Except that the CHOICE Act (repeal Dodd-Frank Act) ends bailouts and TBTF status. House already passed and we should expect the Senate to take it up very soon.Originally Posted by r3volution 3.0
"Let it not be said that we did nothing."-Ron Paul
"We have set them on the hobby-horse of an idea about the absorption of individuality by the symbolic unit of COLLECTIVISM. They have never yet and they never will have the sense to reflect that this hobby-horse is a manifest violation of the most important law of nature, which has established from the very creation of the world one unit unlike another and precisely for the purpose of instituting individuality."- A Quote From Some Old Book
You wanna take bets with me on whether or not the TBTF $#@! gets watered down in the senate until the bill is diarrhea?
If you agree with what I said, what is the mechanism by which this happens?
Again, how? This isn't how banks operate.
A way to think about it, in a not-so-perfect example, is if you are a homeowner who wants to start a business. To acquire the funds to start your business, you can sell your house, or take out a loan against the value of your house. Your buying power does not fundamentally change when you sell the house...and by selling the house, you avoid paying interest, but now pay rent.
Bonds vs. reserves (what the Fed gives in exchange for bonds) is a similar concept, except bonds are much, much more liquid than a house, you are going to have little disparity between bond value and dollars returned (vs selling a house with tax penalties and the amount a bank will lend against it) and bonds only represent a portion of a bank's assets while typically a house would represent a large majority of person's net worth.
It would be a different thing if the Fed was just giving free money to the banks, or buying assets for well over market/book value. Heck, that is why purchases are timed so carefully, to avoid huge price swings.
That's not to say there is no indirect effect. With rates so low, capital costs drop and the stock market becomes more attractive. We've seen leverage ratios climb as interest rates have stayed low.
A gentlemen's bet, sure, particularly since the term "watered down" is so subjective. I'm thinking there will be changes from the House bill, yes, but TBTF status and bail-outs will be no more. Bail-ins is the name of the game now. See Banco Popular for example.
"Let it not be said that we did nothing."-Ron Paul
"We have set them on the hobby-horse of an idea about the absorption of individuality by the symbolic unit of COLLECTIVISM. They have never yet and they never will have the sense to reflect that this hobby-horse is a manifest violation of the most important law of nature, which has established from the very creation of the world one unit unlike another and precisely for the purpose of instituting individuality."- A Quote From Some Old Book
When the Fed buys securities, it creates the money to buy them out of thin air. They are not taking one form of asset, selling it, and using that money to buy bonds (unless they are rolling over their holdings like they are now). That IS giving the banks free money when the Fed buys those securities from the authorized dealers in the secondary market (they don't buy them from the US Treasury).
Aren't these mutually exclusive?
Yes, the Federal Reserve creates the money out of thin air. But, they don't just give to the banks; they swap it out for bonds. The net result is that the private sector loses an interest-bearing, slightly-illiquid asset and gains a non-interest-bearing, very liquid one. I suppose that greater liquidity could help with purchasing stocks, but leverage will have a much greater effect. As others have pointed out, P/E ratios aren't that absurd. The equity risk premium given current market levels (granted, only checked a few weeks ago) is higher than its historical average. Higher earnings, a lower riskfree rate (ie, lower interest rates), and increased dividends/buyback are the primary causes of the stock market highs.
The net result is trading an IOU (the bond) for cash. If I as a bank had to come up with that cash, then yes, they could be mutually exclusive. But the cash does not come from someplace inside the economy. When the bond is normally paid off, that money comes from within the economy- the government takes money from individuals or businesses in the form of taxes and gives that money to the bond purchaser.
Great explanation of how the system works but how can they afford to buy anything back if they are running deficits every year?
Obviously if they intended to retire their debt they have two options- one: default on it and write it off. That would kill the economy and the government ability to borrow at reasonable cost for a very long time (especially for the US since despite their huge debt they are considered the most reliable form of debt) or two: take in more than taxes than they spend and put that excess into retiring debt. I don't see either option happening.Great explanation of how the system works but how can they afford to buy anything back if they are running deficits every year?
Why would the bank have to come up with the cash? The Fed is giving cash to the banks in exchange for bonds. What you are saying makes no sense.
The Fed creates money, and then gives it to the private sector in exchange for bonds. The net change is that the private sector has cash instead of bonds. Instead of having an IOU that was fairly liquid and paid interest, they get cash that is completely liquid and pays no interest. The Federal Reserve holds the bond, gets interest from the US government, and pays it back to the taxpayer minus their paltry operating costs.
When bonds are "paid off", nay, when the government spends money, they don't really take it out of the economy in the sense you are saying. The Treasury will create money out of thin air and credit necessary bank accounts, and the in conjunction with the Federal Reserve, will issue treasury bills to remove that money from the system in order to keep interest rates at their target. The reserve happens when net taxes are collected.
In fact, the current bond-buying program is just a reversal of the above. The private sector accumulated all the bonds thanks to federal government deficits, and the central bank is now swapping those bonds out for cash in order to maintain an interest rate target/affect the yield curve.
The one I've explained. Bonds are liquid assets but they're not money. One can't buy stocks with bonds.
A bank which sells its bonds to another bank, to buy stocks, only makes it harder for that other bank to buy stocks (without in turn first selling its bonds to yet another bank, and so forth). Whereas, when a bank sells to the Fed, it can raise cash to buy stocks without reducing the cash balances of any other potential stock buyers. Hence prices (of whatever these banks might want to buy other than bonds) rise.
Think about it with physical goods; suppose the Fed bought bikes instead of bonds. What would happen? Bike prices would rise, and the price of some other good(s) (whatever the bike sellers spent the money on) would rise. Whereas, if bike owners just sold to other private parties, their increased purchasing power would be offset by a reduction in someone else's.
Last edited by r3volution 3.0; 06-14-2017 at 12:51 AM.
But that's not really how modern banks work. They don't need "money" to buy an asset or make a loan. They create it out of thin air, and acquire the asset while simultaneously creating a liability. They use money and bonds to fulfill their regulatory and internal liquidity and capital requirements. Dollars and bonds are equivalent for the latter, and liquidity requirements are so paltry that the banks aren't exactly in need of dollars in order to make investments/purchases/loans/etc.
Well, the issue with that example is that the Fed would be exchanging cash for a strange, physical, depreciating asset. In that way, they actually would give the private sector more buying power since the private sector has a more valuable asset. You'd also have a chasing effect where the private sector starts making bikes in order to sell them to the central bank.
Think about it this way: when the Federal Government spends more than it takes in in taxes, it is net adding money to the system. It is crediting bank accounts more than it is debiting them; that is a net increase in prices for the system (provided they are not ameliorated by increased production, but I digress).
Let us say the Feds run a deficit of 500 billion (and that for simplicity's sake, the trade deficit is zero). So now, the wealth of the private sector has gone up by 500 billion. They have more money to spend on goods. But, the treasury/central bank will, in normal times, issues government bonds to soak up that money. Those bond sales work like taxes...the feds are debiting bank accounts. Fundamentally, though, when the bonds are issued, the net worth of the private sector hasn't changed. It used to have 500 billion in "cash", and now it has 500 billion in bonds. It can use those bonds to borrow and leverage. That's the reason why net worth is nearly 100 trillion and the effective money supply is nearly 70 trillion even though net real cash+bonds in the domestic private sector is like 3.5 trillion.
To clarify and reiterate, government spending, government deficits, can alter the purchasing power of the private sector in a very meaningful way. The central bank paying over market value for some mortgage securities can do the same. But merely swapping out government bonds for cash/reserves is going to have a very marginal effect.
I suspect the irony of this escapes the notice of most people.
freedomisobvious.blogspot.com
There is only one correct way: freedom. All other solutions are non-solutions.
It appears that artificial intelligence is at least slightly superior to natural stupidity.
Our words make us the ghosts that we are.
Convincing the world he didn't exist was the Devil's second greatest trick; the first was convincing us that God didn't exist.
Was that at the same time as when DB's stock was tanking and about to breach the $10/share psychological barrier (last summer iirc)? Then suddenly digits started pouring into the financial stock sector and DB was suddenly "stable" again. Same bailout?
"Let it not be said that we did nothing."-Ron Paul
"We have set them on the hobby-horse of an idea about the absorption of individuality by the symbolic unit of COLLECTIVISM. They have never yet and they never will have the sense to reflect that this hobby-horse is a manifest violation of the most important law of nature, which has established from the very creation of the world one unit unlike another and precisely for the purpose of instituting individuality."- A Quote From Some Old Book
They aren't. The liabilities against which banks hold reserves aren't denominated in treasuries. If banks treat them more or less equally, this is a result of a highly liquid bond market. Make it less liquid (e.g. by reducing QE), and those bonds will be discounted as reserve assets. If the Fed were buying enough bikes per month, banks could treat bikes as reserve assets equivalent to dollars.
Nominally? Sure, there are now $500 billion more dollars in circulation. But the private sector's real wealth has declined, as $500 billion worth of resources have been consumed (or inefficiently redistributed) by the state. It's the same for all state spending, however financed.Think about it this way: when the Federal Government spends more than it takes in in taxes, it is net adding money to the system. It is crediting bank accounts more than it is debiting them; that is a net increase in prices for the system (provided they are not ameliorated by increased production, but I digress). Let us say the Feds run a deficit of 500 billion (and that for simplicity's sake, the trade deficit is zero). So now, the wealth of the private sector has gone up by 500 billion. They have more money to spend on goods.
The treatment of reserves and treasuries as equivalent in terms of filling capital ratios is a practice that has been around for forty + years. It isn't a result of QE. Years of US treasuries being reliable and risk-free has resulted in this equivalency, as even with short-term swings, over time, you are guaranteed your principal and coupon payments.
Presumptive in the idea is that the private sector doesn't always use all available resources. That is why you have fallow factories and unemployed people; that is why you have periods of deflation. To the extent that government spending cuts into currently used resources, you will have less-productive utilization and inflation. To the extent that the private sector taps into new resources to meet the government spending, you get overall increased production and no inflation.
Apart from the liquidity issue, what happens to bond-holding banks' ability to buy stocks (or whatever) when bond prices rise due to QE?
In an unfettered market, the only resources idled are rationally idled (i.e. chronically, of course there is always frictional unemployment).Presumptive in the idea is that the private sector doesn't always use all available resources.
You have periods of depression following the collapse of inflation-induced bubbles.That is why you have fallow factories and unemployed people; that is why you have periods of deflation.
The latter does not occur.To the extent that government spending cuts into currently used resources, you will have less-productive utilization and inflation. To the extent that the private sector taps into new resources to meet the government spending, you get overall increased production and no inflation.
As bonds get stronger, banks and individuals will have more capacity to leverage, yes. But this would also pertain to increases in the stock market or simply gains in the economy...as the balance sheets of banks become healthier, and as the private sector does better, you will see more investment into the stock market as ter of course.
Examples of this? What do you define as an unfettered market? We've had this discussion before.
This seems a little like circular logic to me. The private sector having any idle resources, no matter how great, is always attributed to some rationality, or, to some government interference, no matter how small. It can never be blamed on the irrationality of people that compose markets. The corporate objectivist function has been disproven half a million times. Stockholders clash with bondholders, investors are irrational, manager prioritize their interest over the interests of shareholders with chicanery, companies decide that manipulation and the withholding of information is the best thing to do, firms creates high social costs which everyone else has to pay...
You are unwisely whittling down complex issues to a single thing, no doubt ideologically motivated.
If you really believe markets are perfectly rational, they should be able to anticipate the effects of government interference and prevent any bubbles from forming. To put it simply, perfectly rational markets would have seen the induced inflation and not let a bubble form.
Well, it's the reason the government has run deficits of over a trillion dollars with very mild inflation.
The original question was whether QE juices the stock market; you've now agreed that it does?
Naturally, economic growth can also raise stock prices.
A nice example of what happens in a relatively unfettered market after a bubble bursts is the Depression of 1921. The bubble was a result of massive wartime expenditures. It was burst by massive reductions in expenditures. A depression as steep as the Great ensued. The government not only didn't attempt to "reflate" but kept cutting spending through the depression. Markets cleared and growth resumed quickly: so quickly that no one even remembers the event.Examples of this?
Economic data for 1920–21 recession[2][3][4] Estimate Production Prices Ratio 1920–21 (Commerce) −6.9% −18% 2.6 1920–21 (Balke & Gordon) −3.5% −13% 3.7 1920–21 (Romer) −2.4% −14.8% 6.3 1929–30 −8.6% −2.5% 0.3 1930–31 −6.5% −8.8% 1.4 1931–32 −13.1% −10.3% 0.8
Unemployment rate[8] Year Lebergott Romer 1919 1.4% 3.0% 1920 5.2% 5.2% 1921 11.7% 8.7% 1922 6.7 6.9% 1923 2.4 4.8%
One in which the state interferes minimally (ideally, not at all, but that is not possible).What do you define as an unfettered market?
No one's claiming that market participants are perfectly rational, only that they're (vastly) more rational than the state, which has neither the knowledge now the incentive to allocate resources in a more efficient manner.This seems a little like circular logic to me. The private sector having any idle resources, no matter how great, is always attributed to some rationality, or, to some government interference, no matter how small. It can never be blamed on the irrationality of people that compose markets. The corporate objectivist function has been disproven half a million times. Stockholders clash with bondholders, investors are irrational, manager prioritize their interest over the interests of shareholders with chicanery, companies decide that manipulation and the withholding of information is the best thing to do, firms creates high social costs which everyone else has to pay...
No, that's a result of production growth managing to keep up with the increase in the money supply.Well, it's the reason the government has run deficits of over a trillion dollars with very mild inflation.
And the absence of inflation isn't the absence of a problem; inflation is only a symptom.
The problem is inefficient allocation of resources and reduced growth.
I have always said it can have a marginal effect, and not in the direct "freeing up cash way" others seem to be saying. Lower rates make the risk-free rate lower, which makes stocks more attractive. It also lowers borrowing costs for the economy and makes stocks more attractive.
Plus, QE hasn't been that effective in lowering long-term rates (ie, the risk-free rate), so I'm not sure how much it is pumping up the stock market.
I was actually asking for an example of an unfettered market. In the 19th century, you had many booms and busts, with minimal government interference and flat, low, government spending. What is the explanation of that?A nice example of what happens in a relatively unfettered market after a bubble bursts is the Depression of 1921. The bubble was a result of massive wartime expenditures. It was burst by massive reductions in expenditures. A depression as steep as the Great ensued. The government not only didn't attempt to "reflate" but kept cutting spending through the depression. Markets cleared and growth resumed quickly: so quickly that no one even remembers the event.
Economic data for 1920–21 recession[2][3][4] Estimate Production Prices Ratio 1920–21 (Commerce) −6.9% −18% 2.6 1920–21 (Balke & Gordon) −3.5% −13% 3.7 1920–21 (Romer) −2.4% −14.8% 6.3 1929–30 −8.6% −2.5% 0.3 1930–31 −6.5% −8.8% 1.4 1931–32 −13.1% −10.3% 0.8
Unemployment rate[8] Year Lebergott Romer 1919 1.4% 3.0% 1920 5.2% 5.2% 1921 11.7% 8.7% 1922 6.7 6.9% 1923 2.4 4.8%
Also, in this specific example of government cuts in spending fueling a recovery, the system was different back then. The US was on a gold standard; the US government couldn't print money on demand. In that case, they did have to go to the private market and find funds before spending; they taxed and then spent. So, when the government cut spending, it meant funds were freed up for the private sector to use elsewhere as loanable funds.
Not to mention that essays have been written about how contractionary monetary policy caused the recession in the first place and expansionary policy ended it....after all, the Fed did lower rates from around 7% to 4-5%; recovery followed that lowering. Fiscal stimulus wasn't necessary given that monetary policy could adjust aggregate demand. Not to mention that tax revenues were actually increased in 1921 to balance out the budget.
That's true, but I'd argue that the market isn't close to perfect, but far from it. Plus, as I have mentioned before, with fiat money and the new system, the Federal government can adjust its deficit spending so that the private sector maximally taps into resources and prevent deflation with only mild inflation. A suboptimally tapped resource is better than an untapped one.
But why is production growing? If the government ran lower deficits, you'd see less demand. Initially, you might see deflation, but eventually, the private sector would cut production to balance the lesser demand.
Ultimately, I think you are too sanguine about the market's ability to allocate resources.
How about this thought experience: Let us say the private sector alone would allocate 80% of the resources in an 80% optimal fashion. The government could allocate 99% of resources in a 40% optimal fashion. So a system where the private sector allocates 80% of the resources in an 80% optimal fashion and the government allocates 15% of resources (a buffer to make sure it doesn't cross into the private sector's used resources) in a 40% optimal fashion is a better system. Not to mention that with time the government could take its influence away and let the private sector use more resources in a cyclical fashion. See how the stimulus plan basically did this by pouring money into the private sector, bolstering its balance sheets, and letting markets then take on the projects (with lowered government spending freeing up resources for markets to use).
I'll finish by amending that I do think that the government can more optimally allocate resources when it comes to defense/police/legal system and that if you started from scratch, markets would eventually evolve with government-like entities that handled those basic features.
Last edited by Dr.No.; 06-15-2017 at 01:22 AM.
Spending was quite flat, except during wartime. A number of boom-bust cycles were a result of increased and then decreased war spending. Others were a result of monetary expansion. A central bank existed in the US from 1781 to 1811, then again from 1816 to 1836. The National Banking System existed from the end of the civil war until the creation of the Fed in 1913. The money supply was more rigid in the 19th century than the 20th, thanks to the gold standard, but not as rigid as you might think. Monetary expansions (followed by the inevitable contraction) occurred regularly, with government frequently suspending specie payments to help the banks. Rothbard actually wrote his doctoral dissertation on the Panic of 1819, available online. I would also recommend his History of Money and Banking in the United States, for a thorough overview of 19th century banking history.
That's still true, always and everywhere. I don't know how you think the state can magically conjure up resources.Also, in this specific example of government cuts in spending fueling a recovery, the system was different back then. The US was on a gold standard; the US government couldn't print money on demand. In that case, they did have to go to the private market and find funds before spending; they taxed and then spent. So, when the government cut spending, it meant funds were freed up for the private sector to use elsewhere as loanable funds.
All wealth it consumes or redistributes must come from the private sector.
The Fed did very little. The US money supply shrank in 1920-21, barely rose 1921-1922, and did not reach pre-recession levels until a year after the recession had ended. Meanwhile, from 1920 to 1922, spending was cut 40%. That taxes were slightly increased is unimportant (the real burden is spending; by increasing taxes, all the the government was doing was shifting the [much reduced] burden from bond investors or dollars holders to taxpayers).Not to mention that essays have been written about how contractionary monetary policy caused the recession in the first place and expansionary policy ended it....after all, the Fed did lower rates from around 7% to 4-5%; recovery followed that lowering. Fiscal stimulus wasn't necessary given that monetary policy could adjust aggregate demand. Not to mention that tax revenues were actually increased in 1921 to balance out the budget.
I think I've already explained the problem with this line of reasoning.That's true, but I'd argue that the market isn't close to perfect, but far from it. Plus, as I have mentioned before, with fiat money and the new system, the Federal government can adjust its deficit spending so that the private sector maximally taps into resources and prevent deflation with only mild inflation. A suboptimally tapped resource is better than an untapped one.
No, you'd see different demand. Resources being appropriated by the state and misspent would be returned to their owners.But why is production growing? If the government ran lower deficits, you'd see less demand. Initially, you might see deflation, but eventually, the private sector would cut production to balance the lesser demand.
The transition process would involve frictional unemployment (i.e. a brief, steep, recession/depression ala 1921).
Let me stop you there. Once again, there would be no idle resources in the first place but for the state preventing markets from clearing.Ultimately, I think you are too sanguine about the market's ability to allocate resources.
How about this thought experience: Let us say the private sector alone would allocate 80% of the resources in an 80% optimal fashion. The government could allocate 99% of resources in a 40% optimal fashion.
Take the English situation in the 20s, which was Keynes' laboratory.
Why was there chronic unemployment? Certain industries were engorged from wartime spending, which was naturally cut upon the return of peace. Normally, in an unfettered market, there would have been a short, sharp depression liquidating those industries and reallocating their resources (e.g. guns --> shoes), as occurred in the US. But in Britain, the labor market was extremely rigid thanks to state sponsored labor unions and an elaborate unemployment insurance program. On top of that, after 1925, Britain tried to go back to gold at the old pre-war par without allowing a deflation and while actually printing more money! Naturally, wages barely dropped, and so unemployment ensued. Keynes took "wages sticky downward" as an article of faith, rather than an effect of the British government's policies of that era, and proposed solving the problem by lowering real wages through inflation. It was a bad solution to an easily avoidable problem, as it remains today.
Well we can agree on that. I'm not and have never been an anarchist.I'll finish by amending that I do think that the government can more optimally allocate resources when it comes to defense/police/legal system and that if you started from scratch, markets would eventually evolve with government-like entities that handled those basic features.
Last edited by r3volution 3.0; 06-15-2017 at 12:45 PM.
Even if one doesn't understand the technical arguments you guys are making, all you need to know is that it defies basic logic that you can print and borrow your way to prosperity. If there was no downside every country would be rich.
Since when is inflating the money supply minimal government interference?
Panic 1837 - "The total money supply had risen from $109 million in 1830 to $159 million in 1833, an increase of 45.9 percent, or an annual rise of 15.3 percent.."
"Total money supply rose from $150 million at the beginning of 1833 to $276 million four years later"
Last edited by loveshiscountry; 06-16-2017 at 08:41 PM.
Noting that those were very high increases in the money supply. If the money supply grows at the same rate as the overall economy it should have zero effect. During eight years of QE, the US money supply (as measured by M2) grew 16% or only two percent a year. https://www.google.com/search?q=qe+e...hrome&ie=UTF-8
That pretty much matches GDP growth (which was slightly higher at 17% from 2008 through 2014).
Last edited by Zippyjuan; 06-16-2017 at 11:59 AM.
Not true
Inflation changes relative prices (i.e. redirect resources away from what supply/demand in the market dictate), regardless of whether the general price level increases. Nor is an increase in the general price level necessary for a boom-bust cycle. A relatively small inflation will cause a relatively small bubble, one whose bursting we might not recognize, but it's still occurring. For example, if the Fed printed just $10,000 and used it buy bikes from a single bike shop in Brooklyn, and then stopped, that bike shop might expand in the face of the additional demand, and then go bankrupt when the Fed stops buying. That's the same as any boom bust cycle, just on a very small scale.
Bubbles can and will happen no matter what yo do with the money supply or what you use for money. They are human nature.
The state's intervention in the market always causes misallocations of resources, which, when large enough, we call bubbles (the correction of the misallocation being the bust). Now, while it's conceivable (i.e. not logically impossible like a square circle) that bubbles could form in a free market (e.g. a very large number of entrepreneurs could spontaneously make the same miscalculations for no apparent reason), it's highly unlikely. Can you cite any example of the latter? Any historical boom-bust cycle which was not caused by state intervention in the market (typically either monetary or fiscal)? In any event, even if boom-bust cycles did form on rare occasions in the free market, that's no justification for creating many additional boom-busts cycles through state intervention.
Last edited by r3volution 3.0; 06-16-2017 at 12:47 PM.
Beanie Babies. Something becomes popular so everybody thinks the want one. People think "hey, I can make money on that too!" so they start buying them up so they can sell them for more in the future. Eventually everybody who might want a Beanie Baby has one. Bubbles are more emotional things. http://fortune.com/2015/03/11/beanie...ilure-lessons/
Or the Tulip Bubble.
Can government fiscal actions cause bubbles? Yes. Are they the only cause? No. Do government actions always lead to bubbles? If so, then why are bubbles constrained to certain sectors- not the entire economy? Like the housing bubble or the stock market bubble or the gold bubbles?
Last edited by Zippyjuan; 06-16-2017 at 05:13 PM.
Why in the world would you think the economy could possibly grow at the same rate? 46 percent in that short a time??? Even Barry Bonds didn't grow at that fast a rate.
Like when we inflated the money supply with free money or easy lending in the Housing bubble or the dot com bubble or the stock market crash in the 20's? Or like the House of Cook?
They are government in nature.
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