POOM! (or soon to be POOM!!)

[ASH]

Re: POOM! (or soon to be POOM!!)

I urge caution on Professor Hamilton's take. What he fails to include is that one of the components of M3 - repurchase agreements (liabilities of depository institutions, in denominations of $100,000 or more, on U.S. government and federal agency securities) is quite similar is definition and practice to the various new Fed facilities like the TAF.

Thanks for the observation, bart. Just to check...

The term auction facility (TAF) allows banks to borrow from the Federal Reserve at an interest rate set by the auction, and for which they must put up collateral (formerly US government and agency securities, but now increasingly junky stuff). The funds are loaned for either 28 or 84 days, after which time the bank is supposed to pay back the loan plus interest, and receive its collateral back... except that these loans can now be rolled-over more or less indefinitely (right?). So, this is a means by which a bank can boost its reserve deposits based upon the notional (essentially ficticious) value of illiquid securities it owns. This is potentially inflationary if reserve deposits rise as a result, and banks lend to the full extent of those higher reserves. Well and good.

In a repurchase agreement, the borrower sells securities to a lender for cash, with the agreement to buy the securities back at a later date, for a higher price. The equivalence you cite seems fairly straight-forward. Either transaction has the form of a collateralized loan at interest.

However, the thing that is confusing me is that I was given to understand from Professor Hamilton's article that loans of this type actually were being sterilized by corresponding sales of treasuries. If Professor Hamilton wasn't talking about this type of loan from the Fed, then to what type of loan was he making reference?

On the other hand, if what Professor Hamilton says is actually so, then sterilization must not be based upon the total reserve deposits in the system -- otherwise we wouldn't be treated to plots of the monetary base going vertical. I suppose this could happen if the amount of treasuries sold by the Fed to sterilize its loans to banks was much smaller than the amount of treasuries bought to target interest rates, or if it was small compared to the change in lending behavior of the banks (hoarding reserves against potential losses). Alternatively, I suppose the Fed could make its decisions about how much to sterilize based upon something other than a 1:1 correspondence to the funds it loans to banks -- for instance, measures of growth and employment, or a stability criterion for the amount of credit loaned against the reserve deposits (rather than the amount of those deposits themselves). If the latter, then Hamilton is talking out the corner of his mouth, and what he really should say is that the Fed can sterilize, rather than the Fed is sterilizing.

Anyway, thanks for chiming in. You are on the list of iTulipers better qualified than I to address Adeptus's question. I just like writing.

[bart]

Re: POOM! (or soon to be POOM!!)

Thanks for the observation, bart. Just to check...

The term auction facility (TAF) allows banks to borrow from the Federal Reserve at an interest rate set by the auction, and for which they must put up collateral (formerly US government and agency securities, but now increasingly junky stuff). The funds are loaned for either 28 or 84 days, after which time the bank is supposed to pay back the loan plus interest, and receive its collateral back... except that these loans can now be rolled-over more or less indefinitely (right?). So, this is a means by which a bank can boost its reserve deposits based upon the notional (essentially ficticious) value of illiquid securities it owns. This is potentially inflationary if reserve deposits rise as a result, and banks lend to the full extent of those higher reserves. Well and good.

In a repurchase agreement, the borrower sells securities to a lender for cash, with the agreement to buy the securities back at a later date, for a higher price. The equivalence you cite seems fairly straight-forward. Either transaction has the form of a collateralized loan at interest.

However, the thing that is confusing me is that I was given to understand from Professor Hamilton's article that loans of this type actually were being sterilized by corresponding sales of treasuries. If Professor Hamilton wasn't talking about this type of loan from the Fed, then to what type of loan was he making reference?

On the other hand, if what Professor Hamilton says is actually so, then sterilization must not be based upon the total reserve deposits in the system -- otherwise we wouldn't be treated to plots of the monetary base going vertical. I suppose this could happen if the amount of treasuries sold by the Fed to sterilize its loans to banks was much smaller than the amount of treasuries bought to target interest rates, or if it was small compared to the change in lending behavior of the banks (hoarding reserves against potential losses). Alternatively, I suppose the Fed could make its decisions about how much to sterilize based upon something other than a 1:1 correspondence to the funds it loans to banks -- for instance, measures of growth and employment, or a stability criterion for the amount of credit loaned against the reserve deposits (rather than the amount of those deposits themselves). If the latter, then Hamilton is talking out the corner of his mouth, and what he really should say is that the Fed can sterilize, rather than the Fed is sterilizing.

Anyway, thanks for chiming in. You are on the list of iTulipers better qualified than I to address Adeptus's question. I just like writing.

Although the A in TAF does stand for auction, in practice its more tightly controlled than a real auction.
Yes, 28, 84 and 85 days - so far. And yes, in theory they can be rolled over indefinitely - just like "regular" temporary repo OMOs, and temp repos are much shorter than 28 days too.

My personal opinion - only a portion of all the Fed actions have been truly sterilized... somewhere around $300 billion is the actual drop in the total System Open Market Account (SOMA).

Monetary base wise, if you were the Fed and wanted to encourage the banks to lend - what would you do with monetary base... and wanting to build confidence in banks and the monetary system... and have more lending happen... and wanting to provide flexibility for yourself... and having the ability to pay interest on reserves? Answering those will give you an idea of what I'm looking at in the area of base and excess reserves.

You got it on "the Fed can sterilize, rather than the Fed is sterilizing."- at least in my always and ever so humble opinion as the be-all and end-all of Fed folderol machination explanations... :rolleyes: ;)

And as far as Adeptus's overall question and observation, the keys are in both the concept of monetary lags and in velocity reversing (a fancy way of also saying a sentiment change away from disinflation/deflation where it counts).

[c1ue]

Re: POOM! (or soon to be POOM!!)

ASH,

It is good to think things through, but also it can be bad to think too hard.

The US dollar's strength prior to 2006 was due to simple mercantilism: other nations had incentive to keep their currencies low in order to sell (and lend) to the US. Note the order.

The US dollar's fall afterwards was an American reaction to ever increasing fiscal and trade deficits.

The US dollar's recent rise is due to other nations realizing that a weak US dollar was hurting their mercantile systems.

Now everyone realizes that the 'golden goose' was in fact a lead pig, and is busy 'beggaring thy neighbor' via various FDI machinations (deposit guarantees), interest rate reductions, and what not.

Unfortunately for the US - its past behavior has removed one major weapon from its 'beggar thy neighbor' arsenal: interest rates. We're now at 1% and simply don't have room to cut much more - kudos EJ with Hurtling toward the ZIRP Mountains?.

Fortunately there are more weapons since the US$ is a fiat reserve currency, and we're seeing them being used.

But as the big remaining weapon is used (dollar devaluation) as a consequence of massive government spending, interest rates will at some point explode.

Interest rates for mortgage loans are already rising - just check out non-conforming loan rates.

But in this case interest rates will be a consequence of dollar devaluation - and this will further increase the government 'lend and spend' (vs. print and spend) tendencies. This then is a Weimar-esque spiral which EJ does not think will occur, but a number of others do (including Faber and myself).

The irony is that one of my friends - who I had very strongly urged not to buy a house last year - went through with the purchase anyway because he was counting on a 30%-40% inflation over 5 years. This would depreciate the amount paid for the house from the $1.5M to a more survivable level - and his assumption was that his income would match inflation.

This might hold still true, but of course now the economy is turning down.

Book to Bill in the semi equipment industry where he works is 0.76 and falling.

6% to 8% pay raises from his already fairly lofty levels look unlikely.

But you pays your money and takes your chances.

[touchring]

Re: POOM! (or soon to be POOM!!)

Wow, at this rate, interest will rise to 7% soon.

30 yr fixed mtg 6.46% 5.96%


Lesson, Financial Crisis 101, always results in mega deflation.

[FRED]

Re: POOM! (or soon to be POOM!!)

ASH,

It is good to think things through, but also it can be bad to think too hard.

The US dollar's strength prior to 2006 was due to simple mercantilism: other nations had incentive to keep their currencies low in order to sell (and lend) to the US. Note the order.

The US dollar's fall afterwards was an American reaction to ever increasing fiscal and trade deficits.

The US dollar's recent rise is due to other nations realizing that a weak US dollar was hurting their mercantile systems.

Now everyone realizes that the 'golden goose' was in fact a lead pig, and is busy 'beggaring thy neighbor' via various FDI machinations (deposit guarantees), interest rate reductions, and what not.

Unfortunately for the US - its past behavior has removed one major weapon from its 'beggar thy neighbor' arsenal: interest rates. We're now at 1% and simply don't have room to cut much more - kudos EJ with Hurtling toward the ZIRP Mountains?.

Fortunately there are more weapons since the US$ is a fiat reserve currency, and we're seeing them being used.

But as the big remaining weapon is used (dollar devaluation) as a consequence of massive government spending, interest rates will at some point explode.

Interest rates for mortgage loans are already rising - just check out non-conforming loan rates.

But in this case interest rates will be a consequence of dollar devaluation - and this will further increase the government 'lend and spend' (vs. print and spend) tendencies. This then is a Weimar-esque spiral which EJ does not think will occur, but a number of others do (including Faber and myself).

The irony is that one of my friends - who I had very strongly urged not to buy a house last year - went through with the purchase anyway because he was counting on a 30%-40% inflation over 5 years. This would depreciate the amount paid for the house from the $1.5M to a more survivable level - and his assumption was that his income would match inflation.

This might hold still true, but of course now the economy is turning down.

Book to Bill in the semi equipment industry where he works is 0.76 and falling.

6% to 8% pay raises from his already fairly lofty levels look unlikely.

But you pays your money and takes your chances.

TIPS yields appear to be saying that deflation is not going to be a problem. Disinflation "Ka" phase already over?

[Adeptus]

Re: POOM! (or soon to be POOM!!)

... I also don't think you should position yourself "all in" based upon any particular investment thesis, unless you can afford to lose all your money. Most importantly, resist the temptation to assign too much certainty to anyone's predictions of the future.

Hi ASH,
I really appreciate all the time you put in to answering my post, especially in such an erudite and coherent manner. I admittedly will need to read it another 2 or 3 times before it all sinks in, though I believe I do get some 70% of it.

As per your final advice, it makes good sense. I admit I pulled the trigger way too fast on buying (too much) bullion and will try to sell a large chunk of it whenever selling it turns into a small profitable position. I underestimated how long the Fed could drag things out for, didn't anticipate my Canadian dollars to devalue 27% in 1 month! nor that trust would continue in the USD as the reserve currency given the mess the US has made of its economy, and the world's by extension. The one thing I did do right is that I didn't over extend myself in my bets, as I can afford to lose most of my bullion invested money, though it would obviously really suck.

Thanks again for your reply, it is much appreciated
Adeptus

[ASH]

Re: POOM! (or soon to be POOM!!)

ASH,

It is good to think things through, but also it can be bad to think too hard.

...

But you pays your money and takes your chances.

In my professional life, I alternate between big-picture generalizations (when managing circuit engineers, circuit design being a discipline for which I have no training) and very detailed semiconductor device physics when I'm designing avalanche photodiodes (my area of expertise). My experience has been that if you make the right generalizations, then most of the time you need not think too hard about the details if you only want to understand trends. Further, I have found that reasoning too finely on the basis of limited knowledge can be counterproductive. All that is in line with your recommendation. On the other hand, I routinely encounter cases in which the big-picture generalizations upon which I rely when working outside my area of expertise lead me astray, because frequently the devil is in the details. I have found that to be effective, one either needs to have full command of the details (in which case in-depth reasoning is worthwhile), or to grasp the limitations of one's big-picture assumptions, and seek expert advice when testing the limits of those assumptions.

I approach economics as a non-expert, and for the first couple of years thinking about it, I have relied upon big-picture generalizations that strike me as plausible. I'm presently trying to decide whether this approach is adequate -- whether I can identify sound generalizations, and whether I can understand things "well enough" for my purposes without delving into the details. Like you, I am not a frequent trader, so the view from 30,000 feet might be entirely adequate, assuming my vision is clear. I see the present financial crisis as a test of whether I can afford to remain an economic dilettante, or whether I must actually immerse myself in the mechanistic details. If I make a lot of money holding the positions I was in heading into this crisis, then I will probably lose interest in understanding the inner workings of the Fed; if those positions lose a lot of value, then I'm going to completely geek-out on the details.

In the meantime, I think it's healthy to probe the mechanistic details underlying some of the macro assumptions out there... particularly when there are folks like yourself and bart to provide correction. Otherwise, we risk assuming that certain contingencies are actually certain, and perhaps committing too much money to a particular trade.

[WDCRob]

Re: POOM! (or soon to be POOM!!)

My experience has been that if you make the right generalizations, then most of the time you need not think too hard about the details if you only want to understand trends. Further, I have found that reasoning too finely on the basis of limited knowledge can be counterproductive.

On the other hand, I routinely encounter cases in which the big-picture generalizations upon which I rely when working outside my area of expertise lead me astray, because frequently the devil is in the details. I have found that to be effective, one either needs to have full command of the details (in which case in-depth reasoning is worthwhile), or to grasp the limitations of one's big-picture assumptions, and seek expert advice when testing the limits of those assumptions.

I approach economics as a non-expert, and for the first couple of years thinking about it, I have relied upon big-picture generalizations that strike me as plausible. I'm presently trying to decide whether this approach is adequate -- whether I can identify sound generalizations, and whether I can understand things "well enough" for my purposes without delving into the details. Like you, I am not a frequent trader, so the view from 30,000 feet might be entirely adequate, assuming my vision is clear. I see the present financial crisis as a test of whether I can afford to remain an economic dilettante, or whether I must actually immerse myself in the mechanistic details.

You just accurately explained my approach about 10x better than I could have articulated it myself. And the bit in red is pretty much a guide to living IMO. 95% of the decisions you make day to day don't require a ton of detail - get the big picture right and good things follow.

Unfortunately I tend to struggle with details not just in areas I only partially understand, but in general where ideas (as opposed to results) are explained by formulas and graphs (I need text). And that definitely hurts sometimes.

Fortunately I'm pretty good at figuring out which people with a talent for that kind of work are worth listening to.

[ASH]

Re: POOM! (or soon to be POOM!!)

TIPS yields appear to be saying that deflation is not going to be a problem. Disinflation "Ka" phase already over?

That would be nice. Ka hurts.

[friendly_jacek]

Re: POOM! (or soon to be POOM!!)

ASH,
Congratulation on the great analysis.
Unfortunately, a typical approach from many gurus relies on generalizations, vague concepts of "money printing", and inflexibility in a face of new developments.
You are a big asset to this blog.

[c1ue]

Re: POOM! (or soon to be POOM!!)

ASH,

I think you are doing very well, but I suspect you do not 'grok' the scale of what is going on.

Because from my point of view - we're well beyond the realm of possibilities and into the realm of when, not how.

The facts I base this view on are built on the trillions of dollars in debt, and the options by which the government has and will act.

Sure, there are absolutely choices. But the choices are split between hard, painful, and unpopular vs. easy, short term positive, and short term popular.

As the latter is pretty much the summation of the politician, and so far I have seen zero evidence of choosing the former - I see no reason to change by view of when, not how.

[ASH]

Re: POOM! (or soon to be POOM!!)

ASH,

I think you are doing very well, but I suspect you do not 'grok' the scale of what is going on.

Because from my point of view - we're well beyond the realm of possibilities and into the realm of when, not how.

The facts I base this view on are built on the trillions of dollars in debt, and the options by which the government has and will act.

Sure, there are absolutely choices. But the choices are split between hard, painful, and unpopular vs. easy, short term positive, and short term popular.

As the latter is pretty much the summation of the politician, and so far I have seen zero evidence of choosing the former - I see no reason to change by view of when, not how.

More precisely, I do not grok what is going on in the 0-3 year time frame.

Long before I joined iTulip, I was a federal debt/demographic entitlements crisis crank, which is to say I raved at my friends about all the points you cite above with respect to the 2017+ time frame. That is the problem I grok, and about which I feel very little uncertainty. (I'm still a crank about this issue.)

I'm expending all this skull sweat because I'm uncertain about whether the present crisis must lead to the end game in the next few years. The debt is still serviceable for awhile yet, and payments to honor the Trust Fund obligations haven't really started squeezing the discretionary budget. I can entertain a scenario in which things don't really fall apart for another ten years or more, even though the ongoing costs of the bailout and fiscal stimulus must advance the day of reckoning. I see the evolution of the immediate crisis as dependent upon Fed and government policy, the outcome of the fiat reserve currency ugly contest, and whether exporters to America prefer to revive the system of loaning in order to sell, or take their chances trying to set up a more sustainable system of global trade -- none of which I grok in the short term.

So, I guess you could say I agree that it's a question of when -- not how. It's just that massive devaluation of the dollar ten or more years from now versus devaluation next year have big implications for my investment posture, and I can't properly handicap the likelihood of POOM next year without better understanding the how.

[metalman]

Re: POOM! (or soon to be POOM!!)

More precisely, I do not grok what is going on in the 0-3 year time frame.

Long before I joined iTulip, I was a federal debt/demographic entitlements crisis crank, which is to say I raved at my friends about all the points you cite above with respect to the 2017+ time frame. That is the problem I grok, and about which I feel very little uncertainty. (I'm still a crank about this issue.)

I'm expending all this skull sweat because I'm uncertain about whether the present crisis must lead to the end game in the next few years. The debt is still serviceable for awhile yet, and payments to honor the Trust Fund obligations haven't really started squeezing the discretionary budget. I can entertain a scenario in which things don't really fall apart for another ten years or more, even though the ongoing costs of the bailout and fiscal stimulus must advance the day of reckoning. I see the evolution of the immediate crisis as dependent upon Fed and government policy, the outcome of the fiat reserve currency ugly contest, and whether exporters to America prefer to revive the system of loaning in order to sell, or take their chances trying to set up a more sustainable system of global trade -- none of which I grok in the short term.

So, I guess you could say I agree that it's a question of when -- not how. It's just that massive devaluation of the dollar ten or more years from now versus devaluation next year have big implications for my investment posture, and I can't properly handicap the likelihood of POOM next year without better understanding the how.

we should a pick place to meet in 10 years where can all get together and talk about how we played the whole sad predictable gov't spending, boom, bust, deflation, inflation, demographics curve. this guy is explaining our future except we won't do it quite this way...

[Guest]

Re: POOM! (or soon to be POOM!!)

If you are posting a reference to Richard Koo's address you might offer a hat tip to Bill for having contributed it to this community a couple of days ago.

we should a pick place to meet in 10 years where can all get together and talk about how we played the whole sad predictable gov't spending, boom, bust, deflation, inflation, demographics curve. this guy is explaining our future except we won't do it quite this way...

[metalman]

Re: POOM! (or soon to be POOM!!)

If you are posting a reference to Richard Koo's address you might offer a hat tip to Bill for having contributed it to this community a couple of days ago.

sorry, looked and couldn't find it. was it you? good one.