QIRP Does Not Work And Rebutting Bernanke’s Defense Of Himself

[piezoe]

Yes, an increase in the balance sheet is a consequence of QE, and is of course expected. You will in coming months see the balance sheet begin to decline, but I don't know when that will be, as it must depend on economic conditions.

The other points you raised were either not strictly correct or a bit misleading, in my opinion. I have already addressed them. Your main point, as I understand it, is that the Fed increased its balance sheet by a very large amount, and it hasn't significantly been reduced. The only thing I would add to that is the word "yet" at the end of the sentence. Your myopic view of things is coming from a more or less correct statement of the current situation, but you have largely ignored the reversibility of these Fed operations. You have a real problem getting out of your mind the false impression that what the Fed is doing is wild printing that is going to result in horrible inflation down the road. We may very well have bad inflation eventually, but I assure you that it won't be because of anything the Fed has done!

You have let your suppressed angst over what you despise about the way the Congress runs your government -- they don't do as you think they should -- spill over into criticism of strictly administrative government operations -- not that these operations are perfect, far from it -- but your anger is misplaced. If you concentrated your efforts on the legislative branch of government, you might get results more to your liking.

You will have to be very patient. Macro economic swings tend to have a periods measured in years. About two decades would be typical of a cycle.

 

[Tsing Tao]

Yes, an increase in the balance sheet is a consequence of QE, and is of course expected. You will in coming months see the balance sheet begin to decline, but I don't know when that will be, as it must depend on economic conditions.

Post bookmarked as to "the coming months". Economic conditions are as bad now as they were during QE. The only difference is that now, Fed public credibility is at stake (for those who still have faith the Fed knows what it is doing - see dot plot revisions or GDP revisions, or etc).

The other points you raised were either not strictly correct or a bit misleading, in my opinion. I have already addressed them.

Misleading? You said the bailouts resulted in profit and needed to be done. I showed that they resulted in losses, not profit.

You told me that the much of the Fed's portfolio was MBS, which I proved to be untrue as well, as your crux of the argument for telling me it was not purchasing "created" debt. Then you tried to point out that the Fed's balance sheet declining was further evidence that it was not "printing" in the sense of the word, but I showed no such decline was happening (to which you just replied "just you wait!"). You even tried mentioning that the Treasury paying down debt would be akin to decreasing this money supply - but that hasn't happened yet nor has the Treasury reduced debt in recent memory.

And it's me who is somehow being misleading.

Your main point, as I understand it, is that the Fed increased its balance sheet by a very large amount, and it hasn't significantly been reduced. The only thing I would add to that is the word "yet" at the end of the sentence. Your myopic view of things is coming from a more or less correct statement of the current situation, but you have largely ignored the reversibility of these Fed operations. You have a real problem getting out of your mind the false impression that what the Fed is doing is wild printing that is going to result in horrible inflation down the road. We may very well have bad inflation eventually, but I assure you that it won't be because of anything the Fed has done!

I didn't say anything about inflation at this point. In fact, this is my first mention of the word "inflation" in the thread. All I said was that the Federal Reserve is printing money - not in the sense of running the actual printers - but in the sense of creating money. You tried (and failed) to argue that this was not the case.

You have let your suppressed angst over what you despise about the way the Congress runs your government -- they don't do as you think they should -- spill over into criticism of strictly administrative government operations -- not that these operations are perfect, far from it -- but your anger is misplaced. If you concentrated your efforts on the legislative branch of government, you might get results more to your liking.

Another completely incorrect assertion. My "angst" if you want to call it that, has nothing to do with Congress in this argument, or any political point of view. My issue with the Fed is that it has injected itself and distorted every single market out there, encouraged reckless spending and investing, punished those who rely on fixed income and interest rates, and kicked the can down the road, all in the name of trying to fix what happened in the last financial crisis (while ensuring the exact same thing happens in the future, on a larger scale). Too big to fail is now too bigger to fail, the same debt overhang (but worse) is pervasive through the markets and a larger equity bubble has been blown - based on nothing at all but monetary policy (and no proper valuation metrics). So don't try to pretend you know what drives my "angst". You're nowhere near truth on any of it.

You will have to be very patient. Macro economic swings tend to have a periods measured in years. About two decades would be typical of a cycle.

How could you possibly know how long economics swings are with the Fed distorting everything macro?

 

[Tsing Tao]

BULLARD: CUT RATES IF ECONOMY SUFFERS SHOCK AFTER FED LIFTOFF.

You will in coming months see the balance sheet begin to decline, but I don't know when that will be, as it must depend on economic conditions.

So Fed will hike rates so it can lower rates right after and launch QE4? LOL!!

 

[Tsing Tao]

What a bunch of clowns these guys are...they are truly clueless as to what to do.

Bullard Hints The Fed May Hike Rates Only To Cut Them Right After

If one needs to observe ample confusion by a central planner, one usually needs to look no further than St. Louis Fed's James Bullard, the same "hawk" who has been pressing for aggressive rate hiking throughout the last year except when the market almost entered a correction and he promptly hinted at QE4.

There was more of the same earlier today, when he spoke earlier at the annual Hyman P Minsky Conference, and said “now may be a good time to begin normalizing US monetary policy so that it is set appropriately for an improving economy over the next two years. Even with some normalization, monetary policy will remain exceptionally accommodative.”

Correctly, he further noted that “a risk of remaining at the zero lower bound too long is that a significant asset-market bubble will develop."

He added that the Fed is concocting a "witch’s brew" of factors that could lead to excessive risk taking if it holds interest rates near zero for too long as the jobless rate approaches normal. "My story about bubbles is most of the risk lies ahead of us. That’s a witch’s brew of factors that sounds like a bubble."

Graphic description of the Fed's chemistry experiment gone bad to paraphrase David Einhorn, what Bullard unfortunately doesn't get is that asset bubble is already here and now and manifests itself in the form of the biggest ever Treasury bond bubble, which is merely the entire market frontrunning the world's central banks monetizing a record amount of debt, and logically, in risk assets as well due to the infamous "There Is No Alternative."

So far so good. It was at this point where Bullard's comments veered off into the bizarre and outright contradictory, because he said that the:

• FED SHOULD NOT SURPRISE MARKETS ON TIGHTENING PACE

... minutes after he said:

• NOW `MAY BE A GOOD TIME' TO BEGIN RAISING RATES

And then added:

• HE'S `DELIBERATELY VAGUE' ABOUT LIFTOFF TIMING

But... he just said....

So which is it? Or does the market expect a rate hike now according to Bullard, and as a result the S&P is back to all time highs?

The answer is simple, and one which Bill Dudley already hinted at last week - the Fed is now market data dependent, and if and when even the smallest selling starts, the Fed crawls back into its shell: "if we did something that surprised one way or another and markets had to reconcile those prices all at once."... “I think that’s an important issue for trust in the market."

We wonder if Bullard realizes the Fed is the market. Probably not.

But the absolute punchline:

• BULLARD: CUT RATES IF ECONOMY SUFFERS SHOCK AFTER FED LIFTOFF

In other words, the only reason the Fed is hiking rates is so it can cut them right after, and if possible launch another full blown QE just to keep markets from being too "surprised"...

 

[piezoe]

I want to make sure you have a correct understanding of what I actually wrote versus what you think I wrote.

This is what I actually wrote:

"...you have largely ignored the reversibility of these Fed operations."

This is how you interpreted those words:

"Then you tried to point out that the Fed's balance sheet declining was further evidence that it was not "printing".

Let's discuss this very briefly. Certainly, what I wrote was the exact equivalent of saying that Fed balance sheets could both expand and contract. That's the reversibility part, and that is a feature that does not accompany true "printing." But as you will see, if you go back and read slowly and carefully what I wrote, nowhere did I say, or even imply, that the Fed's balance sheet had declined, or was declining, as you incorrectly imply. It would be impossible for me to have "tried" to point out that the Fed's balance sheet "declining" was further evidence...etc. (I couldn't know that. I haven't looked at it in a long while.)

I didn't "try" to point something out. I pointed something out. What I pointed out was that while Fed balance sheet expansions are reversible, money printing, except of course in the trivial sense where you burn the money you just printed, is not. That's a fact.

You are entitled to your own opinions, but not your own facts.

I also want to say, I find it very difficult to carry on a sensible discussion with you. I'll be as charitable as I can and assume that your inability to comprehend what I write is a failing on my part. I think at this point I should cut my losses, and give up.

 

[Tsing Tao]

I want to make sure you have a correct understanding of what I actually wrote versus what you think I wrote.

This is what I actually wrote:

"...you have largely ignored the reversibility of these Fed operations."

This is how you interpreted those words:

"Then you tried to point out that the Fed's balance sheet declining was further evidence that it was not "printing".

This whole discussion began when you said the Fed wasn't printing because they could reverse the operation. Since they haven't reversed anything, it's akin to printing. Sure, they can if they want to, but they haven't yet, so the discussion is moot. Your entire argument is based on the idea of "just you want and see!"

I also want to say, I find it very difficult to carry on a sensible discussion with you. I'll be as charitable as I can and assume that your inability to comprehend what I write is a failing on my part. I think at this point I should cut my losses, and give up.

Probably wise. You've made yourself look quite silly in your commentary and reasoning, and it's a good idea to cut your losses.

 

[Tsing Tao]

Ben's new keyboard at Citadel.

And, of course, his desktop.

 

[Tsing Tao]

Stop The Presses: Nobel-Prize Winning Economist Slams QE

Whether it is due to pervasive groupthink, a chronic lack of vision, the perpetuation of failed ideas, or just because the alternative casts grave doubts about the value of their very existence, conventional economists and their media lackeys have almost without exception been supportive of the Fed's "recovery" efforts, be it ZIRP or QE. After all, neoclassical economics demands it, and if the Fed is wrong about its response to the second great depression, then the value of every single economist likewise goes out the window.

Still, in the relentless rising tide of ever louder voices against central planning by the world's monetary authorities, and its destructive consequences, mostly originated by people who engage in actual work as opposed to tenured academics who live in ivory towers where they conduct (failed) thought experiments,it was only a matter of time before at least one prominent economist took the other side of the argument that according to the likes of Paul Krugman has only failed (so far) because not enough of it has been tried (leave it to an economist to completely fail to anticipate the collateral collapse resulting from relentless central bank debt monetization which we forecast as long ago as 2012).

That time has come, and over the weekend, none other than Nobel-prize winning economist Robert Merton (of expanded Black-Scholes fame) with Arun Muralidhar as co-author, released an Op-Ed in Pensions and Investments magazine titled "Monetary policy: It's all relative", in which they slammed not only the current monetary policy response to economic ills (as observed through the prism of pension math and the adverse impact of low rates), but question if instead of leading to an improvement, QE isn't in fact making the situation even worse.

Here are the key excerpts from the op-ed:

... while QE has increased absolute wealth, it has simultaneously lowered relative wealth for a large class of investors. This could lead to the opposite of the desired effect for this group of investors. Lower relative wealth means investors need to save more to improve their funded status, especially where regulations are strict, and it results in less consumption and investment, and may not remove the deflationary overhang.​

...

An alternate, more sophisticated approach to explaining why QE may not work to stimulate aggregate consumption is, perhaps, because the demographic mix of the U.S. (and most parts of the developed world) has shifted toward older people. Unlike 30 or 40 years ago, the enormous baby boomer generation, and even retirees, are much wealthier (including human capital) than in the past, and they are wealthier than current generations earlier in their life cycle. So the wealth effect does not lead to an increase in consumption and, potentially, has the opposite outcome.

When baby boomers were in the sweet spot for housing needs, expenditures on children and cars, etc. 30 to 40 years ago, the effect the central banks were expecting from QE might have worked better, as they expected it would, but that need not be a reliable prediction under the changed current demographic and wealth distribution.​

...

We believe it is imperative for central banks and academia to examine this perspective immediately and develop a new monetary policy toolkit, because it would be tragic if the central banks' attempts to improve economic security with the current orthodoxy leads, instead, to less consumption, less investment and greater retirement insecurity.​

And the punchline:

A recent study by the Center for American Progress shows that millions of Americans (as high as 50% of households) are in danger of retiring with insufficient money to maintain the standard of living to which they are accustomed, and the problem is getting progressively worse. Your previous editorial argues that QE by the central bank may impose unintended costs on pensions, at both the institutional and retail level. This suggests more research needs to be conducted to examine how monetary policy affects relative wealth, not just absolute wealth, and whether traditional approaches are outdated given the current retirement landscape. This may call for central banks to use a different set of policy tools than manipulating long-term rates, and may even argue for the Fed to actually raise long-term rates faster than what is recommended by traditional monetary policy. ​

Alas, with central banks now proudly owning $22 trillion in "assets", it is far too late. The best one can hope for is that the social collapse the results after QE's failure is finally accepted by all, and that includes all other economists, will be somewhat contained.

Needless to say, all it would take for the Fed to "lose credibility" (if only among its "very serious" peers; it has long since lost all credibility across the broader population) is for a few more economists to have a comparable epiphany and declare that the money-printing emperor is naked, and then all bets - at least for the current failed economic and monetary regime - are off.

As for the immediate response to this article from the Keynesian canon, here is a preview of what to expect.

 

[Tsing Tao]

Yes, an increase in the balance sheet is a consequence of QE, and is of course expected. You will in coming months see the balance sheet begin to decline, but I don't know when that will be, as it must depend on economic conditions.

The other points you raised were either not strictly correct or a bit misleading, in my opinion. I have already addressed them. Your main point, as I understand it, is that the Fed increased its balance sheet by a very large amount, and it hasn't significantly been reduced. The only thing I would add to that is the word "yet" at the end of the sentence. Your myopic view of things is coming from a more or less correct statement of the current situation, but you have largely ignored the reversibility of these Fed operations. You have a real problem getting out of your mind the false impression that what the Fed is doing is wild printing that is going to result in horrible inflation down the road. We may very well have bad inflation eventually, but I assure you that it won't be because of anything the Fed has done!

You have let your suppressed angst over what you despise about the way the Congress runs your government -- they don't do as you think they should -- spill over into criticism of strictly administrative government operations -- not that these operations are perfect, far from it -- but your anger is misplaced. If you concentrated your efforts on the legislative branch of government, you might get results more to your liking.

You will have to be very patient. Macro economic swings tend to have a periods measured in years. About two decades would be typical of a cycle.

Another bookmark - this one Piezoe telling us we'd see a Fed balance sheet decline, back in 2015. LOL.

Great call, Pie!

 

[piezoe]

Another bookmark - this one Piezoe telling us we'd see a Fed balance sheet decline, back in 2015. LOL.

Great call, Pie!

I only wish I were still capable of being as cogent, right-on and coherent in my posts as I was in 2015. Of course exactly what I anticipated would happen eventually did happen. Naturally, in 2015 no one could have predicted the Covid Pandemic, nor the extent of the eventual fiscal response to it, and how that would delay the tightening of Fed monetary policy (Tightening is virtually synonymous with balance sheet reduction, as it typically involves selling of Treasuries to reduce bank reserve balances.)

We all recall the U.S. response to Covid-19 was unconscionably slow and unbelievably inept. The States were left largely to their own devices until the crisis could no longer be ignored. Undoubtedly thousands died unnecessarily because the Administration, only months before it was needed, had dismantled the office previously set-up under the Obama administration to coordinate response to pandemic threats and then worked not to support the authority of the experts, but instead to undermine it!* The President himself would have died had he not had access to extraordinary measures not available, at that time, to everyone. We were told "it will all go away by April". Finally, once hospital intensive care wards were overflowing there begin a coordinated response and a push to get the mRNA vaccines approved and manufactured.

I and others have been critical of the Fed because they failed to timely adjust their monetary policy to adequately take into account what would be the affect on demand for goods and services of the extraordinary fiscal measures put in place to deal with massive unemployment resulting from Covid-driven shutdown of the economy. This effect should have been predictable by the Fed's minions of Ph.D. economists. Nevertheless, the Fed's role in causing the subsequent inflation has been greatly exaggerated. The major contributor to the post Covid inflation was mostly Covid-associated externalities plus to some extent failure of the Biden Administration to reverse some of the counterproductive tariffs imposed by the prior administration. I previously mentioned this in the ET Economics Thread entitled Genesis of Today's Inflation (May 14,2022).
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*Any disinterested observer would think this could never happen in a sane world; yet it did.