Sorry, couldn't help myself. It's just so much fun bashing these dumb hedgies.
Remember about a week ago when Bass was out pounding the table at the Salt Investment Conference about how all the "money printing" blah, blah, blah, by central banks was going to make gold skyrocket? We discussed it here. Gold's down about $100 since then.
LOL!!!
Once again, central banks cannot priont money. They simply can't. They can make loans and/or manipulate interest rates. Quantitative Easing is nothing more than an asset swap--one dollar/yen/euro asset taken away, one dollar/yen/euro asset given. Equal amount. No net new financial assets created. Governments can "print money," but they're all in "un-printing" mode...austerity.
Another clueless boy playing with some big money, which won't be big money for much longer.
40 comments:
If someone digs a lump of gold out of the ground and sells it to the Fed, the Fed might well buy it with newly created money (that it just "printed").
The only reason the Fed would buy a lump of gold is for a paper weight on Ben's desk.
Didn't he advise the Univ. of Texas system to put a bunch of its endowment in gold?
Well, Cody, he's basically always right, so...you can see how it could be frustrating to be right year after year and have people who have been wrong year after year repeat the same crazy shit.
Be careful Mike. Not every central bank in the world is the Federal Reserve, or constituted like it.
Some central banks do have the authority to start buying things other than government financial assets, and when they start doing that from entities other than banks you start getting injections.
Essentially the NGDP mob are proposing that the central bank takes over the role of the government for direct stimulus spending - since they prefer rule by economist to rule by democracy.
Neil, the FED can do that too.
The thing is how they do it, the so called 'sterilised' interventions, if they do it through reserves etc. But they can do it directly from the secondary market, in which case is raw money printing.
BoJ has done that (they even bought REIT and ETF's, how that market itnervention has worked for you monetarists demanding NGDP?), the SNB too, the ECB, limitedly, too (through they 'sterilised' it).
All these monetarist experiments have failed to boost demand, but that was not the purpose, more likely manipulate a too strong currency in case of neomechantilist nations, and stabilize the financial system in others (the ECB).
Agree with you on the hideous agenda of NGDP, when Goldman Sachs and Wall St. is behind it you know something dubious is happening. Raw money printing into the system that will flow to the top 0.1%, terrible idea.
Can anyone offer some conjecture as to what this so-called NGDP targeting program would do to bond prices?????
Neil what are they specifically proposing? More asset purchases? Gold? Stocks?
Resp,
Cody,
The thing that PISSES ME OFF is that these media outlets have this guy on and introduce him as some sort of demi-god and he comes on and says "buy gold" and then it drops $100 and then the next time the media has him on they will never call him on it.
Just like Bill Gross who they call the "bond king" tweets last summer "who will buy them now" and then bonds RALLY IMMEDIATELY TO THE DAY like 30% !!!! Now they still have him on.
Maybe Gross is actually broke as I see he is still working even at his advanced age... at least McCulley retired. Perhaps Gross has been speculating in his own account and he is broke so he still has to work....
Treasuries are not "money". If they were not regularly "monetized" by the central bank (by "printing" new money to buy tsys), then presumably interest rates would go up, as banks competed for a dwindling supply of reserves relative to deposits.
It makes no sense to say that central banks "cannot print money", as that is precisely what central banks do - that's their job. If they "print" a lot of money to buy tsys, the interbank interest rate falls. This has the effect of pushing more investors into other markets (like gold,for example) in search of a decent return, thereby pushing up prices in those markets.
As Neil says, if a CB purchases assets other than tsys, this injects new NFAs into the economy.
In both cases, the CB is "spending" by "printing" money.
When it buys tsys, it pushes interest rates down (or stops them from rising) but does not change the quantity of non-govt NFAs. When it buys other assets it pushes interest rates down and simultaneously adds new NFAs.
In both cases it is "printing money".
If the CB buys a load of junk "assets" from banks (mortgage backed securities, for example), then it IS increasing bank's ability to invest in other markets.
If it buys tsys, then it is not changing their ability to switch to other assets, but is encouraging them to do so by removing risk-free sources of interest income. Again, in both cases, the CB's "money printing" to buy assets CAN potentially lead to inflation, though the inflation may be temporary (depending on the scale of its purchases of privately created assets, such as MBSs, for example).
Does anyone here think that there might be a big collapse in the gold price (i.e. a really big drop back to couple-of-years-ago-prices) at some point in the next couple of years?
Some people are still predicting that it will rise to new highs in the near future.
Any thoughts?
The primary purpose of owning gold is as an inflation hedge. However, the government taxes the illusory inflation-induced “gains” on gold at either 15% or 28%, and you can’t eat gold. So, owning gold is problematic in a diluted fiat funny-money economy. If we suddenly have economic good times and inflation in the 5% range for several years, gold might not be a very good investment in the short run.
No net, NFA are created when central banks buy assets. None. Period. They don't print money. Governments can, but not CBs. CBs can only extend loans or change the composition of the financial assets owned by the public.
If I have $10,000 worth of gold and I sell it to the CB for $10,000, I still have $10,000 net worth (all else being equal). What's so hard to understand?
"The primary purpose of owning gold is as an inflation hedge."
Not necessarily. It's also a safe haven.
At the beginning of the 3rd quarter of 2006, I recommended that friends in RE close out positions quickly. After the failure of Bear, I recommended a risk-off strategy to my frields, and then as the situation worsened and it looked as if there was a high probability of a global meltdown, I recommended switching portfolio balance heavily to gold. Those turned out to be good calls.
My sense now is that gold is in a distribution phase. That could change depending on how the euro situation works out. If it looks like the euro is actually going down, there will be a rush to safety that will drive up the dollar and push up gold too.
> No net, NFA are created when central banks buy assets. None. Period. They don't print money. Governments can, but not CBs. CBs can only extend loans or change the composition of the financial assets owned by the public.
Ugh. No Mike, this is *not* true. You have dumped government bonds and dollar balances into an "NFA" category, so you're always confusing *exchanges* of bonds and dollar balances as "no effect" actions. You think of them as just swirling around the mix of bonds and dollars.
I think that view is incorrect, but let's put that aside.
Even you should be able to see that Fed purchases of *other* assets (stocks, corp debt, mortgages) *is* NFA creation. Labeling this "money printing" or "not money printing" does not change what's going on.
"No net, NFA are created when central banks buy assets. None. Period. They don't print money. Governments can, but not CBs. CBs can only extend loans or change the composition of the financial assets owned by the public."
NFAs are created by the CB when it buys privately created assets, such as mortgage backed securities, corporate bonds, gold, etc. Gold is technically a real asset, not a 'financial' one, though the distinction is a bit blurry I guess.
As I said, government bonds are not "money", although they have most money-like attributes. The CB has to monetize them or else there wouldn't be enough actual money in the system and interest rates would go crazy.
"If it looks like the euro is actually going down, there will be a rush to safety that will drive up the dollar and push up gold too."
I don't know, you would have thought there would be some positive movement in gold as a result of all the current uncertainty. But at present it's just doodling around, going nowhere. I don't know enough about that market to make any predictions, but I think the whole mystique surrounding it following 2008 might have evaporated to a substantial degree. I may be wrong, it's difficult to second guess that mad market. Probably if Greece drops out of the euro, gold will shoot up. I'm just wondering whether at some point in the next few years the price will crash down again, or whether it will stay at these high levels for a long time to come.
@Anon/Marris,
You need to understand central bank operations to understand when it is actually creating money. When the FED (or any central bank) prints up reserves (a financial asset) and buys another financial asset it is not creating net new financial assets – with the slight exception of any premium it paid which it typically trivial to the overall value of the transaction.
When the US Government deficit spends it creates net new financial assets. How does it do this if it “borrows” money? The fact is that it DOES NOT BORROW MONEY! While it is currently illegal for the FED to directly fund Treasury expenditure, the Treasury, operationally, compels the FED to indirectly fund its spending.
On the FED’s balance sheet are reserve accounts for all the major (and most minor) banks. Every day each bank examines its reserve level and determines how much it must hold to support reserve requirements or meet its estimated needs for settling interbank transactions. Some banks will determine that they have excess reserves that they will make available to lend to other banks – this is the Federal Funds Market. The FED has a target interest rate tied to the market rate of the Federal Funds Market – Federal Funds Rate (FFR). As demand changes for Federal Funds by banks the rate attempts to move up or down. The FED performs Open Market Operations (swaps reserves for treasuries) to ensure that the FFR does not material deviate from its target.
Also on the FED’s balance sheet is the US Treasuries primary checking account – note, this account is NOT part of the Federal Funds Market. When the US Treasury “sells” a bond reserves must leave the Federal Funds Market. In order for the FED to maintain its FFR target it must ensure there are sufficient EXCESS reserves available and if not it must add them to the market in order to maintain its target rate.
The FED monetizes US debt every time the Treasury sells it. Any purchases of US Treasuries by the FED after the fact are nothing more than an asset swap. You can’t monetize the debt twice.
"I'm just wondering whether at some point in the next few years the price will crash down again, or whether it will stay at these high levels for a long time to come."
Gold is difficult to predict because it has little use value other than demand for jewelry and some industrial applications and no investment value, i.e., it doen't produce a return other than price appreciation, and physical gold has a negative return in storage cost. Its use is as a hedge rather than an investment vehicle.
So one is left with technical analysis to estimate accumulation and distribution patterns and turning points based on them. The exception is those times when gold comes into prominence as a hedge in portfolio management.
The wild card in price movements of gold is cb action. Central banks are in a position to move markets or stabilize them as they conduct policy. Of course, they don't announce policy so it this difficult to anticipate.
There is a sounder floor being created for gold by the increasing wealth of emerging markets, especially India and China, where gold is a traditional favorite. As a result, as long as the global economy remains relatively strong, Asia will be stepping in to buy on significant dips, breaking potential crashes.
ON the other side of the coin, the emergence of ETF's and other retail venues has increased participation by retail players. In addition, the recent action has also brought in professional portfolio managers. Both of these are regarded as weak hands that will run for the door at the wrong time.
So unless one is hedging a portfolio iaw a strategy based on probabilities, gold is a crap shoot.
Matt,
Agreed 100% on Gross. With Bass, however, why would anyone need to call him on a $100 gold move? Gold went from $1650 to $1550. What is that 6%? If it was 60% or even high double digits, fine...but there is just to much angst about these small gold moves - with bears and so-called gold bulls WAY too energized about these relatively small moves which are normal in a bull market. Would anyone care is stock XYZ went from $16.5 to $15.5??
Bass only appeared on the scene within the last year or so...and had some great calls. So, he deserves the benefit of the doubt at this stage. Let's see what happens in Japan, with fiat currencies, and with gold. He isn't trading for only +/- 6% moves.
Sorry...I meant low double digits
"When the FED (or any central bank) prints up reserves (a financial asset) and buys another financial asset it is not creating net new financial assets – with the slight exception of any premium it paid which it typically trivial to the overall value of the transaction."
Yes, I know the CB doesn't create NFAs when it buys govt bonds (all else equal). I said that already. Although as you point out, if it bids prices up real high this could be seen as a form of NFA creation(?). (Not entirely sure about this).
"The FED monetizes US debt every time the Treasury sells it. Any purchases of US Treasuries by the FED after the fact are nothing more than an asset swap. You can’t monetize the debt twice."
Yes, the Fed monetizes debt when the Tsy sells it. But also, as deposits expand, the Fed has to monetize more debt if it wants to keep interest rates at its target level. Banks extend credit then go looking for reserves if they are short. If the market is lacking, rates rise unless the Fed monetizes govt bonds or lends out new money. If it didn't monetize, rates would be all over the place.
Bass to mouth (south park)
Adam1 "When the FED (or any central bank) prints up reserves (a financial asset) and buys another financial asset it is not creating net new financial assets – with the slight exception of any premium it paid which it typically trivial to the overall value of the transaction."
Right. To increase NFA the cb has to either do a "helicopter drop" of packages of currency (transfer payment) or purchase real resources, moving them from the private to the public sector. Both of these are fiscal operations, which in the US are reserved to Congress.
For example, Bernanke refused Paulson's request to bailout the banks saying it was fiscal, hence, the prerogative of Congress, failing to realize initially that the problem was illiquidity and not insolvency per se. He should have provided the necessary liquidity immediately to unfreeze the short-term credit markets and then directed regulators to put any insolvent institutions into resolution.
The cb could do quasi-fiscal, however, even in the US. The Fed could take non-performing loans off bank balance sheets, even at par and even through they were technically in default, on the view that the loan could recover and eventually be paid off. However, it that did not materialize, then the bank would have the asset while the cb would be left holding the bag. Of course, it can also be argued that any loss that the db absorbed rather than the banking system was quasi-fiscal.
When a cb purchases gold it injects currency. Since this occurs in the gold market it is impossible to pair the counterparty. But if the cb purchases gold from a domestic producer, it credits the producer's bank's reserve account with reserves and the bank credits the producer's deposit account. This is an injection of NFA, and cb's are generally permitted to do gold ops, as far as I understand.
It can also be argued that the cb does a quasi-fiscal operation when it uses monetary policy to recapitalize banks through interest.
"The Fed could take non-performing loans off bank balance sheets, even at par and even through they were technically in default, on the view that the loan could recover and eventually be paid off. However, it that did not materialize, then the bank would have the asset while the cb would be left holding the bag."
Are you saying it's only really "fiscal" if it results in a net financial loss to the CB?
What about "normal" fiscal - the treasury recoups most of what it spends through taxes.
What about when the CB bids up prices on govt bonds (as with QE). Does this result in NFA injection?
What about
ignore the last "what about", or else read the whole post as some sort of poem, perhaps.
“…the Fed has to monetize more debt if it wants to keep interest rates at its target level. Banks extend credit then go looking for reserves if they are short. If the market is lacking, rates rise unless the Fed monetizes govt bonds or lends out new money. If it didn't monetize, rates would be all over the place.”
I don’t know if I agree with how you’re using the terminology of monetization here. The FED monetized the debt when it was issued. When it buys back a Treasury at some future date to increase reserves (for what ever reason) it is just changing the financial asset makeup of the non-government sector. It’s like trading me a Budweiser for a Heineken. I still have a beer it’s just a different kind.
Think of it this way… I could own a US Treasury bond. I could sell it to someone and in exchange receive a bank deposit. I could then go to the bank and demand that deposit in cash. The bank may need to sell some of its reserves to the FED to obtain currency to give me. I could then take that currency and stick it under my mattress. From beginning to end the amount of outstanding financial assets held by me, and the non-government sector, did not change – just the composition of those assets changed.
“What about when the CB bids up prices on govt bonds (as with QE). Does this result in NFA injection?”
Yes, the premium paid is typically a net new financial asset on the balance sheets of the non-government sector.
“Are you saying it's only really "fiscal" if it results in a net financial loss to the CB?”
Monetary transactions swap financial assets between the CB and the banking system. Fiscal transaction by a CB either leaves the CB with real assets (goods and services) or nothing. If a swapped asset (monetary transaction) goes bad then it wasn’t a swap really. The loss by the CB basically converts the transaction into a fiscal transaction.
@ Anonymous
A fiscal injection injects NFA which normally occurs through a budget deficit, although it can also occur through off-budget special appropriations, which as occurred under Bush. Special appropriations that are off-budget show up as an increase in the national debt not resulting from a budget deficit.
"Are you saying it's only really "fiscal" if it results in a net financial loss to the CB?"
If the cb takes a loss on its book that impacts its return to Treasury, and it also results in reserves that are not offset on the cb's balance sheet after taking the loss.
"What about "normal" fiscal - the treasury recoups most of what it spends through taxes."
The fiscal deficit is expenditure minus taxes. The is the NFA injection that can only be reduced by future taxation that withdraws NFA.
"Are you saying it's only really "fiscal" if it results in a net financial loss to the CB?"
"What about when the CB bids up prices on govt bonds (as with QE). Does this result in NFA injection?"
The "normal" fiscal is through congressional appopriation. Quasi-fiscal is the Fed upping NFA by endrunning the appropriation process.
Double, are you kidding me? Mike Norman is "always right"? Ha. Yeah, except when he said there was no housing bubble in late 2006. This guy literally made one of the worst economic calls in the history of economics. He said housing would continue to appreciate and that the economy was strong. He top ticked the turn nearly to the day.
You MMTers love to cherry pick when you're right and forget the bad calls. Embarrassing.
See Mike in action at the 3 minute mark.
http://www.youtube.com/watch?v=60CLQse27p8
Wow. Just. Wow.
With calls like that, no wonder he berates Kyle Bass for be "down" 6% on gold in the last week or two. He needs a little smokescreen distraction.
"ignore the last "what about", or else read the whole post as some sort of poem, perhaps."
Who IS that masked man?
You make my (online) day, just about every day. I internet-love you so much.
The worst part is the laugh at 3:57 of that video, as the other speaker is outlining the country's economic problems before they exploded in the lap of the American public.
Any contributors want to expound on why Norman missed this call so badly? If this MMT is so useful school of thought, how could that happen? I'm not being a jerk here...I'm just curious, since that was the most important call to be on the right side of in a generation or two. Thanks...
http://www.youtube.com/watch?v=eON8mQA0rVA
kyle's long lost brother.
Cody,
Randall Wray, Wynne Godley and Michael Hudson predicted the crash, Wray and Godley years in advance.
Ok...thank you for the reply. I'm assuming these are MMT guys, but they must have been unable to influence this Norman dude.
I guess the real crime here is not being wrong...a lot of people were wrong. But the insolent and condescending tone he took with the other speaker. Reminds me of the schoolyard bully, especially when a man his age resorts to name calling (dumb, idiot, jerk, etc) on this site. Looks bad...even more so when wrong.
I know what you mean.
Wynne Godley isn't really MMT, he mainly disagreed on the trade deficit. He developed the sectoral balance analysis at the heart of MMT.
So Kyle Bass does not understand money? Is that way he made almost a billion on the mortgage meltdown and a huge sum on Greek CDS. Must have been luck. If the Fed cant create money how did they increase their balance sheet by Trillions since 2008? If the ECB cant create money how can it loan almost a Trillion dollars to sick European banks. Did they have that money in their piggy bank. If the ECB cant create money how did the ECB buy up all of that PIIG debt? Sounds like semantics to me. If you buy up toxic assets and your own debt at face value with money that did not exist until recently how is that not creating money? Since Central banks cant create money I guess there is no inflation either. My last question is why is gold up so much over the last 10 years? A 10 year bubble?
Please enlighten Kyle and myself.
So are you going to trust Mike or Kyle Bass? Bass made almost a billion dollars on the mortgage meltdown, Mike was clueless, go to the 3:00 minute mark as Schiff eviscerates him.
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