Saturday, November 12, 2016

ZIRP/QE hands election to GOP


The Democrat Obama administrations (8 years) have presided over the lowest policy interest rates in the post 1971 era of our return to a numismatic system of currency.

Total issued US Treasury securities over this period have averaged about $14T while the policy rate has remained at 0.25%.

If instead of ZIRP and QE we ran the risk free rate at a more typical 4%, it would have resulted in an average additional leading USD flow of $500B per year of interest income in the USD system on top of the approximate $4.2T leading flow experienced or about 20 - 25% more.

If those were the conditions we'd have experienced, I'd say there would have been a Democrat victory in this year's presidential election.




15 comments:

Andrew Anderson said...
This comment has been removed by the author.
Andrew Anderson said...

If instead of ZIRP and QE we ran the risk free rate at a more typical 4%, Franko

The risk-free rate should be less* than 0% otherwise we are providing welfare proportional to wealth, not need.

it would have resulted in an average additional leading USD flow of $500B per year of interest income in the USD system ...

So hand out $500B equally to all citizens. That does not violate equal protection under the law and has the additional advantage of more of the dollars going to people who need them.

*Not 0% since there are overhead costs to pay. Also, shorter maturities should cost more than longer ones with reserves costing the most.

Andrew Anderson said...

Also, shorter maturities should cost more than longer ones with reserves costing the most. aa

Except for a $250,000 or so per adult citizen liquidity allowance that should be negative interest free since SOME risk-free liquidity is good.

Matt Franko said...

AA never going to happen....

It's historically been an important source of USD flow and Obama admin was never able to administer the USD economy with it being there in contrast to all others.... imo directly led to economic underperformance and a tight GOP election victory after 8 years....

Tom Hickey said...

Argues for abandoning monetary policy as fundamentally flawed and switching to functional finance.

US politicians cannot offload their fiscal responsibilities onto the Fed without also delegating fiscal powers to the Fed.

Auburn Parks said...

Matt-

I dont believe we would have gotten your desired $4.2 T in current Govt spending + $500B additional interest spending for a total of $4.7T in Govt additions which would result in a $800 Billion deficit. Instead we would have gotten something like cuts to current Govt spending to offset that $500B interest increase. So we would maintain roughly our current spending and deficit, but the spending would have been much more regressive since interest spending is probably the most regressive way to add additional dollars to the economy.

Matt Franko said...

Well Auburn interest is an automatic appropriation so what they might have done is looked at "the deficit!" and the deficit would probably been a bit higher than what we saw... maybe we would have seen the govt people do something different than the sequestration but sequestration is not directly dependent on automatic appropriations...

But also, my point is always that we have to look at the leading flow rather than the deficit....

The deficit is a function of leading flow... so the higher the leading flow, then probably the higher the deficit unless there is something going on demographically or with the external sector's USD savings policies...

Matt Franko said...

PS, to be clear Obama got screwed by the Fed imo.... ie first black president legacy got F-ed by the monetarist morons (along with the rest of us...)

PPS I dont think the last 8 years have been a complete disaster for Obama, but could have been MUCH better for his legacy if we had rates back up in a normal range and he was presiding over a period where we had more normal/typical historic rates in the USD system... left us under-performing and created an opportunity for Trump to hammer the incumbent Democrat party over the head with.. (successfully...)

Auburn Parks said...

Oh believe me Matt, I get your point, its not complicated. And who would disagree with the math that higher interest rates = higher Govt spending. However, higher interest spending necessarily has a small muliplier since the policy is so regressive, which means even though spending would be up the circular flow would be low and as such wouldnt generate much in tax revenue thereby increasing the deficit. And I personally dont believe that a R controlled congress along with all the Dem hawks would have allowed for a higher deficit and as such would have cut a corresponding amount of other Govt spending (most likely non-military) maintaining roughly the current levels of deficit. So there wouldnt be the great boost in spending that you envision.

IOW Total leading flows would stay roughly the same, they would just be distributed differently. This is the part that you are ignoring. You may disagree, but you have to at least acknowledge the validity of this point.

Matt Franko said...

Well they have the "sequestration" which ties their hands on discretionary so if you look at that as a given, then this talk is kind of moot...

But also, what President has had to deal with such a thing as 'sequestration' before?

Maybe Gramm-Rudman back in the day... but they blew that thing off pretty quickly when we went surpluses late '90s...

Obama got F-ed by all this and doesnt even know it....

Matt Franko said...

Lay it on him anyway as he blew off 'the coin' which was dropped right into his lap...

Matt Franko said...

"US politicians cannot offload their fiscal responsibilities onto the Fed without also delegating fiscal powers to the Fed."

Its interesting Tom imo the Fed has stayed on 0% largely due to shitty fiscal... imo the Fed looks at what is going on with fiscal and if they think fiscal is shitty then they stay on 0%....

imo if they shit can sequestration and hit fiscal hard for both military and infrastructure the Fed is going to raise substantially in response...

Matt Franko said...

Stanley Fisher talks often about the Fed's response to fiscal policy in this way... ie more fiscal means higher rates...

Tom Hickey said...

As I have pointed out before, monetary policy is double edge sword.

If the Fed tries to use interest rates fiscally by increasing the FFR then it faces higher mortgage rates and higher borrowing costs for investment, as well as higher margin rates. The post of lower rates in monetary policy is to stimulate investment and reduce saving.

This is the problem with using a shotgun approach like monetary policy to substitute for good fiscal policy.

Congress cannot effectively dump economic policy onto the Fed with out giving the Fed the additional tools required.

Andrew Anderson said...

This is the problem with using a shotgun approach like monetary policy ... Tom Hickey

If only! Instead, monetary policy is welfare proportional to wealth since the richer can buy and sell more inherently risk-free sovereign debt from/to the central bank than the poorer - and profiting both ways.

Otoh, fiscal policy can be, if desired, a shotgun approach that benefits all, such as equal fiat distributions to all citizens.