Monday, September 12, 2016

Rate hikes ARE helicopter money. But the "geniuses" don't even understand that.


I'm busy finishing up this week's issue of MMT Trader, however, I just had to stop to write this because it is so glaringly obvious yet nobody gets it.

All the idiot "geniuses" who were saying that central banks had no other option, but to engage in "Helicopter Money" (central banks dropping money into the economy) don't even recognize that ratre hikes ARE helicopter money!!

When the Fed raises rates it literally requires itself to give money to people. That's money out of thin air.

Maybe it's not shared equally, but neither are the tax cuts that people scream for all the time either. And when those happen they are generally deemed "good."

Yet people are selling stocks like crazy.

If the Fed were to announce that it is about to start sending money out to people--no matter how much the amount--you would see crazy buying of stocks and gold and selling of the dollar, yet that's exactly what the Fed is announcing and people are doing the exact opposite.

This will be the biggest fakeout in history.

Buy gold. Buy stocks. Sell the dollar. Sell Treasuries.

27 comments:

Ralph Musgrave said...

Debatable. First, the Fed takes money FROM the private sector in that it sells Treasuries to the people. That’s in effect “reverse QE”. So the private sector has less money.

People gain money in that they get more by way of interest, but against that, the money for that interest comes out of taxes. To that extent, more money flows out of the private sector’s right hand pocket and back into its left hand pocket.

On balance, the effect is deflationary, as per conventional wisdom, far as I can see.

Random said...

https://www.theguardian.com/business/live/2016/sep/12/stock-markets-biggest-falls-brexit-vote-federal-reserve-ecb-live?page=with:block-57d69a34e4b013613fffc72a#block-57d69a34e4b013613fffc72a

"Republican presidential nominee Donald Trump has just weighed in - warning Americans that interest rates won’t stay at their near record-lows forever.

Speaking on CNBC, Trump reminded the nation that US interest rates once hit 21% under Jimmy Carter.

What’s going to happen when interest rates could go up? And they could go up....

We’re living like there’s no interest rates, because we’re paying almost no interest.

In a typically rumbustious performance, Trump also claimed that the Federal Reserve “wasn’t even close to being independent”.

Fed chair Janet Yellen should be “ashamed” to have kept interest rates so low to assist Barack Obama, he added."

Random said...

"way of interest, but against that, the money for that interest comes out of taxes."

Nope. It is paid by crediting bank accounts like ALL spending.

"So the private sector has less money."

Why would swapping one "bank vault" with any other matter. It is SPENDING that matters.

Tom Hickey said...

Like everything, there are tradeoffs. Higher rates mean higher borrowing costs affecting margin and mortgages. What are the multipliers?

Michael Norman said...

The initial effect is a speeding up of purchase and investment plans, just like in an inflationary environment. This is well established. The multipliers may impede later on, but not initially. Furthermore, with household debt burdens at 40-year lows, the scope for a significant increase in debt accumulation is very real.

Michael Norman said...

"First the money is taken."

Right. But it's nice to get it back.

Tom Hickey said...

The question is how much would flow to spending, since interest payments are deposits. Government spending, on the other hand, is spending, except for transfers, but they are targeted toward the bottom where consumption greatly exceeds saving.

Interest payments are helicopter money, which is fiscal in the sense of increasing $NFA. But helicopter money is no the same as fiscal expenditure in that it is not targeted toward spending.

Probably a lot of it would be saved in various financial instruments, driving up assets prices, so in that sense it is bullish.

Jose Guilherme said...

But - in the present context of monetary policy - "higher interest rates" will mean higher IOR.

So, the first beneficiaries of the hike will be the banks, who are awash in reserves deposited at the Fed.

Of course, the hike will be then "transmitted" to higher rates on T-bills, the prime rate, rates on long-term bonds, etc.

However, the fact that the banks will be the first agents to benefit from the move may throw some doubts about the stimulative nature of the rate hikes - right?

Ralph Musgrave said...

Random,

Re your claim that interest on Treasuries comes from "crediting bank accounts", that would be one way of doing it. But that's not actually how it's done is it? I.e. the Treasury / government cannot just print money: only the Fed can do that.

Matt Franko said...

Random,

Obama is going to go down as first potus in history of CB era to have had ZIRP his whole 2 terms.... He got screwed royally.... Too stupid to figure it out .... So is Trump....

Matt Franko said...

Banks still seek deposits so they advertise their deposit rates they pay...

Matthew Franko said...

Higher rates or another big war?

Which ones will you guys have?

Put me down for the former....

Matt Franko said...

Ralph you are ignoring Dealer role and associated Dealer inventory in the process...

Random said...

Ralph:

http://heteconomist.com/exercising-currency-sovereignty-under-self-imposed-constraints/

Matthew Franko said...

Ralph maybe this way:

Christen-dumb: Tri-party arrangement

Econo-dumb: Bilateral arrangement

Try to think about these switched around...

Postkey said...

"When you look at firms, I think, one of the things that we teach people, and will continue to teach people, is that interest rates matter. There is enormous discussion of interest rates. They do matter for the distribution of income but nobody has ever been able to detect an interest rate effect on demand for investment or household savings. That risk perceptions dominate among institutions, their concerns in making investment decisions. And you have to teach people that and forget about the "r" variable that you have in your models and I'm not optimistic that that's going to happen. What that means in turn is that when you talk about monetary policy you cannot talk about it in the abstract. Monetary institutions matter a lot. The institutional form of banking systems matter a tremendous amount. I think it's fair to say that across the world, whether it's Abenomics, the European Central Bank or the US Fed, there is no significant evidence that they've had a positive effect. In fact, how they defend themselves is "ohh, if we hadn't done this we would have had a depression". But again you can look at countries that didn't do it and they didn't have depressions. Sucessful monetary interventions with the institutions we now have in place do not look like traditional monetary policy. They look like what the Swedes did in the middle 1990s when they had a tremendous problem, what the Koreans did in the wake of the Asian crisis, which is direct recapitalization of the banks."
https://www.facebook.com/notes/joseph-e-stiglitz/bruce-greenwald-the-shadow-joe-stiglitz-on-interest-rates-and-monetary-policy/692222450791460/

Ralph Musgrave said...

Random,

That’s an interesting article by Heteconomist which I think I’ve absorbed (???).
The central point the article makes is that if the Treasury wants to spend more and fund that via more borrowing, and if the Fed “…is targeting a positive short-term interest rate”, then the Fed must supply the market with new reserves to enable the latter borrowing (else interest rates will rise).

But the situation we’re discussing is where the Fed DOES WANT interest rates to rise.

So…back to the initial question, i.e. does an interest rate rise equal helicoptering? My answer is that the extra interest rate payments COULD BE funded from freshly issued reserves, but the Fed just won’t do that to any great extent precisely because it wants to impose a deflationary effect. I.e. the Fed will say to the Treasury, “extra money you need to pay interest on extra borrowing, or rolled over Treasuries will just have to come from tax”.

Matt Franko said...

Ralph they think the higher rates themselves have the "deflationary!" effect...

And they don't look at increased interest income as potentially "inflationary!" No economics theory even looks at that at all ... It's all monetarists there.... They look at M1, M2, reserve balances etc.....

If they see any "inflation!" start to develop they will increase rates and maybe reduce reserve balances period this is their playbook.... And they will stick to it...

Matt Franko said...

Ralph to me it's like you have one foot in the MMT camp but still one foot in the monetarists camp....

Ignacio said...

The net effect depends on the balance sheet composition and distribution of the private sector.

If household balance sheets are relatively strong then it would be good, if there is more credit outstanding then no.

Take in mind the average american does have less than $2K in savings and is one paycheck away from poverty and usually net liquid equity is negative (discounting real estate assets for example). Those with net savings would benefit, those with higher debt wouldn't.

Then there is the multipliers, if those with savings would spend more because their disposable income increases and that would help boosting aggregate demand and increase wages that could help indirectly those who have a worse equity position.

The answer is not a straightforward "good or bad (on aggregate)", there are like a 100 variables influencing the outcome. If the FED is really data driven (don't think so), they would base their decisions on all those variables. I doubt they have the manpower and brainpower (is not trivial to be fair) to come with a decent model, hence falling on whatever absurdity like ISLM.

In any case: interest rates are still an awful tool for directing any kind of policy (monetary or otherwise). Falling on that is because all the non sense dominant monetarism and central banking religiousness.

Matthew Franko said...

" net effect depends on the balance sheet "

Balance sheet is ex post.. nothing can "depend" on a ex post result think about the time domain here ... this is the mistake the SFC "models" people make... its still mathematically "trial and error" because we dont have a functional equation we are using and then examining derivative action of that functional equation...

Maybe like this:

X = f(W)

where W is Treasury withdrawals....

ie

Taxes = f(W)

Savings = f(W)

Bank Credit = f(W)

For a numismatic system like we have now....

Matthew Franko said...

Ignacio there is 19T in ERISA accounts here so the "average" savings of individuals directly might be $2k but there is a lot more than that in accounts on individuals behalf....

It also effects the finances of state and local govts over here as those non-federal but still public institutions guarantee the shortfalls in the ERISA pensions of their employees... that is a big part of the 19T in ERISA...

Any raises are going to have a positive effect .... And if it really gets rolling they are going to keep raising imo....

Matthew Franko said...

One half of one percent of $19T is $95B....

Every one percent is $190B....

Matthew Franko said...

Get Mike's latest report he has total Federal Salaries at $160B so every one point raise will increase ERISA accounts by in excess of the the total of current Federal Salaries...

Its almost like doubling the size of the current Federal workforce....

Obama got screwed big league with this ZIRP for his whole 8 years... first potus ever...

Ignacio said...

Balance sheet is ex post.. nothing can "depend" on a ex post result think about the time domain here ...

You understood what i mean... depends on how much debt vs. financial savings there are.

There are trillions in credit outstanding, and the distribution of equity and credit outstanding is INEQUAL (that's all the fuss about inequality is about). You are missing elephants in the room.

Ignacio said...

https://fred.stlouisfed.org/series/CRDQUSAPABIS

This is what has been pushing up "growth" (at diminishing productivity rates!). A minor drop in the growth rate of debt and the system collapses, hilariously malfunctioning system (take into account the "inflation" rate is not keeping up).

Matt Franko said...

I,

That's also a function of withdrawals (and prices)....