Thursday, January 22, 2015

Gaius Publius — "Yes Virginia, all that money printing did show up as inflation"


"They" have already anticipated that. Assets don't "inflate," they "appreciate." Over-appreciation with respect to underlying value is a "bubble" rather than "inflation," and asset bubbles are self-correcting in markets.

It's all in getting the terminology right.

Actually, an intention of QE was for risky assets to appreciate, thereby creating a wealth effect that was supposed to increase spending and demand for goods and services, leading to increased investment and hiring. Didn't happen that way.

19 comments:

Jim said...


If we accept the MMT proposition that the "natural" rate of interest is zero and that therefore the state would not issue bonds when "deficit" spending, then asset prices held by the owners of our world - stocks, high end real estate, yachts, etc - must be expected to appreciate ad infinitum. This is so because the owners would be the ultimate beneficiaries of the monetary profit created by the state spending and they'd have no where else to put the money.

This is clearly unstable. Taxation at the high end to offset state spending seems by far the best solution in order to avoid either unending asset appreciation or the paying of unearned interest.

Ultimately, there really is no stable solution when dealing with oligarchy other than ending it.

Ralph Musgrave said...

Jim,

There’s an important distinction between QE which just shovels money into the pockets of existing asset owners, and the deficit spending to which you refer. Obviously the former enriches the oligarchy.

But deficit spending is different. Assume the extra money is spent on the existing variety of stuff that government already purchases: roads, law enforcement, education, etc. That money goes straight into the pockets of a cross section of the population – rich and poor. Alternatively, a deficit can take the form of tax cuts. Again, if the cuts are made in a VARIETY of taxes (sales tax, income tax, payroll tax etc) the extra money is dispersed pretty widely.

In fact the latter is EXACTLY WHY the elite doesn’t like deficits. They prefer QE.

Auburn Parks said...

Ralph-

What you have regularly failed to understand is that there is no difference between QE and not having issued those Govt securities in the first place.

In both examples, the Govt spends the money on the same things and in both examples, some portion ends up in the hands of the wealthy as they own the businesses. SO there is no difference at all except GOvt issuing securities allows the wealthy an extra place to save. QE removes that extra place to save in the same exact way.

Jim-

Asset prices would not rise ad infinitum, they would rise up to the level of the one time adjustment that comes from removing $12 trillion in savings opportunities (QE infinity = not issuing Govt securities). Once the adjustment is made, everything would go back to "normal".

The only difference between a Govt bond deficit model and a reserve only deficit model is who gets the interest income (assuming you have a positive rate). When the Govt issues securities, everyone has an opportunity to receive that income on their savings. When the Govt just uses reserves, only banks and other financial entities with access to reserve accounts at the Fed would be eligible to receive free interest income from the Govt.

Jim said...

I would argue that ultimately the wealthy receive virtually all the money spent as they are the owners to which profit must eventually flow.

If the govt keeps spending without paying interest on reserves or selling bonds, then the receivers of the monetary profit would have no option but to inflate financial asset prices. The only alternative is to keep the funds in their non-earning checking account - most unlikely.

Auburn Parks said...

Jim-

"I would argue that ultimately the wealthy receive virtually all the money spent as they are the owners to which profit must eventually flow."

Thats what I just said

"If the govt keeps spending without paying interest on reserves or selling bonds, then the receivers of the monetary profit would have no option but to inflate financial asset prices"

To say that asset prices would increase over time along with deficits is completely different than how I interpreted your original comment about ad infintum financial asset appreciation. Asset prices always increase no matter what in the long term with a growing population and money supply. So the question is whether or not issuing bonds makes a difference to the rate of increase as the nominal level is irrelevant.

Two examples:

$10 trillion in Govt securities outstanding and a 20K DJIA. A 5% deficit and a 5% DJIA increase each year

$0 in Govt securities outstanding and thus a 30K DJIA. A 5% deficit and a 5% DJIA increase each year

These examples are equivalent for all intents and purposes. The only difference would be if we had the same exact scenarios above and yet in the no Govt securities model the DJIA was increasing at 10% every year due solely to lack of Govt savings accounts (TSYies).

My position would be that you'd get the one time jump from 20K to 30K if we did QE infinity but the rate of increase would be no different.

Who's right? Lets run the experiment!

Ralph Musgrave said...

Auburn,

Re “no difference”, if you’re saying that having the state print money and spend it comes to the same thing as having the state borrow money and spend it, and subsequently QE the latter debt/bonds, then I agree there is “no difference” there.

However, those were not the two scenarios dealt with by Jim. He was dealing with the situation where the state has already issued some debt and then has a choice between QE and second, having the state print and spend new money.

He claimed that the latter inevitably enriched the already rich. My criticism of that point is that spending money on the normal government stuff (education, defence etc) actually enriches a wide section of the population, unlike QE.

Auburn Parks said...

Ralph-

The result of QE is the exact same as if those securities were never issued in the first place.

Ergo, if you want to know what the impact of deficit spending w reserves only would be, simply look at the effect QE has had.

Which is of course, it has no effect other than to increase the value of the remaining investment classes.

If there is $40 trillion in savings equally divided between equities, corporate bonds, state and local bonds, and T-securities and you remove TSY securities altogether, than that same $40 trillion exists but now must fit into just 3 categories instead of 4. Which would of course raise the price of the remaining 3 categories on average.

Its not really a complicated concept

Philippe said...

"I would argue that ultimately the wealthy receive virtually all the money spent as they are the owners to which profit must eventually flow."

you seem to be assuming that non-wealthy people don't or can't accumulate savings.

Philippe said...

Auburn,

"If there is $40 trillion in savings equally divided between equities, corporate bonds, state and local bonds, and T-securities and you remove TSY securities altogether, than that same $40 trillion exists but now must fit into just 3 categories instead of 4. Which would of course raise the price of the remaining 3 categories on average."

the money used to buy those 3 asset classes still remains however, so at what point do people choose to hold the money instead of buying assets?

Auburn Parks said...

phillipe-

"the money used to buy those 3 asset classes still remains however, so at what point do people choose to hold the money instead of buying assets?"


Right, thats my bad. I forgot to include that. So instead just think of it as starting with 5 savings vehicles (bank deposit accounts being the 5th) being reduced to 4 savings options and then all the same logic holds.

If the $10 trillion that used to be in TSYies stayed in private bank savings accounts then you would get less appreciation in the other classes for example. However, you would never get no appreciation because even if bank customers dont buy into the other asset classes, then the banks would with all their additional reserves from the QE infinity, especially if the Fed didnt pay any interest on reserve balances and we had a true ZIRP environment.

If the Fed paid 10% interest on reserves, why would the banks take on any risk buying equities unless they expected to beat that guaranteed rate? Banks can always charge higher interest on their loans, they cant demand higher equities returns.

Like I said before, its impossible to predict exactly how the situation would play out, so lets run the experiment.

Neil Wilson said...

Profit is merely the wages of capitalists - in return for their risk taking and management skills, just as interest is the wages of bankers in return for their project assessment skills.

The trick is to ensure that the system is sufficiently well balanced so that the wages of everybody are not too excessive. That doesn't happen my magic. It has to be managed.

However this idea that you have to 'smash the wealthy' is just pure envy.

What you need to do is make sure they earn their money. Then if they want to save some, why not?

Butch Busselle said...

Auburn, I could be misguided, but Ralph seems to be pointing to the flows. The working classes may spend most or all of their share of the flow, but it's gonna pass through an awful lot of hands before coming to rest in the accounts of the plutocrats. So maybe the workers save some, buy some trinkets or tools, whatever, that's enrichment. QE goes straight to those fortunate enough to earn enough to have bought some securities, floating right over the heads of the lower earning folks. So while the end result may be similar in spending vs QE, every one gets at least a temporary piece of spending.

Dan Kervick said...

QE doesn't shovel all that much money out there; it's just an asset swap, right? If QE leads to increased private sector spending, that can only be because of portfolio composition effects.

1. Treasury issues securities and swaps them for private sector dollars.

2. Fed issues dollars and swaps them for the treasury securities the private sector bought.

3.Treasury uses the dollars it collected from the securities sales to redeem the securities (interest free, assuming the Fed is maintaining positive annual income).

The net result is a wash for the treasury, and most of the dollars issued by the Fed through the private channel are returned to the Fed through the treasury channel. The private sector profits by the difference between the purchase price of the securities and the buy-back price offered the Fed - not a whole lot.

If QE is used to purchase private sector securities, then it's more or less the same thing, but the treasury is not involved. The Fed issues dollars and swaps them for an MBS, for example. And as a result, the cash flow tied to that MBS now flows from private sector sources into the Fed, rather than from one private sector source to another. Assuming the Fed paid somewhere close to the accurate market price for the security, it's a wash - maybe even a slight "profit" for the Fed, and ultimately the treasury. The net added liabilities the Fed adds to its balance sheet are reduced and cancelled out over time as the MBS dollars flow into the Fed.

In the end, QE is all about timing and portfolio composition effects, with negligible long-term impacts on balance sheets.

Dan Kervick said...

The main point of QE, in my view, was to give the treasury the political space to spend more without expanding the deficit. QE reduces the net interest payment Treasury has to make on existing debt. Also, the Fed made healthy profit for the treasury from its non-government securities purchases, because the dollar returns from those securities were greater than what the Fed had to pay for them. (Presumably the private sector owners of the securities were willing to sell them because they preferred somewhat smaller immediate term liquidity to somewhat larger longer-term liquidity.)

However, the government stupidly used these profits to reduce its deficit rather than expand spending. The net effect is as if the Fed had simply cancelled some treasury debt. That's one reason we had such a long, sluggish and incomplete recovery, and the net position of most Americans is worse than it was below.

However, because the QE enthusiasts in the US punditry have been able to point to the basket case European employment situation as a comparison case, they have managed to re-market years of policy failure as success.

Neil Wilson said...

There's a lot of curve fitting going on Dan across the spectrum.

It's all about sounding convincing. Probably it always has been.

Tom Hickey said...

What QE does is alter portfolios (rather than increase either investment or consumption). In taking safe assets off the table, it increases systemic risk by increasing the price of riskier assets.

It may also increase the price of some assets like equities that are likely to respond to inflationary expectations, even through that assumption has been shown to be false so far.

In the US, QE was supposed to increase the wealth effect that would spill over into increased investment and consumption. If that happened in the US, it was minimal and barely perceptible, and it doesn't seem to be happening in Japan either.

QE is also a fiscal drag by reducing interest payments by the Treasury to non-government.

Malmo's Ghost said...

"The main point of QE, in my view, was to give the treasury the political space to spend more without expanding the deficit"

This.

Matt Franko said...

Well then why would Bernanke brag to Congress in his testimony about all of the earnings that the Fed was able to return to the Treasury for deficit reduction?

That's what is in the public record...

Dan Kervick said...

Well then why would Bernanke brag to Congress in his testimony about all of the earnings that the Fed was able to return to the Treasury for deficit reduction?

Because it was true Matt. And he was basically begging them to take the hint - but they never did.

In appearance after appearance, he warned about "fiscal headwinds" and "fiscal drag". In other words: "Why the heck aren't you guys taking advantage of the money we are shoveling your way in order to increase spending and/or cut taxes?"

As the chair of the Fed - the politically "independent" central bank, it was not his role to go to Congress and tell them what to do in blunt terms. That would have been overstepping his authority. But he did communicate his outlook in a discrete way.