourself using the timeframe because you know that if you’re not right you can just disappear by then or it will be long enough that you have a fighting chance of being right. You’ve probably learned not to make short-term predictions because your 2009 call was off by so much. So, if you stretch it out over a longer period you hedge yourself. That’s fine. It’s smart. But it’s not a bet worth paying attention to.

    If you actually have any conviction in your call we should place a bet in a more relevant timeframe. Something like 12 months or a few years. Otherwise, we both know it’s kind of pointless and no once will care in 5 years. I don’t care either way though. I’ve been making these hyperinflation bets with people for 5 years now. The other guys always disappear within 12 months.

  • krb

    Give it up Bart. This has been a productive and educational exchange….leave it at that. krb

  • http://www.orcamgroup.com Cullen Roche

    1. QE is the Fed buying Treasuries. The two parties (end points) to the transaction are the Fed and the Treasury.

    2. The Fed creates money out of thin air (CR quote: ” Like any bank, the fed creates its deposits “out of thin air”.”

    3. The Fed buys Treasuries mostly from the Primary Dealers (the secondary market).

    4. The Treasury doesn’t sell directly to the Fed but does sell to the Primary Dealers.

    5. Therefore, the Primary Dealers are the intermediary between the Fed and the Treasury.

    6. Again, the basic transaction (aka, final end points) is only between the Fed and Treasury. It uses the Primary Dealers as an intermediary.

    7. The Fed creates money (per CR) and the Treasury gets the money for the Treasuries from the Primary Dealers.

    CR:

    1. Part right. They buy more than Tsys.

    2. Right. Reserves are created out of thin air.

    3. Right.

    4. Right. And the PD’s ALWAYS on-sell their inventory.

    5. Right.

    6. Wrong. There are multiple specific transactions. Not just one transaction between the Fed and the Treasury.

    7. Wrong. The Fed doesn’t give the PDs the money to buy the bonds. Outside money is not used to purchase the bonds. The PD’s use inside money to buy the bonds. They then on-sell the bonds to the Fed and obtain outside money in their reserve accounts. PDs always on-sell their inventory though. So you’re misconstruing the actual transactions there.

    There are two very specific different transactions occurring here. The first one is fiscal policy (the PD’s using inside money to buy the bonds from Tsy). The other is monetary policy (the Fed using outside money to buy the bonds from the PDs). They’re very specific things.

  • http://www.nowandfutures.com bart

    “Give it up Bart. This has been a productive and educational exchange….leave it at that. krb”

    No thanks, especially not when CR is very close to agreeing with me on all points.

  • Pierce Inverarity

    Heck, I’ll take the bet. But there’s a caveat: there cannot be a massive disruption in the oil supply chain.

    Other than that, I would take the other side of your bet.

    The U.S. will not experience an annual inflation rate of 25% or more over the next 10 years.

  • http://www.orcamgroup.com Cullen Roche

    I like those terms as well. Game on, “Great Bart”!

  • http://www.nowandfutures.com bart

    Wow!, wish you would have answered that simply and directly hours and hours ago.

    “1. Part right. They buy more than Tsys. ”
    Of course, but in the context of the actual subject of the QE op alone, only Treasuries are involved.

    “6. Wrong. There are multiple specific transactions. Not just one transaction between the Fed and the Treasury.”

    Of course. But all of the multiple QE transactions are just between the Fed & Treasury as the only end points, with PDs as helpful & necessaries intermediaries.

    “7. Wrong. The Fed doesn’t give the PDs the money to buy the bonds. Outside money is not used to purchase the bonds. The PD’s use inside money to buy the bonds. They then on-sell the bonds to the Fed and obtain outside money in their reserve accounts. PDs always on-sell their inventory though. So you’re misconstruing the actual transactions there. ”

    No, right. The total proof is right there on the Fed’s balance sheet – actual and new money flows to the PDs from the Fed.

    Just because the PDs temporarily buy Treasuries from the Treasury itself and use their own money (or repos or excess reserves at the Fed itself or whatever)(in other words it doesn’t even have to be inside money) for a few seconds or hours doesn’t make them any more than an aid to the real and overall QE transaction. And the real new money that the Fed sends the PDs cancels the very temporary use of the PDs own money (or repos, etc.).

    The correct analogy is getting change for a dollar from you to buy bubble gum. My dollar and the bubble gum is the only thing that matters in the transaction, and anything else just unnecessarily makes the transaction way more complex than it needs to be.
    You don’t have the 4 quarters for a few seconds until you get the dollar bill in exchange.

  • http://www.nowandfutures.com bart

    And if you want to call one monetary and the other fiscal, fine with me.

    That’s nothing more than a nuance in the main subject and issue of how QE works and that inside money plays a very minor role, if any.

  • http://www.orcamgroup.com Cullen Roche

    1. This is factually wrong. QE also involves MBS. MBS makes up 30% of the entire Feds balance sheet. I know it doesnt’ mesh well with your monetization theory, but you don’t just get to say things are wrong because you want them to be wrong. The Fed calls them Large Scale Asset Purchases or Permanent Open Market Operations. All explained all over the Fed’s website in great detail. You have this point factually incorrect. Again, these are irrefutable facts.

    See here, here or really anywhere.

    6.

    “But all of the multiple QE transactions are just between the Fed & Treasury as the only end points”

    Again, I can’t make you believe that it’s a car’s engine that makes a car move forward in operation with its steering wheel and wheels. But you simply refuse to believe that there’s a middle part of this process. You really think the steering wheel and wheels are making the car move forward. Fine. I’ll let this one go since I can see you refuse to understand.

    7. Again, this is factually incorrect. The PD’s do not use the reserves to buy the bonds. If you understood how a bond auction worked you would know this. The PD’s take delivery of securities with inside money. Again, this is an irrefutible fact. The reserves only appear on their balance sheet when the Fed performs a monetary op AFTER inside money has been used to buy the bonds. That’s always the case. If you understood how monetary policy works you would have been making this argument for ages because the Fed always changes interest rates by altering reserve balances in the banking system.

    For instance, in 2006, long before LSAPS started, the Fed purchased $50B in US government bonds in operations that are no different than QE. That’s how monetary policy is always performed. The Fed changes reserve balances. Look at a chart like this one of reserve balances. See those big changes? That’s Fed ops. This is going all the way back to 1984. According to guys like you, the Fed has always been “monetizing the debt”. But you didn’t start screaming about it until you got confused about QE on some conspiracy websites and decided this was your chance to scream to the world that hyperinflation was coming.

    At some point, you’d think you begin to counter with facts and data (as I have) rather than repeating the same things over and over again….

  • http://www.nowandfutures.com bart

    “1. This is factually wrong. QE also involves MBS.”

    Oh my. All of my examples have *only* mentioned Treasuries, but if you must get that technical and specific then yes of course. Most of the QEs so far have been Treasuries only. MBS transactions are usually much more complex than Treasuries, and apparently you do understand that, so let’s please keep it simple and not get unnecessarily complex and drift away yet again from the main points?.

    The whole point of this is about PDs and inside money and new money from the Fed, not minor details.

    “6.

    “But all of the multiple QE transactions are just between the Fed & Treasury as the only end points”

    Again, I can’t make you believe that it’s a car’s engine that makes a car move forward in operation with its steering wheel and wheels. But you simply refuse to believe that there’s a middle part of this process. You really think the steering wheel and wheels are making the car move forward. Fine. I’ll let this one go since I can see you refuse to understand. ”

    I’ve taken baby steps and have attempted to make it as clear and simple as possible, but you refuse to even vaguely see that there are zero/nada/no outfits at the two end points of QE transactions than the Fed and Treasury. It may be necessarily to allow some aspects of MR to be forced asd correct, but it’s just plain not real world and never will be.

    I’ve said numerous times that the PDs exist and perform a function, but it’s *only* as an intermediary.
    If the Fed was allowed to directly buy from the Treasury, your whole theory would fall apart – it would be completely impossible to have any inside money in the transactions. But you insist on making the PDs into some huge issue, when all they are in practice and the real world is nothing but a temporary intermediary – like making change for a dollar in my analogy quoited again below.

    As I noted above:
    The correct analogy to how the PDs actually work is getting change for a dollar from you to buy bubble gum. My dollar and the bubble gum is the only thing that matters in the transaction, and anything else just unnecessarily makes the transaction way more complex than it needs to be.

    You don’t have the 4 quarters for a few seconds until you get the dollar bill in exchange.

    “7. Again, this is factually incorrect. The PD’s do not use the reserves to buy the bonds.”

    You’re being way too literal again, just like you did on repos. Repos are *not* the only way that the PDs buy Treasuries, as your very own quote from the Fed says when they note “primary way”.

    And allow me to re-post the real point from my prior post without the apparently offensive addition, which you still have not successfully addressed directly, and is at the core of the totally unnecessary inclusion of inside money in QE (with Treasuries).

    Just because the PDs temporarily buy Treasuries from the Treasury itself and use their own money (or repos or whatever, and there are many other things they can and have used besides repos) for a few seconds or hours doesn’t make them any more than an aid to the real and overall QE transaction. And the real new money that the Fed sends the PDs cancels the very temporary use of the PDs own money (or repos, etc.).

    I also note that you have again failed to address the basic simplicity I’ve noted many times so far – the Fed is the one with the new money.

    It’s Accounting 101. The Fed adds Treasuries to their balance sheet. There must be something on the other side of the transaction – which is the Fed’s newly created money – conjured from thin air.

    Stating it another way, adding directly to bank reserves (or sending the PD a Fedwire or a check or gold or *whatever* you like or don’t like) from thin air with brand new money created by the Fed *is* what occurs in the real world, and it has nothing to do (except in minor nuances) with inside money.

  • http://www.orcamgroup.com Cullen Roche

    30% of all QE is a “minor detail”? It’s becoming hard to take you seriously with that mentality. You didn’t understand that MBS was part of QE. Stop back pedaling out of your mistakes.

    “If the Fed was allowed to directly buy from the Treasury, your whole theory would fall apart ”

    That would change the whole description! Of course it would render my point invalid! Just as my description renders your current point invalid! Do you even realize you’re proving yourself wrong!?!?!?

    I think we’ve taken this conversation about as far as it can go. Thanks for contributing Bart.