Shadow Government Statistics: Hyperinflation could be experienced as early as 2010

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

c1ue, the $60T figure you use includes the unfunded mandates, not just the current debt. these mandates are a bunch of promises which are impossible to fulfill. therefore these promises will be broken. they could be broken by hyperinflation and payment in shrunken dollars, or they could be broken - legislatively- in other ways. when things get bad enough, the other ways will be considered, i hope.

"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."

- Alan Greenspan (Chairman of the Federal Reserve US Central Bank), appearing before the Senate Banking Committee on February 15, 2005, in response to Democratic Senator Jack Reed of Rhode Island on the topic of funding Social Security.

[phirang]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

EJ, if not already, you will someday wish you'd never lent your reputation to this 'hair on fire' commentary by Williams. The SL Fed's chart is likely meaningless within the context of their new 'tools'. I don't want be a cheerleader for the Fed, but no rational thought has been applied in this thread to how the TAF effects this chart. After all, it's just a chart, it's spreadsheet logic, it's not thought.

From the Fed's website:
I'm looking at this chart and asking myself why banks would start borrowing at this rate? New Japan carry trade, some way of leveraging their reserves, let's at least put our banker hats on and find some logical explanation.

TAF exists to avoid incriminating your capital structure by begging at the discount window.

[jk]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

TAF exists to avoid incriminating your capital structure by begging at the discount window.

agreed. the taf is essentially a way to use the discount window and maintain anonymity. but there is a problem in the banking system if they need to use either the discount window or its anonymous backdoor so heavily. the banks don't trust each other, and for good reason.

[phirang]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

agreed. the taf is essentially a way to use the discount window and maintain anonymity. but there is a problem in the banking system if they need to use either the discount window or its anonymous backdoor so heavily. the banks don't trust each other, and for good reason.

and it's REALLY bad when the fed needs to pay banks on their reserves...

again, this news i think is what's been driving up gold so high, but wtf do i know.

[jk]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

and it's REALLY bad when the fed needs to pay banks on their reserves...

again, this news i think is what's been driving up gold so high, but wtf do i know.

as i've posted elsewhere, i've read that paying interest on reserves is a means of switching the fed's tools for managing interest rates. they want to stop targeting a specific fed funds target and instead offer a corridor- a low rate at which they will borrow surplus funds from the system, and a higher rate at which they will supply the system with funds.

[phirang]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

as i've posted elsewhere, i've read that paying interest on reserves is a means of switching the fed's tools for managing interest rates. they want to stop targeting a specific fed funds target and instead offer a corridor- a low rate at which they will borrow surplus funds from the system, and a higher rate at which they will supply the system with funds.

but the fact they do this means they want to maintain inflation expectations by obfuscating the relevant metrics.

[jk]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

but the fact they do this means they want to maintain inflation expectations by obfuscating the relevant metrics.

i think the argument for a corridor is that it give the market more day to day input over the shortest rates.

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

i think the argument for a corridor is that it give the market more day to day input over the shortest rates.

And the corridor concept also hides that non borrowed bank reserves are factually non existent, and ignores the probable plans to completely eliminate reserves.

[moonshot]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

as i've posted elsewhere, i've read that paying interest on reserves is a means of switching the fed's tools for managing interest rates. they want to stop targeting a specific fed funds target and instead offer a corridor- a low rate at which they will borrow surplus funds from the system, and a higher rate at which they will supply the system with funds.

My understanding is that the near-term benefit of being able to pay interest on reserves is to de-couple interest rate targeting from the Fed's activities in Treasuries. Specifically, if the Fed continues to expand the list of illiquid assets it is willing to swap for Treasuries, at some point, it runs out of Treasuries. If it buys more Treasuries to provide more capacity for further exchanges of Treasuries for illiquid assets, this will lower the actual Fed funds rate, potentially below the Fed's target - i.e., it will lose control of its rate targeting ability. By paying interest on reserves, the Fed can increase its balance sheet, and maintain control over the Fed funds rate.

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

My understanding is that the near-term benefit of being able to pay interest on reserves is to de-couple interest rate targeting from the Fed's activities in Treasuries. Specifically, if the Fed continues to expand the list of illiquid assets it is willing to swap for Treasuries, at some point, it runs out of Treasuries. If it buys more Treasuries to provide more capacity for further exchanges of Treasuries for illiquid assets, this will lower the actual Fed funds rate, potentially below the Fed's target - i.e., it will lose control of its rate targeting ability. By paying interest on reserves, the Fed can increase its balance sheet, and maintain control over the Fed funds rate.

That's much of the "official" logic, but in actual practice and per the actual data, the Fed has had little trouble controlling the Fed Funds rate when comparing their performance with earlier times of relative financial crises. Yes, the standard deviation has varied a great deal more than normal but that's to be expected with wildly varying daily stresses in liquidity during a crisis.

The whole "corridor" idea is much more of a red herring and logical fallacy than anything else, although it does have grains of truth and will help some in managing the Fed Funds rate. By paying interest on reserves, the Fed is simply removing another reason for reserves behind deposits.

And do note that the item that jk and others continue to ignore and is that paying interest on reserves is another and next to final step towards the total elimination of reserves on deposits, and the eventual declaration of a field day for monetary & credit expansion via theoretically infinite credit creation. That is not a good thing, no matter how it gets spun with pretty words like rate corridor.

There also is no historical evidence that Fed purchase of Treasuries will lower Fed Funds, especially given the many varieties of Open Market Operations and the very low understanding of OMOs in general. And OMOs are far from the only tools in the Fed's arsenal.

Not only that, but I've been called an alarmist by simply pointing out that there are no actual bank deposit reserves in existence today that are not borrowed from the Fed?
If that isn't a reason for some alarm, then what is?


Do keep in mind who we're dealing with here - while having a mandate for currency stability, the dollar has lost over 95% of its value during the existence of the Fed.

And all the noise about how they shouldn't or can't interfere with bubbles is shown for what it is with inconvenient truths like this:

"When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets. What in fact occurred is that, as evidence of the dramatic shift in the economic outlook began to emerge after we moved and long-term rates began to move up, we were also clearly getting a major upward increase in expectations of corporate earnings. While the stock market went down after our actions on February 4th, it has gone down really quite marginally on net over this period. So what has occurred is that while this capital gains bubble in all financial assets had to come down, instead of the decline being concentrated in the stock area, it shifted over into the bond area. But the effects are the same. These are major capital losses, which have required very dramatic changes in the actions and activities on the part of individuals and institutions.

"So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System."
-- Alan Greenspan, Chairman of the Federal Reserve

Source: Federal Open Market Committee (FOMC) meeting minutes from March 22, 1994

(emphasis mine)

[FRED]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

That's much of the "official" logic, but in actual practice and per the actual data, the Fed has had little trouble controlling the Fed Funds rate when comparing their performance with earlier times of relative financial crises. Yes, the standard deviation has varied a great deal more than normal but that's to be expected with wildly varying daily stresses in liquidity during a crisis.

The whole "corridor" idea is much more of a red herring and logical fallacy than anything else, although it does have grains of truth and will help some in managing the Fed Funds rate. By paying interest on reserves, the Fed is simply removing another reason for reserves behind deposits.

And do note that the item that jk and others continue to ignore and is that paying interest on reserves is another and next to final step towards the total elimination of reserves on deposits, and the eventual declaration of a field day for monetary & credit expansion via theoretically infinite credit creation. That is not a good thing, no matter how it gets spun with pretty words like rate corridor.

There also is no historical evidence that Fed purchase of Treasuries will lower Fed Funds, especially given the many varieties of Open Market Operations and the very low understanding of OMOs in general. And OMOs are far from the only tools in the Fed's arsenal.


Do keep in mind who we're dealing with here - while having a mandate for currency stability, the dollar has lost over 95% of its value during the existence of the Fed.

And all the noise about how they shouldn't or can't interfere with bubbles is shown for what it is with inconvenient truths like this:

As we said in Zero Bound Diaries: Is Bernanke Volcker's Mirror Image? right about now the Fed stops targeting rates and starts to target the money supply.

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

As we said in Zero Bound Diaries: Is Bernanke Volcker's Mirror Image? right about now the Fed stops targeting rates and starts to target the money supply.

"Strangely" enough, here's the last few weeks of actual MZM and M3b (excluding TAF, PDCF, etc.) numbers, showing both absolute values and annual rates of change. It's too soon to call, but they are beginning to trend down.

Week ending	M3		MZM
3/17/2008	$13,601	17.4%	$8,632	16.7%
3/24/2008	$13,711	18.3%	$8,622	16.6%
3/31/2008	$13,919	17.5%	$8,667	16.2%
4/7/2008	$13,986	17.1%	$8,734	15.9%
4/14/2008	$13,988	16.8%	$8,771	16.0%
4/21/2008	$13,940	17.0%	$8,712	16.4%
4/28/2008	$13,893	17.6%	$8,595	16.1%
5/5/2008	$13,920	17.1%	$8,573	14.9%

[jk]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

is there any difference between the hypothesized targeting of monetary aggregates and japan's "quantitative easing"? or perhaps my question is better stated as: what's to keep the fed's monetary targeting from devolving into the boj's seemingly ineffectual "quantitative easing"? i guess paying interest on reserves on top of quantitative easing becomes a way for the fed to feed profits to the banks and help them thereby repair their balance sheets. is that the idea?

[bart]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

is there any difference between the hypothesized targeting of monetary aggregates and japan's "quantitative easing"? or perhaps my question is better stated as: what's to keep the fed's monetary targeting from devolving into the boj's seemingly ineffectual "quantitative easing"?

I'm honestly not sure what you're asking, but I can point out that Volcker did target monetary aggregates. Maybe that helps?

i guess paying interest on reserves on top of quantitative easing becomes a way for the fed to feed profits to the banks and help them thereby repair their balance sheets. is that the idea?

That's a small part of it, but 2% interest or so on the $45 billion currently required reserves won't help much with the probable over $1,000 billion derivatives losses.

I really do think that the key is that its just another step on the way towards zero reserves and the allowing of infinite credit creation. And just like the probabilities of Williams hyperinflation scenario, allowing something does not mean that it will automatically happen... but it sure does increase the probabilities.


As an aside and since you brought up Japan, the BoJ and MoF very much helped the Japanese banks and multinationals sweep the massive capital ratio problems under the rug in the '90s... very much like the Fed and FASB etc. are helping US banks and multinationals do the same thing now.

[c1ue]

Re: Shadow Government Statistics: Hyperinflation could be experienced as early as 201

JK,

I don't see any difference between Fed monetary aggregate targets and BOJ 'easing', but there will be vastly different results.

For one thing, it is not clear to me that the present situation in Japan is NOT what was ultimately desired by the Japanese government: a slow grind of deflation where the population doesn't suffer much even as an epoch (by economic time scales) of debt hiding passes.

For another, as I've pointed out ad nauseam, Japan has run current account surpluses for a long time and can afford 'dark collateral': collateral which theoretically exists, but is invisible to bank balance sheets and in terms of basing loans from, but which must be there or else the banks holding them would not exist.

The US, not so.