Uncertainty, deflation and interest rates question

[GRG55]

Re: Uncertainty, deflation and interest rates question

EJ..."Because if the U.S. goes down it's game over for the IMS."..

IMS = What? Increase Money Supply ???? Correct

International Monetary System (based on the US$ as the Reserve Currency)

[vt]

Re: Uncertainty, deflation and interest rates question

International Monetary System
Game over

[astonas]

Re: Uncertainty, deflation and interest rates question

i think draghi's self-image is beyond my imagining. he may think that staying in his current position, being ready to do "whatever it takes," and keeping weidmann out of it is the greatest service he can do. who knows?

I'm not claiming to know Draghi's mind either, and for the same reason. I was mostly trying to point out that this is one area where meaningful prediction may be particularly hard. It's easy to point to words like "whatever it takes" as a promise. But it might wind up only being the promise of a politician.

I do see the broader forces at play still pointing to continued accumulation of power for the germanic block, at the expense mostly of the mediterranean. To me, that just follows from the numbers at this point. And I see the threat of Brexit as a bluff that's being called. But so much of the timing and magnitude of the shift depends on the particular actions of individual people. Draghi choosing to act in what would appear to be his own best interest could significantly alter the game in Europe, in a manner even more dramatic than the way DSK's scandal in New York affected the IMF. And who can claim to know exactly how far the disenfranchised can be pushed thereafter before rising up in violent response?

butterflies and hurricanes

This thread was aptly named.

[Polish_Silver]

Japan: what deflation?

, . . . Unlike the Bank of Japan, that for political reasons dithered and argued with the legislature as the ship went down, the Fed was ready with it's fingers on the keyboard.

.

If Japan had actual deflation, wouldn't the yen appreciate, and the general price level go down?

My understanding is that consumer prices never went down more than 2% in a year, and more than about 3% over any time interval. I wouldn't call that significant deflation.

There was substantial price drops in leveraged assets, such as stocks and real estate. But that by itself is not "deflation" in my book.

I'd agree that the fed was more agressive than BOJ, and we "suffered" less asset price reduction than Japan. But does that bring a better long term outcome?

[Polish_Silver]

Re: Uncertainty, deflation and interest rates question

Please correct me if I am wrong, but QE would expand the money supply IF the banks would use the cash to make loans instead of parking it as excess reserves at the fed.

Our friend Mr. Bart shows M1, M2 and M3 increasing 5% Y-o-Y, however YOY rate is decreasing starting in 2014. Any Ideas on a target rate, and how long does it take increases in the money supply to start effecting CPI. Billion Price shows 2%+ inflation and trending down since the beginning of the year.

CB, I think QE increases the general money supply in the long run, but not immediately. And how long the time constant is, who knows? The transactions are done with electronically generated $, so that has to increase the money supply in some way. That is not obvious now, because there are major deflationary forces at work, the contraction of electronically generated money during the housing bubble. Banks also "electronically" increase the credit level

[don]

Re: Uncertainty, deflation and interest rates question

the NYT's explanation . . .

The Fed started buying bonds for the first time in modern times because it had run out of other options. Under Ben S. Bernanke, then the Fed’s chairman, the central bank cut its benchmark short-term interest rate to zero in December 2008, maxing out its primary means of influencing economic conditions.

Mr. Bernanke had argued years earlier that central banks could further reduce borrowing costs by purchasing long-term bonds. The idea was that reducing the supply would force investors to accept lower interest rates from borrowers.

Under Mr. Bernanke and then under his successor, Janet L. Yellen, the Fed proceeded to expand its holdings of Treasury and mortgage-backed securities to $4.5 trillion, from less than $1 trillion.

(none of this adds "new money" to that in circulation. It does pump up the wealth effect)

Federal Reserve officials generally argue that the impact (low interest rates) comes mostly from the size of the Fed’s holdings. In this view, the end of purchases is a minor event. Much more important is the Fed’s intention to maintain the portfolio at its current size until after it starts to raise rates.


Others, however, see the flow of purchases as more important.

A third view saw the purchases primarily as a means of reassuring markets that short-term rates would stay low.

So far, events have tended to support the Fed’s view. The tapering of bond purchases has not shaken the conviction of investors that the Fed is unlikely to raise interest rates before the middle of next year.

The Fed has not ruled out a resumption of bond purchases.


Carl R. Tannenbaum, chief economist at Northern Trust, said he hoped the Fed would emulate the clarity of its retreat from bond-buying as it moved toward raising interest rates.

“I do think this has been a success story,” he said. “I’m hoping that when the time comes to raise interest rates, that they’ll do an equally clear job of foreshadowing that.”

But a voice from the past, the former Fed chairman Alan Greenspan, warned on Wednesday that the next phase of the Fed’s retreat would not unfold so smoothly. Asked whether the Fed could avoid turmoil, he responded, “I don’t think it’s possible.”

[Polish_Silver]

Re: Uncertainty, deflation and interest rates question

Please correct me if I am wrong, but QE would expand the money supply IF the banks would use the cash to make loans instead of parking it as excess reserves at the fed.

Our friend Mr. Bart shows M1, M2 and M3 increasing 5% Y-o-Y, however YOY rate is decreasing starting in 2014. Any Ideas on a target rate, and how long does it take increases in the money supply to start effecting CPI. Billion Price shows 2%+ inflation and trending down since the beginning of the year.

There's an article on the relation between money supply and inflation at financial sense. It is written by an ex BOE guy (Mervyn King?) , who is well regarded by Kotlikoff. The basic idea is that inflation lags the money supply by an interval, I think it's 5 years.

[Milton Kuo]

Re: Uncertainty, deflation and interest rates question

CB, I think QE increases the general money supply in the long run, but not immediately. And how long the time constant is, who knows? The transactions are done with electronically generated $, so that has to increase the money supply in some way. That is not obvious now, because there are major deflationary forces at work, the contraction of electronically generated money during the housing bubble. Banks also "electronically" increase the credit level

My limited understanding of what is going on is that QE does not really increase the money in circulation. The Federal Reserve offers to buy Treasuries and mortgages--not caring about the price it pays--and entities holding those assets decide to sell to the Fed. However, the cash received from selling those assets is generally not spent on things in the productive economy; they are spent purchasing other financial assets such as riskier bonds or stocks.

That is, QE does not noticeably increase the velocity of money because the money (less fees and bonuses to the FIRE economy) is just sequestered in another asset class.

[GRG55]

Re: Japan: what deflation?

If Japan had actual deflation, wouldn't the yen appreciate, and the general price level go down?

...

It did, and the yen appreciation was a successful currency play for me at the time.

I had a strategy prior to the financial crisis to hold a lot of cash and divided it into holding one currency in each of the Americas, Europe and Asia. At that time it was Loonies, Swissie and the yen. When I sold the yen I moved it to Sing $ and also swapped the Loonies for US$. Typical holding periods were 2-3 years so this is not a trading strategy.

[charliebrown]

Re: Uncertainty, deflation and interest rates question

Money cannot be sequestered. If a bank sells the FED T's and gets electronic dollars, then uses the electronic dollars to buy stocks, stocks increase in price as more demand is created. However someone has to sell those stocks to the bank, now that person has the dollars. It seems the zirp dollars are passed around like a hot potato. The FED has made it uncomfortable to hold dollars at zero percent. So folks chase risk assets in search of return. I suppose the end game is when all risk assets return the same amount as a zirp dollar, that is zero. For example look at plain jane utilitiy stocks. They just set an all time high today. Using VPU as a proxy for all U.S. utilities, the yield is now 3.04%. Its getting close to the yield on the 10 yr T, which is still on long term downward trajectory. If you look at total electricity consumption in the US it peaked about 2008, and is stable to down until 2012 which is the last year I have data for.

[sutro]

Re: Uncertainty, deflation and interest rates question

The anti-deflation policy tool that cannot be explicitly discussed in policy circles is The Foolproof Way of currency depreciation.

An increase in a country’s money supply causes interest rates to fall, rates of return on domestic currency deposits to fall,
and the domestic currency to depreciate.



Money supply up, USD down, imports price inflation up, inflation expectations up, CPI up. And vis versa.

I understood in 2007 that The Foolproof Way was certain to be deployed in the future in order to prevent the U.S. economy from falling into a deflationary liquidity trap as Japan's economy did when it's bank-financed property bubble collapsed. Unlike the Bank of Japan, that for political reasons dithered and argued with the legislature as the ship went down, the Fed was ready with it's fingers on the keyboard.

Also keep in mind that today the management of policy is entirely computerized whereas in the early 1990s the tools and models were relatively primitive. The software the Fed uses to model the economy and markets today has been described to me as "the best that billions in R&D can buy."

Back in those days when I was forecasting currency depreciation as a policy tool the other major economies of the world were not so much in need of currency depreciation themselves to stay out of the deflation zone. How does The Foolproof Way work when inflation is low in major economies, which economies are also trying to work their way out of output gaps?

The answer is that they take turns. Since early 2013 it's been Japan's turn.

A concerted effort to weaken the yen has produced the desired inflation rise.

But what about in the case of a new global credit market crash and deflationary shock? Can every economy depreciate at once?

They cannot. Instead only one country will depreciate -- the U.S. again -- and the rest will reflate via fiscal policy and QE.

Why will the U.S. get to depreciate when the others cannot?

Because if the U.S. goes down it's game over for the IMS.

Game over for IMS = WWIII

[astonas]

Re: Uncertainty, deflation and interest rates question

Game over for IMS = WWIII

Maybe. But isn't another stab at Bretton Woods more likely? The last time around, the US nixed Keynes' idea of the Bancor, a nationless currency, and replaced it with the dollar as the reserve currency. It could be argued that this swap was the fatal flaw to begin with, which precipitated all subsequent problems. Another attempt to re-establish a pegged system would have a lot of appeal to national leaders, since it could more easily be sold as prudent at home.

In any event, I suspect that WWIII will be fought with money, not bullets, and perhaps it has already begun.

[vinoveri]

Re: Uncertainty, deflation and interest rates question

Right on cue, FED ends QE, BOJ sharply increases it QE and now expressly authorizes buying Nikkei equities.
https://www.boj.or.jp/en/announcemen...4/k141031a.pdf

Is this is the early stages of a process whereby every industrialized country CB creates money ex nihilo to purchase an ever widening scope of assets ostensibly to prevent asset deflation? this is like some sort of dream ...how does it end I wonder - one thing I know, not for the good of the common folk. lunacy, the madness and cowardice of men

[astonas]

Re: Uncertainty, deflation and interest rates question

I do see the broader forces at play still pointing to continued accumulation of power for the germanic block, at the expense mostly of the mediterranean. To me, that just follows from the numbers at this point. And I see the threat of Brexit as a bluff that's being called. But so much of the timing and magnitude of the shift depends on the particular actions of individual people. Draghi choosing to act in what would appear to be his own best interest could significantly alter the game in Europe, in a manner even more dramatic than the way DSK's scandal in New York affected the IMF. And who can claim to know exactly how far the disenfranchised can be pushed thereafter before rising up in violent response?

This one seems to be increasingly likely as time passes, in any event.

Approaching Brexit? Merkel Fears Britain Crossing a Red Line on Immigration

Merkel was much more worried about a different development. For the first time, according to an assessment by the Chancellery and the Foreign Ministry, Cameron is pushing his country toward a "point of no return" when it comes to European Union membership -- a point at which Germany would cease doing all it can to convince Britain to remain a member of the EU. Were Cameron to continue insisting on an upper limit for immigration from EU member states, Berlin sources said "that would be that." Sources say that Merkel left no doubt about where she stands on the issue during a private meeting with the British prime minister on the sidelines of the recent EU summit. The sources said that the surprise bill from Brussels was hardly mentioned.

This brought to mind another favorite quote:

“Diplomacy is the art of telling people to go to hell in such a way that they ask for directions.”
– Winston S. Churchill




The way this is all unfolding makes me think that in the heat of the 2008 crash, Cameron unwittingly asked for directions.

[jk]

Re: Uncertainty, deflation and interest rates question

are you sure that it's hell towards which he's headed?