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Some talking heads say to expect a 1/2% interest rate rise per Trillion (or some large number) of Fed balance sheet. Is there any support for that data point.

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Posted on 04/19/2017 3:07 PM
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I don’t see why the Fed would feel the need to raise rates as they shrink the balance sheet. They’re independent policy actions. Some people who are confused about this subject seem to think the Fed NEEDS to shrink its balance sheet in order to raise rates. That is totally wrong.

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Cullen Roche Posted by Cullen Roche
Answered on 04/19/2017 3:15 PM
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    Cullen wrote a lot about QE being merely and exchange of cash for bonds and no new assets are created. The reverse should be the same. Right now it is said that bonds are “overbought” so it might be a good time to let the Fed’s bonds mature without them buying new bonds and thus “rolling over” their holdings. Shouldn’t this have an effect of raising rates in the market a bit? Would be like buying low during QE and selling high during this “overbought” time period and make some moolah for Uncle Sam. But what do I know?

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    Posted by Dennis
    Answered on 04/19/2017 6:48 PM
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      > By expanding its balance sheet the Fed created super high quality short-term instruments and traded
      > them in exchange for high quality long-term instruments like Mortgage Backed Securities and T-Bonds.

      What have you been smoking? 🙂 The Fed doesn’t just print up and exchange bank reserves for illegal assets from Phony and Fraudie or lending tens of billions to the three illegal Maiden Lane trusts unless it was intent on taking LOW quality assets off the rescuee’s balance sheets — which indeed is exactly what it did during the subprime crisis. After all, that is how banks recover from a balance sheet recession — by dumping the LOW quality assets onto the taxpayer (aka socialization of costs). QE2+ exchanging for Treasuries is an entirely different matter and a total non-event.

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      Posted by MachineGhost
      Answered on 04/19/2017 10:59 PM
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        Fannie and Freddie were perceived to be low quality assets because their backing by the US govt was in question when the reality is that these assets were never at risk of default.

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        Cullen Roche Posted by Cullen Roche
        Answered on 04/19/2017 11:04 PM
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          Back to the OP — historical data shows that the size of the monetary base and T-Bill yield are highly correlated as it reflects liquidity preferences. Just don’t confuse that with causation.

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          Posted by MachineGhost
          Answered on 04/19/2017 11:08 PM
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            Historical data is irrelevant to int rates in an environment where interest on reserves is paid.

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            Cullen Roche Posted by Cullen Roche
            Answered on 04/19/2017 11:16 PM
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              They’re still not high quality assets. Going into receivership/conservatorship/nationalization, having the equity holders wiped out and illegally ripping off the bondholders is not what anyone would call “full faith and credit of the United States”, nevermind being “General Obligations of the United States” that is allowed to be exchanged for by the Fed in the Federal Reserve Act. They were pseudo-government entities and still are and none of the problems since the subprime crisis have been solved. Junk quality.

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              Posted by MachineGhost
              Answered on 04/19/2017 11:16 PM
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                And BTW Congress has prohibited the Fed from doing what it did… ilegally buying mortgage-backed bonds so where is the “no risk of default” going to come from next time they blow up so they maintain their “high quality” mirage? Just sayin’.

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                Posted by MachineGhost
                Answered on 04/19/2017 11:18 PM
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                  What does IOER have to do with the liquidity preferences of the real (or financial) economy?

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                  Posted by MachineGhost
                  Answered on 04/19/2017 11:20 PM
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                    Fannie and Freddie bonds matured and continue to mature at 100 cents on the dollar because of govt support so your opinion that theyre not high quality is wrong and irrelevant.

                    There’s no “preference” in your mythical liquidity preference. Banks aren’t choosing to hold reserves. They’re being forced to.

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                    Cullen Roche Posted by Cullen Roche
                    Answered on 04/19/2017 11:23 PM
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                      I want to see hard proof of where this government-backing for Freddie, Fannie and Ginnie bonds is legally overt and not just because they put the former two into receivership, i.e. implied, tacit or assumed. Got a link?

                      Okay, so you’re saying there is no relationship between short-term interest rates and the amount of currency or bank reserves that is willing to be held? That doesn’t sound right to me. Why would someone want to hold more of the zero-yielding latter category if the former category was yielding higher? So we know that IOER applies to bank reserves and banks, but I was referring to the yield-chasing behavior of people in the real (or financial) economy. How do you explain that all yields on all assets have been driven down to near zero (or to the IOER) if people were not actively voting for a liquidity preference with their savings?

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                      Posted by MachineGhost
                      Answered on 04/19/2017 11:43 PM
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                        Isn’t the last 8 years proof enough that the bonds wouldn’t be allowed to go bad? All the people who said these bonds were worthless in 2008 were dead wrong. They were in fact high quality assets backed by the US govt and they matured at 100 cents on the dollar. The evidence is in the history books. You can’t call those MBS low quality assets when they matured at 100 cents on the dollar.

                        I am saying that banks don’t determine the quantity of reserves being held. That is determined by Fed policy. The banks also don’t control the cost of overnight funding. That is set by the Fed. This isn’t about what they “prefer” to hold. It’s about what their master (the Fed) says they will hold.

                        The fact that other assets are selling at low yields has nothing to do with how overnight rates are set or how much reserves are held by banks so it has nothing to do with the post I wrote.

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                        Cullen Roche Posted by Cullen Roche
                        Answered on 04/20/2017 12:15 AM
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                          How can you keep reiterating that the Fed has not printed money out of thin air via the QE process, when it has ? I appreciate not to the tune of $4.5Tn, but to the tune of all the interest it has collected on those assets that it has recycled back to the Treasury.

                          Otherwise why not finance the entire Government debt via QE, and save everyone from paying any tax ever again ?

                          You state it has not been inflationary, but it has and is just not seen as consumer price inflation. You might receive 100 cents on the dollar back on those bonds, but that 100 cents doesn’t buy you what it did 10 years ago.

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                          Posted by Freedom
                          Answered on 04/20/2017 5:55 AM
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                            Monetary and fiscal policy are not the same things. When the Fed expands its balance sheet they create reserves and print them into the private sector while unprinting a bond.

                            Fiscal policy involving a deficit involves printing a bond.

                            These are two totally different things.

                            It’s amazing to me that people still argue with me over these points even though I am one of the only people in the world who was right about QE from the start….

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                            Cullen Roche Posted by Cullen Roche
                            Answered on 04/20/2017 7:39 AM
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                              Hi Cullen,
                              Both your article and your recent response had some word fragments that are giving me pause.

                              It was my understanding, that back in 2008, QE1 involved the mass purchase of MBSs (and CDOs??) that were backed by mortgage notes that were essentially worthless because the homes were worth less than the note itself. How did the write-offs not effect the “high quality” of these financial instruments?

                              IOW, how in the world did they get 100 cents on the dollar?

                              Also, how is an MBS backed by the US government? It was a resold mortgage note that was bundled by some other financial agent and sold to ‘investors’.

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                              Posted by Poseidons Bear
                              Answered on 04/20/2017 3:25 PM
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                                Hi Cullen,
                                More on the backing of the mortgages. Are you saying that the Fed limited its MBS purchases to those that had mortgages that were backed by the 3 GSEs? What about other mortgages from Joe Bank?

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                                Posted by Poseidons Bear
                                Answered on 04/20/2017 3:28 PM
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                                  PB,

                                  It depends on the bonds, but as presently constructed the GNMA are fully backed and the FNMAs are implicitly backed since Fannie has a credit line with the US Treasury. Even if the underlying mortgages aren’t paid the bonds are still getting paid out in full.

                                  And don’t confuse this segment of the mortgage market for the sub-prime market. The sub-prime market was seeing default rates that were MUCH higher than the FNMA space. If I recall correctly it was well over double digits in the sub-prime space and about one tenth of that in the FNMA space.

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                                  Cullen Roche Posted by Cullen Roche
                                  Answered on 04/20/2017 3:37 PM
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                                    PB< regarding your second question - QE limited the scope of assets the Fed could buy directly. Basically, they had to be AAA assets of which the GSEs fit into that category. A lot of people read "MBS" and immediately assume that the entire MBS space was low quality garbage which is not true.Of course, the Fed supported the non-agency MBS space in other ways by acting as the lender of last resort. But those were credit lines mostly that supported banks and other financial entities. We shouldn't confuse that with what QE was.

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                                    Cullen Roche Posted by Cullen Roche
                                    Answered on 04/20/2017 3:39 PM
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                                      So basically, “high quality” securities are any that will be guaranteed to be made 100% whole via socializing the losses? I’m assuming here the Fed has had no losses at all on its junk once-now-“high quality” MBS purchases. That somehow seems incestuously convenient and it feels like it violates some kind of iron law of economics. But fine, I guess that is what “elastic money” really means in the real world. Grrr.

                                      As to the rest of your comments, I’m really not sure we’re on the same page. I’m concerned about the yield seeking behavior of investors and not the damn banks in the FRS playing their Monopoly money games among each other. If balance sheet shrinkage won’t result in higher yields and less yield chasing behavior in the real world due to systemic equilibrium effects and investor liquidity preferences, then how do you explain the last 8 years of the opposite going on? Its really hard to understand how investors behave when there is not supposed to be a transmission mechanism, yet at the same time both the “money multiplier” and “liquidity preference” have actual (and current!) historical data strongly correlating to the claims of both theories, yet you say both are bunk. It’s confusing.

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                                      Posted by MachineGhost
                                      Answered on 04/20/2017 7:59 PM
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                                        > It’s amazing to me that people still argue with me over these points even though I am one of the
                                        > only people in the world who was right about QE from the start….

                                        Maybe its because you have a very clear worldview in your own mind, but the rest of us are stuck with sorting through any number of other competing and convincing macroeconomic theories. This is why I recently asked if your Monetary Realism paper followed the rules of Western-style rhetoric (I have no idea about SSRN standards but it seems somewhat lax and may not be peer-reviewed). You write a lot of blog posts making sensible claims, but you don’t follow the proper format for providing proof each time (who would?). You can’t just say this or that — even if empirically obvious — without going through the arduous process of providing proof in the way that others (who are naturally skeptic) expect to see. BTW, I haven’t read your book yet, but do you demolish macroeconomic “sacred cows” in it using Western-style rhetoric? I consider this rhetoric issue important because if we want to spread the message about Monetary Realism worldwide, we can’t afford to get pile-drivered when interacting with the academic professionals or skeptics if your claims aren’t presented in the expected format.

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                                        Posted by MachineGhost
                                        Answered on 04/20/2017 8:09 PM
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                                          Well, it may be true that GSE securities being bought by the Fed were “high quality”, but this isn’t reflective of how the real world works. Banks originate mortgages then get rid of the risk by dumping them onto the GSEs. Banks have no stake in the game so they don’t have to about about the quality. This is by design because this is what the GSE’s were intended to do that the private sector would not touch. And the GSE’s have lax lending standards compared to private sector originations, so naturally every lender offloads the lower quality crap to the GSE’s. It’s only rational. I admit, I may have conflated the HUD mortgages which are overwhelmingly sub-prime in the truest sense with the GSE MBS, but I think it should be reiterated here that they are only “high quality” because of the Treasury backstopping, not fundamentally in terms of the underlying and GSE’s do indirectly lend to sub-prime borrowers. If we know anything about history, governments and markets, the taxpayers will — one way or the other — pay the price for the low quality fundamentals attached to mirage “high quality” paper. You can’t put a lipstick on a pig and call it pretty.

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                                          Posted by MachineGhost
                                          Answered on 04/20/2017 8:20 PM
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                                            Yes, I don’t write in common academic formats. I know that. I say things and I back them up with operational descriptions. I don’t make stupid models of theoretical worlds like most economists do. I actually say, this will happen because this is how the world works. When it comes to QE I made a lot of uncommon predictions that ended up being dead right. And I didn’t back these ideas up with loosey goosey ISLM models or things like that. I said, this is how banks work and this is how central banks work and this is why the things they’re doing won’t impact the economy the way some people think. Meanwhile, tons of bull shit artists and professional economists were making different predictions because they don’t understand how banks work. And even after they were proven to have no understanding of banks people kept listening to them.

                                            So yeah, it’s frustrating. It’s frustrating that anyone can just spend a few years in school attaching the letters PhD to their name and suddenly they are an expert about the economy. What about all the people like me who actually work and live in the economy and have spent their lives actually understanding it by working in it? Why is that less credible than a bull shit artist who has no experience actually working in the real economy, running companies, working in financial institutions?

                                            I mean, the world of economics is like a world where the real car experts aren’t the people who build and engineer cars. No, in the world of economics the real car experts are the bull shit artists who learned about cars in a textbook, but have never actually built a car or driven one. It’s really amazing. Most economists have no ideas how to run a business, how the financial system actually works or how the actual economy functions. They just have these silly academic models that they write about in their western style formats so they can keep their tenure and comfortable status. So yeah, I get frustrated that, after 10 years of being right people still come here and argue that I am wrong because I don’t write my research in some bull shit format that doesn’t matter. Why is my work less credible than someone with a PhD when I've predicted things 10X better than most of the people with PhDs?????

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                                            Cullen Roche Posted by Cullen Roche
                                            Answered on 04/20/2017 11:58 PM
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                                              It needs to be put in context. As Fen held bonds mature the Fed shrinks the Government will be at the same time issuing more bonds. And so there will be more government bonds in the private sector than there is now. So a larger amount of high quality interest earning assets available to be purchased in the private sector , so there is a mechanism by which rates could possibly rise.

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                                              Posted by Dinero
                                              Answered on 04/21/2017 4:10 AM
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                                                Cullen,

                                                A few thoughts:

                                                1. From where did all that trillions of lost capital come from to give rise to the massive hyperinflation in stocks and real estate since 2009 when it was mostly lost in the 2008 crash? During 2008, Investors frantically sold all their stocks swapping for cash, meaning whoever held the stock were holding onto a depreciating asset who would have almost certainly gone bankrupt if they didn’t have emergency liquid reserves to offset their losses. And as stock prices went down further private investors were getting less cash back possibly going bankrupt in the process.
                                                2. Regarding (1), we saw commodities like oil, gold and copper collapsing as a result. Which is confusing because this is deflation going on here. What if some of the cash from here was used to inflate the stock market?
                                                3. The bull market in bonds has been because of low inflation. And the Fed can’t control inflation but react to it. Perhaps theres just not enough spending by consumers because of ageing demographics? Even if the fed raises rates, the long term trend in inflation has been down, hence bond yields also will be forced down. This could perhaps change if inflation is currency driven causing imports to be more expensive. Other possibilities: wages for employees somehow increase, taxes decrease for middle clas and people somehow have more cash to spend?

                                                I know you keep saying that the Fred did NOT create new money, but all that extra money surely came from somewhere and it is causing hyperinflation in asset classes like stocks and real estate.

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                                                Posted by Incognito 7
                                                Answered on 04/21/2017 5:08 AM
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                                                  Hello Cullen,

                                                  I was curious about a perspective that I heard a few weeks ago on the investors podcast. I am a newbie to learning about all of this stuff, so please forgive me if this question is not relevant to this post.

                                                  If I understood correctly, he was indicating that the impact of QE is very minimal as compared to a similar mechanism that has been created by foreign central banks through trade surplus with the US. For example, he indicated that PBOC creates reserves “out of thin air” to facilitate the currency conversion (dollars for RMB) – in turn they take those dollars and purchase US bonds or other dollar denominated assets. He indicated this is very similar to QE except with an extra step. If his numbers are correct, this expansion of foreign reserves over the last decade or so is ~ 2 to 3 times larger than the last three rounds of QE. It seems like the bigger stick resides with foreign central banks and not with the US FED as long as we maintain these large trade imbalances and the destination for this new currency ends up in dollar denominated assets.

                                                  If this is all true, will the foreign central banks act in a similar manner in terms of unwinding their balance sheets or not?

                                                  Does the US Fed actually have as much control on the yield curve as they would like in this environment?

                                                  Thanks in advance for answering the questions and sorry if this is not germane to this conversation.

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                                                  Posted by Darb Foor
                                                  Answered on 04/21/2017 9:39 AM
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                                                    Sorry, this was an interview with Richard Duncan in context of the “He” above

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                                                    Posted by Darb Foor
                                                    Answered on 04/21/2017 9:40 AM
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                                                      Hi Cullen,

                                                      I know you have posted on this in the past in 2 forms: “moneyness”, endogenous vs. exogenous money. But it seems we’re getting confused. I know I am.

                                                      Is it not true that the only 2 agencies that can print money are the United States Mint (circulating coinage) and the Bureau of Engraving (paper currency)? Is it not true that the control of these 2 agencies is by the Dept. of the Treasury? Does not the Fed only play a facilitating role in the physical transmission of that money into the banking system?

                                                      Then, is it not true that the Fed CANNOT PRINT MONEY? (I am getting sick of hearing this phrase)

                                                      Is it not true that the Fed ‘prints’ reserves? (which is in electronic form) Is it not true that those reserved are contained ENTIRELY within the Fed Reserve System of Banks usually for the sole purpose of clearing payments (QE being the exception)?

                                                      Is it not true that those reserves are created out of think air by a simple expansion of the (double entry) balance sheet?

                                                      Is it not true that the fed can hold stuff on its sheet for about 20 presidential terms of office? I mean, what’s the rush?

                                                      Is this not exactly the same process by which a bank makes a loan (a member by shot-gun marriage of the FRS)? Out of ‘thin air’? (Really, create the dollars for the loan on one side of the sheet (asset) with a corresponding liability on the other side of the sheet)

                                                      Is it really such shock and awe to create stuff out of thin air? Heavens!

                                                      It is accounted for. After all.

                                                      Finally, do you have a gauge of how much backing by the GSEs was required to cover the MBS bonds ‘shortfall’ (mortgage payment deficiencies) that were purchased by the Fed in QE I?

                                                      Thanks. Have a good weekend.

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                                                      Posted by Poseidons Bear
                                                      Answered on 04/21/2017 12:30 PM
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                                                        @ incognito,

                                                        “1. From where did all that trillions of lost capital come from to give rise to the massive hyperinflation in stocks and real estate since 2009 when it was mostly lost in the 2008 crash?”

                                                        Asset price inflation is not consumer price inflation. In fact, stocks rose because corporate profits rebounded tremendously and because corporate cash flows improves. You can claim that stocks rose because of QE, but then you have to make the ludicrous conclusion that QE made corporate profits increase also.

                                                        “2. Regarding (1), we saw commodities like oil, gold and copper collapsing as a result. Which is confusing because this is deflation going on here. What if some of the cash from here was used to inflate the stock market?”

                                                        Commodities fell for fundamental reasons pertaining to China and weak global demand. Perhaps there is some extra demand for stocks because of the extra cash in the system, but I think it’s playing a much smaller role than fundamental forces like the huge increase in profits.

                                                        “3. The bull market in bonds has been because of low inflation. And the Fed can’t control inflation but react to it. Perhaps theres just not enough spending by consumers because of ageing demographics? Even if the fed raises rates, the long term trend in inflation has been down, hence bond yields also will be forced down.”

                                                        Right, inflation has remained low in large part because there is insufficient consumer demand.

                                                        Lastly, I don’t say the Fed didn’t create new money. THEY DID. But you have to keep it in the right context. They created trillions in reserves and removed trillions in bonds. They swapped checking accounts for savings accounts. If you want to call that “money printing” then be my guest. I would say they just changed the composition of the private sector’s assets by removing an asset with a marginally lower level of moneyness.

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                                                        Cullen Roche Posted by Cullen Roche
                                                        Answered on 04/21/2017 12:37 PM
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                                                          @ Darb,

                                                          The impact from the trade surplus is a different matter entirely. When a country runs a trade surplus their consumers will presumably exchange cash or deposits at the bank for local currency. This is a form of off balance sheet deficit spending in that the Central Bank is ultimately the entity that issues new currency to the banking system where it is then distributed to the private sector. It actually works in the reverse order, but whatever. The bottom line is, the Central Bank has to swap foreign for domestic currency which is kinda like money printing. Then they take that foreign currency and use it for whatever they want. So yeah, foreign govts obtain reserves via trade, but that’s not at all like QE. It’s just a function of international trade. QE is its own domestic policy initiated to intentionally alter the composition of private sector assets. Trade is a more natural market outcome.

                                                          The Fed doesn’t really control the curve all that much. Think of it like a man walking a large dog on a leash. At the point closest to the man’s hand there is near absolute control of how much the leash can sway from side to side. However, the further you get out the less control there is. The same is true of the yield curve. The Fed has absolute control over overnight rates, but has little to no control over 30 year rates.

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                                                          Cullen Roche Posted by Cullen Roche
                                                          Answered on 04/21/2017 12:44 PM
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                                                            HI PB,

                                                            That’s right. Cash only comes from the US Tsy via the Bureau. I think when people say QE is “money printing” they are referring to deposits and reserves. These are liabilities exclusively of the Fed and the banking system. They are “printed” by these entities and not the US Tsy.

                                                            And yes, the Fed prints reserves (electronically credits them) and they do not leave the reserve system. Think of the reserve system as the payments system for the banks alone. It is how they settle their overnight payments.

                                                            Yes, reserves are created from thin air.

                                                            Yes, you can basically say it’s a loan.

                                                            I don’t have exact figures on the total govt support that the govt had to provide to cover potential losses in Agency MBS. Non-agency MBS was a much bigger problem and the loans the govt issued were in the trillions.

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                                                            Cullen Roche Posted by Cullen Roche
                                                            Answered on 04/21/2017 12:49 PM
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                                                              Hi Cullen,
                                                              Thanks for all of these responses. And thanks for pointing out the error in my thinking.

                                                              I always sucker into that trap. I equate money with the mediums of exchange (that I use). Hence, money is coins, paper currency, and my handy-dandy credit card.

                                                              I am so barbaric that I don’t even think of a loan as money. It’s a loan. Da’ Bears.

                                                              I promise never to grouse about “The FED is printing money!!!” again.

                                                              I’ll just kick the wall instead, for the simple reason that the statement is disinformation (like that is money that we could use or it will cause hyperinflation and the end of our lives as we know it, blah, blah, blah), and it builds fear and histrionics. I don’t find it to be constructive.

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                                                              Posted by Poseidons Bear
                                                              Answered on 04/21/2017 3:11 PM
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                                                                Cullen,

                                                                I don’t think anyone who knows your work would question your integrity and expertise. My guess is that the people who do this are those who aren’t familiar with your work or more likely the academics who are threatened by your work. You’ve made a lot of economists look very bad over the years so take that as a badge of honor instead of an attack.

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                                                                Posted by Lars Svensen
                                                                Answered on 04/21/2017 6:06 PM
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                                                                  The purpose of QE is not to increase the amount of reserves in the system , the purpose is to increase the amounts of deposits in the system.

                                                                  Here are a few quotes from the BoE paper “Money creation in the modern economy “, from 2014.

                                                                  “QE — creating broad money directly with monetary policy”

                                                                  ” The additional reserves shown in Figure 3are simply a by-product of this transaction. “

                                                                  ” The way in which QE works therefore differs from two common misconceptions about central bank asset purchases: that QE involves giving banks ‘free money’; and that the key aim of QE is to increase bank lending by providing more reserves to the banking system…”

                                                                  ” The sellers of the assets will be left holding the newly created deposits in place of government bonds. The sellers of the assets will be left holding the newly created deposits in place of government bonds. They will be likely to be holding more money than they would like, relative to other assets that they wish to hold. They will therefore want to rebalance their portfolios, for example by using the new deposits to buy higher-yielding assets such as bonds and shares issued by companies — leading to the ‘hot potato’ effect discussed earlier. This will raise the value of those assets and lower the cost to companies of raising funds in these markets”

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                                                                  Posted by Dinero
                                                                  Answered on 04/22/2017 12:37 PM
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                                                                    @Incognito7: Hyperinflation is defined as a price level increase of at least 50% month.

                                                                    @Dinero: That could be described as yield-chasing behavior, but it would be limited only to the FRS banks. How much do they really invest in other asset classes besides Treasuries or earning IOER, really? Especially with bad balance sheets full of underwater mortgages. There’s at least one person who believes the Primary Dealers are the ones that engage in the yield-seeking behavior, both themselves and their prime customers. That would imply a transmission mechanism for QE.

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                                                                    Posted by MachineGhost
                                                                    Answered on 04/22/2017 8:15 PM
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                                                                      No not FRS banks. As written in the BoE document QE is conducted with non banks such as pension funds. I think hot potatoes explanation is illogical , a better explanation is that the supply of the safest asset is reduced, its price rises, and so investors move on to the next safest asset.

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                                                                      Posted by Dinero
                                                                      Answered on 04/23/2017 8:29 AM
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                                                                        The sellers of the bonds were mostly private non-bank entities, banks served as middle men. The non-banks moved on to other investments.
                                                                        But the banks were left holding very safe but low yielding reserves, and likely wanted more yield on their other investments, which just makes sense given that their new risk profile would support a move to some higher yielding investments.
                                                                        Hard to believe that some think that the increase in reserves aids lending or that QE was stimulous. QE1 provided support for some assets, but after that QE was just a show, put on to give the illusion of “doing something”.

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                                                                        Answered on 04/23/2017 10:07 AM
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                                                                          The newly acquired reserves in the banks assets are an addition to the banks assets , not a substitution and so the risk profile is not changed as the same assets with the same risk are still there. The zero risk weighted reserves are matched by new deposit liabilities and so they don’t dilute the risk of the assets. Maybe there is a spread between the IOR and the interest paid to depositors which could build up retained earnings over time.

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                                                                          Posted by Dinero
                                                                          Answered on 04/23/2017 1:40 PM
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                                                                            Dinero?

                                                                            Aren’t reserves treated as Liabilities on a bank’s sheet? Reserves have the same treatment as deposits, they are Liabilities, not Assets, correct?

                                                                            Please refer to the following 2 web sites; they may be helpful:

                                                                            https://brown-blog-5.blogspot.com/2013/02/banking-example-1.html

                                                                            Check out how the reserves are booked – they are on the right-hand side of the sheet.

                                                                            Also here:
                                                                            https://www.federalreserve.gov/federal-reserve-banks/fam/chapter-8-special-topics.htm

                                                                            Careful, this stuff is more dense than I can handle.

                                                                            I’m gonna ask Cullen (yet) another stupid question…

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                                                                            Posted by Poseidons Bear
                                                                            Answered on 04/23/2017 9:30 PM
                                                                              Private answer

                                                                              Reserves are assets of commercial banks , they are the deposits they hold at the Fed. They are on the left hand side of the balance sheet. On the right hand side of the commercial bank you have the liabilities ,the deposits , what is owed to other people.

                                                                              Reserves are liabilities of the Federal reserve bank.

                                                                              In your first link the reserves are on the right hand side because it is a Central bank. In your second link the Federal reserves banks are the Federal reserve system spread over the USA. They are usually referred to in the aggregate as the “The Fed” in these discussions.

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                                                                              Posted by Dinero
                                                                              Answered on 04/24/2017 5:51 AM
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