Monday, April 9, 2012
Mike on Larry Kudlow's Show This Evening
CNBC video from this evening embedded below. Market review precedes the panel's commentary.
In Mike's second segment he skillfully slips in some MMT based analysis on the Fed's QE approach being effectively a tax increase due to the net fiscal effects. Hopefully Larry K. will pick up on this view and continue to think this through, perhaps with Mike's further assistance, as Larry typically supports lower taxes.
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20 comments:
nice Mike.
Thanks for grabbing this, Matt! Did you hear me explain to Malpass, that the buying of securities is how the Fed sets rates! He looked stumped!
Nice work, Mike.
Both Kudlow and Malpass are truly dazed and confused.
It's more accurately how the Fed *defends* rates. But in the context of QE, buying/selling doesn't really have to do with setting rates. Setting rates is now on the IOR, and buying securities won't be necessary to defend the FFR until there aren't sufficient excess reserves.
Yes, Kudlow seemed confused, (in fact his face looked confused as I was speaking to him), when I said that QE "acts like a tax" because it removes income. Perhaps I should have gotten into "how" it removes income, but I thought he'd get it. He hates QE, so I thought he'd run with the, "acts like a tax" line, but it seems he's really just married to the whole, devaluing the dollar, thing.
IOR is how the Fed keeps the funds rate anchored, but it is NOT how it directly sets other rates. It's NOT how it sets bond rates for example. That is done via monetary operations. QE was all about the Fed targeting long-term rates lower.
Yep sorry you are right about that. Although MMTers argue the Fed really needs to announce a price to really move rates.
I'm not sure that the Fed doesn't realize that it can either target price let quantity float and vice versa. It may be that they thought the market wasn't ready for setting price across the yield curve, especially when they were already paying IOR. They may have feared that the market would choke at that level of outright control. So they used quantity to purchase bonds, driving up demand beyond what it would have been, and lowering yields with a view to keeping mortgage rates low to support a falling housing market, which was killing banks. Not as elegant but it works.
Mike, I get your position that QE and interest income reduction act as a tax, but doesn't the correlated interest expense savings on debt also function as an opposing force and equalizing force in the economy? Personally, I'm saving far more in lower interest rates on my business and my personal debt than I'm losing in interest on savings and I assume that the companies I invest in are similar. If you increase interest rates paid by businesses on loans, would corporate earnings be at all time highs?
mfpii -
The interest you're paying goes to somebody else in the private sector. It does bring up an interesting question.
Interest income from Gov't bonds adds net financial assets to the economy. Lower interest rates on those bonds acts like a tax, or like the gov't reducing the "deficit". Now, that isn't to say that interest income from gov't securities is always spent in to the economy.
Your observation is more about a difference in flows between subsectors of the private sector.
So, given such a subsector, is loss of interest income from gov't bonds going to have more of an impact (trickle down?) or will lowered contributions to the drain of corporate hoarding have more of an impact? Too many variables?
Yes Mike you are providing great facts and hopefully Larry can have more time in future segments to go further into these topics....
I liked the part where you went back to 2008 when RBs were 900B and petro was $145 now today, RBs are like 3T and petro is $100: Facts are stubborn things...
imo Malpass is off with the Fed distorting equity prices here... rather imo, as they are operating directly in this market, they are distorting bond prices to the downside. Once they leave the marketplace in June, cet. par. we should be back on the "Japan Express" to paraphrase Warren Mosler...
btw this was imo a very "heady" or bordering on a somewhat intellectual level segment, I think based on what you brought to the table... The "cliches" were mostly left out. You guys got to some pretty professional stuff as opposed to often there it is mostly buzzwords and no hard data...
Great job! (as usual)... as I said hopefully Larry is intrigued by the "tax" ie fiscal angle of the QE and wants to dig further into that insight you provided...
Resp,
To comment further on Malpass view that the Fed allegedly "bids everything higher":
Read this story at the NYT about how the Fed was going about QE2 and you will see that the FACTS are that they do NOT bid everything they buy higher, they try to "get the best price for the taxpayers" which means they LOWER their bids in the bond market.
http://www.nytimes.com/2011/01/11/business/economy/11fed.html?pagewanted=all
“We are looking to get the best price we can for the taxpayer,” said Mr. Frost, a buttoned-down 34-year-old in a striped suit and rimless glasses.
Whether Mr. Frost will reach that goal is uncertain. What is sure is that market interest rates have risen, rather than fallen, since the Fed embarked on the program in November."
Same thing has happened since Oct 1 2011 when Fed started their "twist", bond prices topped out...
Resp,
Can somebody give a dumbed-down version of how QE works as a tax?
@mfpii:
Good point. You are correct that debtors see a corresponding increase in disposable income as a result of lower rates, however, there are propensity issues. Savers tend to spend out of interest income and debtors don't receive all those income gains as there is some leakage that accrues to banks and investors in the form of profit margins.
At best it's redistribution and not stimulus.
"Can somebody give a dumbed-down version of how QE works as a tax?"
Operationally, taxes withdraw net financial assets from non-government rather than providing revenue that funds government expenditure. When the Fed purchases tsys, the interest that would have gone to non-govt as an NFA injection instead goes to Treasury to reduce the deficit. Deficits inject NFA into non-govt, so deficit reduction always means NFA that non-government is not getting. Taxes withdraw NFA directly, and QE indirectly, as does cutting spending to reduce the deficit.
Larry Kudlow's mind is a fact-free zone.
It can be argued that the Fed's near-zero interest rates and ultra low bond yields mean that more money is going to go looking for higher returns elsewhere, which means moving into riskier assets and thereby pushing up equities and commodities.
This in turn leads to increased speculative behaviour in commodity and oil markets (even more so given supply constraints), further fueling general price rises and cpi inflation.
So in essence the Fed's actions do lead in this case to distortions in markets and an 'inflation tax'.
Excess reserves and low or zero rates may not encourage banks to lend, but they still seem to lead to more speculative behaviour and the inflation that can result from that. What would be the MMT solution to this, given that mmters tend to want a permanent ZIRP?
P.s. why is MMT so anti using monetary policy in any way? Couldn't fiscal and monetary be used in conjuction if need be?
@ Mike Norman
Who cares if a bank makes transaction fees off my refinance of debt, it's justified or the transaction wouldn't happen?
One example, I paid roughly $100k to refinance a $7.15MM note and save almost $10,000/month in interest. I also took $288k off the table at closing. If the net result is more disposable or investable income then that cash can be used to stimulate via consumption or investment. I'm thinking the bank would gladly give me back my $100k, if I would continue to pay $120k more per year for the next 7 yrs. of the note.
If that's redistribution at best, then I like the way redistribution works! $1MM in my pocket, $840k less in theirs...credit the $100k transaction fee...
mfpii
"It can be argued that the Fed's near-zero interest rates and ultra low bond yields mean that more money is going to go looking for higher returns elsewhere, which means moving into riskier assets and thereby pushing up equities and commodities. "
The president of Brazil just confronted President Obama about US monetary policy encouraging capital inflow from the US into emerging countries, seeking higher return and disrupting their economies.
"What would be the MMT solution to this, given that mmters tend to want a permanent ZIRP?"
Switch to MMT based fiscal policy instead.
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