$5 Triilion "QE" coming?

[Rajiv]

Re: $5 Triilion "QE" coming?

For everybody concerned about deficit spending, this is a video to watch

U.S. Senate Candidate Warren Mosler Explains Why The US Government is Not Revenue Constrained

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

[jk]

Re: $5 Triilion "QE" coming?

The fed is under pressure now to do something, but the tide has turned against additional bank bailouts and government programs. The next move will be for the Fed to stop paying interest on excess reserves.

http://www.financialsense.com/fsu/ed...2010/0622.html

the banks will then use their reserves to buy treasuries.

[lsa420]

Re: $5 Triilion "QE" coming?

... Or maybe I'm about to get schooled by someone who understands the mechanics of central banking better than I.

I have often seen is asserted that expansion of a central bank's balance sheet with bum assets risks "insolvency" of the Fed, and "puts tax-payer dollars at risk." I have never understood these assertions. I always assumed that the people making these claims had a misunderstanding about how central banks work, or were conflating the Treasury with the Federal Reserve, but I have also wondered if instead it is I who misunderstand something.

The way I see it, a regular bank is insolvent if it can't meet its obligations to pay back depositers when they seek to withdraw funds, or to pay creditors. To the extent that the Fed creates money to buy assets, rather than borrowing money or paying for assets out of income, it is hard to envision a scenario where the Fed can't pay its bills. In theory, federal reserve notes are liabilities of both the Federal Reserve and Treasury... but liabilities for what? "Lawful money". And what is "lawful money"? Fiat. And what can you get from the Federal Reserve in exchange for US dollars? Whatever securities the Fed is offering for sale from its balance sheet. What can you get from Treasury in exchange for US dollars? The notes are "legal tender" to settle any debts you might owe the Treasury. It's a rather circuitous path, but to the extent that the liabilities of the Federal Reserve are limited to the assets on its balance sheet, I don't see how degradation of those assets affects the solvency of the Fed (rather, it is the real world value of the federal reserve notes that degrades!). Likewise, the Fed's issuance of liabilities against those assets creates instruments which can be used to settle debts owed the Treasury, but that doesn't really incur debts owed by the Treasury.

As far as I can tell, the problem with the Fed printing money to buy sketchy assets is really just the inflationary impact, and the difficulty introduced managing the money supply if those assets can't later be sold. And those problems are considerable -- taken to an extreme, the inflationary impact is hyperinflationary. But if anyone understands how the Fed can 'go broke' or put the US tax-payer deeper in debt by printing money, please let me know. A lot of people seem sure about this, and I might be missing something.

ASH

I think you've done an excellent job of explaining an extremely confusing subject - the mechanics of the Fed's balance sheet. I have a masters degree in accounting (not to brag) and this topic confuses me. FRED recently posted the Fed balance sheet on another thread, showing the increase in the past several years and the amount of MBS now on the books. The liability, as you say, is just printed money, while the MBS, etc is on the asset side of the balance sheet.

So yes, what this means, at least as far as I can determine, is that the Fed cannot go broke and doesn't put the US tax payer deeper in debt, even though this of course can cause massive inflation. If asset values on the Fed's balance sheet deteriorate significantly or at all, I guess they can sell other assets or just print money to make up the difference?

Now that I think about that last sentence, it is highly likely that values of Fed assets (especially MBS) will deteriorate from the price the Fed purchased them for back in 2008/2009. Honestly, considering the mechanics of the balance sheet (buying toxic debt with printed money) I have no idea what the implications of falling asset values on the Fed balance sheet are.

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

As far as I can tell, the problem with the Fed printing money to buy sketchy assets is really just the inflationary impact, and the difficulty introduced managing the money supply if those assets can't later be sold. And those problems are considerable -- taken to an extreme, the inflationary impact is hyperinflationary. But if anyone understands how the Fed can 'go broke' or put the US tax-payer deeper in debt by printing money, please let me know. A lot of people seem sure about this, and I might be missing something.

Eh - money is mostly just the bookkeeping unit. The fact that the Fed or Treasury can print money without limit has no more impact on our economy than the fact that Disneyland can print ride coupons has on the price of a ride there, or on the profitability of the Walt Disney Company. Ride coupons are printed and destroyed as convenient. What matters are things such as how good the rides are, how much they cost to build and maintain, how long the lines are and what is the return on the investment in a ride ... and whether you have any children between the ages of about four and fourteen.

But I digress...

What matters in economics are things such as the worth of present and future property and productivity, and the claims (debt) thereon. By "debt" I (sometimes, inconsistently) refer to one or the other or both halves of the pair of bookkeeping entries, the asset and the liability, as a single entity. Like hydrogen, it is a basic building block of two oppositely charged units. One charge is the present amount, the original principal. The other opposite charge is the future amount, that due to be repaid. (Yes, many electrons have been redirected to point out that the future payment due charge is not quite equal to the present principal value charge, and bemoaning the inherent instability of such an asymmetric universe.)

Debt is an exchange of present value for a claim on future value. When future claims exceed future wealth available to pay those claims, you can either pyramid further, kicking the can down the road and borrowing (or lending, depending on which side of the desk you sit) even greater sums from even further into the future, or else you can duck and cover as she blows up ... or if your name is Lloyd Blankfein I guess you can set the charge yourself and make money on the event both long and short.

What's happening with the balance sheets of the Fed, the Treasury, Fannie, Freddie, Ginnie, the FHA and the Social Security and Medicare "trust funds" is they are accumulating a rather large stash of bad debt. They have both made promises to pay they can't meet, and hold promises to be paid that won't be kept. You see, we're way over-leveraged now, with the future claims of our debt far outstripping the future real wealth we will have to meet those claims. It's a giant game of musical chairs with about ten players for every one chair. At some point I expect we'll have a huge bonfire, as much debt is defaulted or restructured.

By the way, it would seem that the U.S. Military is also way over-extended and rapidly becoming more so as well. I anticipate that increasing military expenditures will further aggravate the financial balance (imbalance?) sheet problems of the U.S.

A few chosen ones, such as likely JPMorganChase, will get to keep their chair (several very fine chairs) while most of us will lose:

1. much of the value of the "real" collateral, the property, bank deposits, and GLD shares we thought we held,
2. the labor productivity we thought we might earn, as well as
3. the value of retirement income stream we were expecting to get.

Most of the debt held by the Fed and other U.S. Federal institutions listed above will self-destruct, but they don't really care, for those institutions exist by political power, not by virtue of their actual balance sheet. Likely the fireworks show when their balance sheet blows up will be used to justify a shift in their structure and political power, but that need be so only as a matter of convenience for the propaganda, not because of some essential financial connection between the two.

The thing to track is the debt - both sides. Much of the debt collateral you hold will be taken away from you and much of what you're owed won't be paid. This is the biggest game of musical debt chairs in human history; it will be a whole lot easier to enjoy the fireworks of the grand finale if one is not in imminent danger of starvation, imprisonment or homelessness. Neither a borrower nor a lender be.

Well, actually, I don't expect the grand finale right away. We're presently in a pump-and-dump scheme to the balance sheets of the U.S. Federal institutions listed above. I expect that bubble will burst within a few years, after which the next bubble will be in some sort of SDR or Wocu international monetary reserve currency unit, exchanged only between central banks.

One thing I don't understand yet, and what might be the reason my often repeated forecast is total B.S., is how that monster pile of U.S. Federal debt (including promised future Social Security and Medicare payments) is handled. Logically, it would seem that some ginormous swap of debt for equity is required, but logic is often not a useful tool in these matters. Perhaps the foreign national central banks holding U.S. Treasuries receive in exchange promises denominated in Wocu, while private holders of U.S. Treasuries get to laugh in their beer watching a Jon Stewart YouTube video making fun of their plight.

One very large part of that U.S. debt is future Medicare and Social Security entitlement payments. Being on the receiving end of those promises, I expect to get short sheeted. Not yet accounted for on the U.S. Federal books are escalating military expenses, private and other government pension fund bailouts, and individual state bailouts.

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

I have a masters degree in accounting (not to brag)

It's not clear to me whether such a degree would be a help or a hindrance in these matters <grin>. You have my condolences; perchance they will be of some small comfort to you.

[lsa420]

Re: $5 Triilion "QE" coming?

It's not clear to me whether such a degree would be a help or a hindrance in these matters <grin>. You have my condolences; perchance they will be of some small comfort to you.

After reading my own post, apparently it's a hindrance. Your condolences are well received.

[gnk]

Re: $5 Triilion "QE" coming?

Mosler's descrption of government finance is correct.

His conclusions are wrong.

Demand was already artificially high. Excess Government spending distorts an economy (it encourages malinvestment), making the economy unstable and unsustainable.

Excessive credit ultimately self-corrects, with a corresponding self correction of demand.

He is fighting this process.... just as past fed chairmen and Presidents and Congressmen fought this process in every recession we have had. Guess what? Those past recessions never ran their course. Now we're paying the price.

He wants to tamper with the economy one more time, and destroy the currency in the process.

(by the way, there's a reason why the federal reserve and the federal income tax were created around the same time - Mosler alludes to this)

[jtabeb]

Re: $5 Triilion "QE" coming?

That's the PROBLEM! Can't we just do what will succeed without having to experience the failure (cause we KNOW it's going to fail, I mean WHO CAN'T see this coming). I mean, this AIN'T HARD to figure out. (What I means is PEOPLE HAVE figured it out, so if there is a SOLUTION, how come we GET NO ACTION?).

[ASH]

Re: $5 Triilion "QE" coming?

Now that I think about that last sentence, it is highly likely that values of Fed assets (especially MBS) will deteriorate from the price the Fed purchased them for back in 2008/2009. Honestly, considering the mechanics of the balance sheet (buying toxic debt with printed money) I have no idea what the implications of falling asset values on the Fed balance sheet are.

The main implication from a mechanical standpoint is that if the Fed has to "un-print" money, it does so by selling assets from its balance sheet back to the banks in exchange for cancelling out reserve deposits at the Fed. The problem is that if the Fed "prints" $2T to buy junk MBS from the banks and later wants to remove those reserve deposits from the banking system, it has to sell $2T worth of securities back to the banks. But if the market value of the securities it bought is significantly lower than when the Fed bought them, the Fed might not actually have enough assets to sell to withdraw the desired amount of excess reserves. FRED's chart of the Fed's balance sheet shows that the recent purchases of MBS make up a substantial fraction of the total, so this is more than an academic possibility. However, there are other ways that the authorities could drain liquidity from the banking system, even if the Fed couldn't do so by selling its balance sheet assets. One possibility would be to legislate a change in reserve fraction requirements, so that a smaller amount of credit could be extended for a given amount of capital. That wouldn't reduce the quantity of reserves in the banking system, but it would still have the effect of tightening credit and withdrawing liquidity. I believe this would require a change in banking law by Congress and could not be initiated entirely by the Fed.

[ASH]

Re: $5 Triilion "QE" coming?

Eh - money is mostly just the bookkeeping unit. The fact that the Fed or Treasury can print money without limit has no more impact on our economy than the fact that Disneyland can print ride coupons has on the price of a ride there, or on the profitability of the Walt Disney Company.

...

What matters in economics are things such as the worth of present and future property and productivity, and the claims (debt) thereon.

You've made this point before, and it is a good one at the most generalized level, but I think there are some extremely important issues that it does not address. For one thing, the ability to print money without limit dillutes claims on present and future property and productivity, and giving printed money to some parties and not others affects the distribution of those claims in society. So yeah -- at the most abstracted level, the wealth in the economy is whatever it is, and creating more 'units' doesn't directly affect how much actual wealth there is to divy up (assuming a uniform rescaling that preserves the distribution of claims). BUT there are multiple actors in the economy (millions!) and the distribution of the bookkeeping unit and its conversion rate to physical wealth can be changed by printing money. If the claims on present and future property and productivity matter, then doesn't it matter who holds those claims in what proportion? In fact, I would argue that the distribution of wealth and debt can have a big effect on productivity and economic growth, so printing money can have a VERY VERY big impact on the variables you cite as being important.

EDIT: PS -- Agree with a lot else that you said in the prior post, but had nothing to add myself; am not ignoring the rest of the content, but rather am nodding.

[ASH]

Re: $5 Triilion "QE" coming?

That's the PROBLEM! Can't we just do what will succeed without having to experience the failure (cause we KNOW it's going to fail, I mean WHO CAN'T see this coming). I mean, this AIN'T HARD to figure out. (What I means is PEOPLE HAVE figured it out, so if there is a SOLUTION, how come we GET NO ACTION?).

I blame the pharmaceutical industry. There is a cabal determined to sell me medication to manage my blood pressure and calm my rage, and they seek to profit by inciting said rage and high blood pressure through willful bad governance.

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

So yes, what this means, at least as far as I can determine, is that the Fed cannot go broke and doesn't put the US tax payer deeper in debt.

It is at the nexus with the real world of goods, production and power that the Fed could go bankrupt, not on its accounting balance sheet. Even when it does go "bankrupt", it likely won't happen because the powers that be could no longer prevent it from happening by any means. Rather the powers that be will be scheming, as always, to use these events to their own advantage, to orchestrate events so they can transition to other institutions and arrangements that maintain and advance the power of the most powerful.

In more static economic times, he who controlled the most land and finest buildings was wealthiest, and a monetary system based on gold could, from time to time prove serviceable. Gold, land and grand buildings grow slowly.

In the dynamic, high energy times of the last century, he who controlled the most raw commodities, especially oil, was most powerful. This power has centered on the United States. Development of natural resources, including oil, within the United States has either been grandly suppressed or exhausted the supply of at least what was more cheaply obtained (it is a matter of considerable controversy which.) Development of natural resources outside the U.S. borders, where some power competing with the Anglo-Americans might gain an advantage, has been a major focus of conflict, including military, espionage and economic. Recently China and others had been increasing their interest in drilling for oil in the Gulf of Mexico (if I recall correctly.) I'll wager that recent events with the gulf oil spill will put a brake on such Chinese drilling in the gulf.

So long as petroleum fuels the engines of economic activity, and so long as petro trades predominantly in dollars, then the Fed is top dog. Some countries, including Russia, China, Iran and Venezuela are not so eager about cooperating with this regime.

The Wocu is the "carrot" of a carrot and stick choice that might be offered up to sustain this balance of power favoring the Anglo-Americans. The U.S. military and intelligence departments manage the stick, obviously enough. The Wocu purports to be based on a basket of the currencies of the top 20 nations (roughly the G20, which includes Brazil, Russia, India and China). This Wocu currency basket is weighted by the GDP of these 20 nations. That GDP is determined by IMF reports issued every six months. Note that the IMF largely controlled by the same Anglo-American power elite who have dominated for the last century or two, at least.

So long as the Anglo-American power elite continues to dominate, the Fed will persist in whatever form is useful to them. Perhaps the Fed's monetary role will be subordinated more to some BIS/IMF/World Bank institutions, at least as regards what passes for the world's reserve currency (aka that which one trades for oil) even as the Fed's regulatory power over U.S. banking is solidified.

In short, do not measure the Fed's health by balancing its accounting books (they hardly let you do that anyway.) Measure the Fed's health by the balance of world power.

If the Fed appears to go bankrupt on its accounting books, that will be a staged event, used to justify some rearrangements in the world monetary system.

[ThePythonicCow]

Re: $5 Triilion "QE" coming?

You've made this point before, and it is a good one at the most generalized level, but I think there are some extremely important issues that it does not address. For one thing, the ability to print money without limit dillutes claims on present and future property and productivity,

But they are not printing money without limit. This is not Zimbabwe.

They are creating debt entries without limit. Debt exchanges present value for future deliverables. Eventually, in your lifetime if you're as young as your avatar and if you successfully manage your blood pressure, that debt pyramid collapses. Eventually, more such "future deliverables" become due and payable now than can possibly be rolled over or bailed out.

A fundamental question that iTulip should be addressing (may well be addressing as, unlike Mega, I have not read most of EJ's past works) is not monetary inflation versus deflation and other variants, but rather debt inflation versus deflation. Is the debt expanding or shrinking; where is the debt moving to and from; what is the quality of the debt; how much higher and deeper can it be piled?

Simple money is here and now. If I win the lottery ticket tomorrow, I am richer next week (and likely poorer next year, if I manage that money as poorly as many lottery winners.)

Debt takes place over time. It has a schedule of repayment stretching out sometimes 20 or 30 years and can exert a claim on future income and on collateral decades into the future.

We had a large shot of debt deflation a year or two ago, which was prevented from snowballing further by the U.S. Fed and Treasury backstopping major banks and GSE's. But the unhealthy debt continues to accumulate in various places about the world, and the healthy productivity that could extinguish some of that debt continues to suffer. That backstopping did not extinguish much of that debt; it just moved it to a deeper, but less audit-able, set of accounting books which are thus more resistant to the risk of bankruptcy.

For most of the past half century, this excess of debt was grown in second and third world nations, and seemed to be an evil plot of the Americans against other less wealthy nations. See further John Perkin's Economic Hitman.

But as we've seen this last decade in the United States, the economic elite do not guarantee the United States any special exemptions from excess debt. They fostered a rather large mortgage bubble the United States, with securities of these mortgages and derivatives of these securities. The United States remains a very important economic and military power center for them, so they can't (I hope) write us off like some backwater third world nation. This does not however prevent them from using excess debt, as they have exaggerated threats of terror, global warming, energy shortage, illegal drug trafficking, illegal immigration, pollution, pandemic, idiotic or philandering Presidents, and Lord knows what else to guide our destiny and control our politics.

The dilution of the money supply has been present, no doubt. But it has been rather slow and steady. That's not the killer. The debt is the killer; the creators of ever the ever expanding debt are the killers.

[GRG55]

Re: $5 Triilion "QE" coming?

I blame the pharmaceutical industry. There is a cabal determined to sell me medication to manage my blood pressure and calm my rage, and they seek to profit by inciting said rage and high blood pressure through willful bad governance.

I don't watch much television, but judging by the pharma commercials on CNN et al one could come to no other conclusion than the biggest problem facing America today is erectile disfunction...

[GRG55]

Re: $5 Triilion "QE" coming?

...So long as petroleum fuels the engines of economic activity, and so long as petro trades predominantly in dollars, then the Fed is top dog. Some countries, including Russia, China, Iran and Venezuela are not so eager about cooperating with this regime...

...

What goes around, comes around.

Then:

Iran Aims to Shift Forex Reserves From Dollar to Euro
September 21, 2009 05:29 EDT

Sept. 21 (Bloomberg) -- Iranian President Mahmoud Ahmadinejad has ordered Iran’s foreign currency reserves, currently in U.S. dollars, to be held in euros, Press TV reported.

The order was issued on Sept. 12 following a decision by the trustees of the country’s foreign reserves, the state-run news channel said on its Web site...

Now:

Iran Selling 45 Billion Euros of Reserves for Dollars
June 2, 2010

Jun. 2 (Bloomberg) -- Iran’s central bank began the first phase of the 45 billion-euro ($55 billion) sale of some of its reserves for dollars, the state-run Jaam-e-Jam newspaper reported, citing people it didn’t identify.

The bank is selling 15 billion euros in the first of three stages, which will be completed by Sept. 22, the newspaper reported on its website on May 31.

Iran will “substantially” decrease its oil sales in euros, the paper said. It informed Japan and other crude-oil customers of the change, Jaam-e-Jam said. The Persian Gulf country’s euro reserves are 55 percent of the total, and would be reduced to 20 to 25 percent after the sale is complete and after oil sales in euros have been reduced, the paper said...