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The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
Quote from ralph00:
This makes no sense. There are two variables there. The Fed has a bit of degree of control over one, but none over the other. You cannot dismiss Koo and other who argue that QE doesn't work because of that equation.
I'm sorry but Koo is dead wrong
"The important question, of course, is whether a determined Bank
of Japan would be able to depreciate the yen. I am not aware of any
previous historical episode, including the periods of very low interest
rates of the 1930s, in which a central bank has been unable to devalue
its currency. Be that as it may, there are those who claim that the
BOJ is impotent to affect the exchange rate, arguing along the
following lines: Since (it is claimed) domestic monetary expansion has
been made impossible by the liquidity trap, BOJ intervention in foreign
exchange markets would amount, for all practical purposes, to a
sterilized intervention. Empirical studies have often found that
sterilized interventions cannot create sustained appreciations or
depreciations. Therefore the BOJ cannot affect the value of the yen,
except perhaps modestly and temporarily.
To rebut this view, one can apply a reductio ad absurdum
argument, based on my earlier observation that money issuance must
affect prices, else printing money will create infinite purchasing
power. Suppose the Bank of Japan prints yen and uses them to acquire
foreign assets. If the yen did not depreciate as a result, and if
there were no reciprocal demand for Japanese goods or assets (which
would drive up domestic prices), what in principle would prevent the
BOJ from acquiring infinite quantities of foreign assets, leaving
foreigners nothing to hold but idle yen balances? Obviously this will
not happen in equilibrium. One reason it will not happen is the
principle of portfolio balance: Because yen balances are not perfect
substitutes for all other types of real and financial assets,
foreigners will not greatly increase their holdings of yen unless the
yen depreciates, increasing the expected return on yen assets. It
21
might be objected that the necessary interventions would be large.
Although I doubt it, they might be; that is an empirical question.
However, the larger the intervention that is required, the greater the
associated increase in the BOJâs foreign reserves, which doesnât seem
such a bad outcome.
In short, there is a strong presumption that vigorous
intervention by the BOJ, together with appropriate announcements to
influence market expectations, could drive down the value of the yen
significantly." - Bernanke
The only reason Japan doesnt have inflation and healthy nominal GDP growth is because the BOJ is run by incompetents
"An alternative strategy, which does not rely at all on trade diversion,
is money-financed transfers to domestic householdsâ-the real-life
equivalent of that hoary thought experiment, the âhelicopter dropâ of
newly printed money. I think most economists would agree that a large
enough helicopter drop must raise the price level. Suppose it did not,
so that the price level remained unchanged. Then the real wealth of
the population would grow without bound, as they are flooded with gifts
of money from the governmentâ-another variant of the arbitrage argument
made earlier. Surely at some point the public would attempt to convert
its increased real wealth into goods and services, spending that would
increase aggregate demand and prices. Conversion of the publicâs money
wealth into other assets would also be beneficial, if it raised the
prices of other assets."
is money-financed transfers to domestic householdsâ-the real-life
equivalent of that hoary thought experiment, the âhelicopter dropâ of
newly printed money. I think most economists would agree that a large
enough helicopter drop must raise the price level. Suppose it did not,
so that the price level remained unchanged. Then the real wealth of
the population would grow without bound, as they are flooded with gifts
of money from the governmentâ-another variant of the arbitrage argument
made earlier. Surely at some point the public would attempt to convert
its increased real wealth into goods and services, spending that would
increase aggregate demand and prices. Conversion of the publicâs money
wealth into other assets would also be beneficial, if it raised the
prices of other assets."
Disagree... Degree to which V collapses is purely a function of the mkt and, as such, virtually unbounded. Fed has all sorts of limitations on just how much it can respond by raising M (e.g. coconuts in Congress). Same can be said of the ECB, where I observed this phenomenon in action, first-hand, up close and personal-like.Quote from Daal:
The math is not refuted by that, you are changing the variables which affect the result. Point is the Fed can boost M more than the collapse in V
Quote from Martinghoul:
Disagree... Degree to which V collapses is purely a function of the mkt and, as such, virtually unbounded. Fed has all sorts of limitations on just how much it can respond by raising M (e.g. coconuts in Congress). Same can be said of the ECB, where I observed this phenomenon in action, first-hand, up close and personal-like.
I'm not sure which limitations are you referring, as far as I know politicians(except Ron Paul) love cheap money, some might not want they to buy GSE debt but they are a minority(Plus what if Fed buys USTs, they might change their concerns). To me there is little doubt that if Bernanke saw some kind of Japanese scenario coming up he would try to get everyone(except Hoenig) on board for a large QE program that would get M growing strongly
To me the only reason this has not happened is because inflation is still holding positive and expectations(even though are fluctuating all over the place) happen to be parked in a level they are comfortable with but that might change in a few months
Also congressional complaints would STILL need to get through a presidential veto as Geithner(being ex-FOMC) and Summers(being stimulus happy) would almost surely agree with Bernanke's plans
One realization that I had lately is that the Fed exit strategy might not be complicated as it appears. The reason is, the private sector is delevering and will probably continue to do that for a number of years, as that happens the government(including the Fed) will lever up. As people use their available M2 to pay off bank debt, the Fed will go in the other side and purchase assets to try to increase M2, but some of those purchases will happen in a permanent basis because selling ALL the assets(taking the balance sheet back to pre-crisis levels) would lead to a 1930's collapse of the money supply(because of all those people who used their M2 to pay off bank debt).
As a result a good deal of the total US bank credit decline will become a permanent increase in the Fed's balance sheet. $1.5T might be the new $800B, although I'm just guessing about that number
As a result a good deal of the total US bank credit decline will become a permanent increase in the Fed's balance sheet. $1.5T might be the new $800B, although I'm just guessing about that number
Have you seen Bernanke trying to explain x-ccy swaps (lines to foreign CBs) to Alan Grayson? What about the whole "audit the Fed" malarkey? Or how about counting the number of posts here on ET talking about "abolishing the Fed", bubbles and etc?
These are all limitations...
These are all limitations...
Quote from Martinghoul:
Have you seen Bernanke trying to explain x-ccy swaps (lines to foreign CBs) to Alan Grayson? What about the whole "audit the Fed" malarkey? Or how about counting the number of posts here on ET talking about "abolishing the Fed", bubbles and etc?
These are all limitations...
Still, I cant see them gathering enough support to override a presidential veto with the worst labor market since the 30's in order to stop loosening of monetary policy
Quote from Daal:
One realization that I had lately is that the Fed exit strategy might not be complicated as it appears. The reason is, the private sector is delevering and will probably continue to do that for a number of years, as that happens the government(including the Fed) will lever up. As people use their available M2 to pay off bank debt, the Fed will go in the other side and purchase assets to try to increase M2, but some of those purchases will happen in a permanent basis because selling ALL the assets(taking the balance sheet back to pre-crisis levels) would lead to a 1930's collapse of the money supply(because of all those people who used their M2 to pay off bank debt).
As a result a good deal of the total US bank credit decline will become a permanent increase in the Fed's balance sheet. $1.5T might be the new $800B, although I'm just guessing about that number
$1.5T might actually understate things, the new future Fed balance sheet might actually be quite a bit higher than current levels! It all depends on how many years the delevering takes place, that is how long does net bank credit growth remains negative, also if it turns positive how positive is it
I'm trying to figure out if this is incorrect because I have never read this realization anywhere but so far I believe its accurate. One cant be in the delevering camp and still believe the Fed will exit at some point, as it currently stands there will be never an exit if the private sector continues to delever, the excess reserves pose no threat as bank lending even if it picks up will probably not be enough to offset debt paydowns(which means negative M2 growth, at least from the private sector)