Wednesday, November 1, 2023

No, QE Is Not Costless — Brian Romanchuk

I ran across a couple lame attempts at blaming the U.S. Treasury for not extending the duration of issuance during the pandemic low in yields. This is entirely typical for market commentary — going after fiscal policymakers and ignoring the major culprit, which is the central bank. To the extent that the United States has put itself into an awkward macro stabilisation situation with respect to interest rate expenditures, it is the result of the brain trust at the Federal Reserve.

One could try arguing that if the Treasury lengthened issuance maturities and the Fed buys those bonds back, the Treasury has locked in their funding cost and that is all that matters. The problem is that approach ignores that the Fed is a wholly-owned subsidiary of the Treasury1, and so when the Fed blows itself up on hare-brained levered rates positions, the Fed losses will work its way into the fiscal accounts via reduced dividends. Financial accounting consolidates wholly-owned entities for a reason....
Note that some critiques of MMT, including Post Keynesian, fault MMT for consolidating the Treasury and Fed accounts.

Bond Economics
No, QE Is Not Costless
Brian Romanchuk

7 comments:

Matt Franko said...

“ About the only people who questioned the balance sheet expansion are the hard money cranks who have been continuously wrong about the inflationary impact of the policy.”

I have been a consistent critic of this and am certainly not a hard money crank… I hate all the gold people..

And this: “ I will accept that there might have been a “market functioning” argument behind the initial wave of purchases”

What is he talking about when they made their initial purchases in March 2020 BONDS CRASHED hello!

Konrad said...

OFF TOPIC

ANOTHER OF MY RANTS…

I want to comment on health care, but my actual focus is on economics.

Many Americans want Universal Medicare like the UK or Canada has, where the federal government pays for healthcare. I have some questions about this, since federal programs tend to be “woke” (i.e. anti-white). According to woke liberals, treating white people the same as everyone else, equally, would not be “equitable.”

Another equally odious issue is “cost.” One of the best predictors of cardiovascular disease is a Coronary Artery Calcium scan (CAC scan) which accurately reveals how much damage has been done to the arterial system by poor diet and lifestyle choices . This yields a reliable cardiovascular disease risk profile, so that patients can make life-saving changes.

In the UK, the NHS will not authorize a CAC scan because it “costs too much.”

First of all, a CAC scan only costs $100 or less (in the USA), and second, cost is not an issue. The NHS has unlimited money, since the UK government creates unlimited pounds sterling out of thin air.

Big Pharma doesn’t want people having CAC scans, because it might make people less willing to take highly toxic (and highly profitable) statin drugs. Therefore you cannot get a CAC scan from the NHS. You would have to pay a private cardiologist to get his permission to have a CAC scan, and then pay for the scan yourself.

This is an example of how the lie about the UK / US / Canadian governments being “broke” can cost lives.

Peter Pan said...

Blame the elderly for health care costs.

In Logan's Run the system came up with a way to save on healthcare. Terminate everyone on their 30th birthday.

Matt Franko said...

“ This is an example of how the lie about the UK / US / Canadian governments being “broke” can cost lives.”

They are all too numerous to list..,

Matt Franko said...

“We can’t afford to incarcerate the violent underclass we’re broke!”

mike norman said...

This was idiot Stanley Drunken-miller who said this. Guy is clueless.

AXEC / E.K-H said...

Comment on Brian Romanchuk on 'No, QE Is Not Costless'

The US economy runs on profit. The 3-sector ProfitLaw Q≡(G−T)+(I−S)+Yd implies that the greater part is produced by deficit-spending/money-creation. The institutional setup ― including Congress/Fed/Treasury/Wall Street/Big Business ― guarantees the Oligarchy's continuous self-alimentation with Profit. This had worked just fine over the last 200+ years.

So, private financial wealth grows with public debt and in the form of bonds becomes the eternal interest cash cow for the Oligarchy. WeThePeople owe the public debt and are taxed for interest. The IRS ensures that interest is paid on time to the Oligarchy.

The profit/interest double-whopper explains the observable time path of distribution i.e. the exponentially growing inequality of income/wealth in the so-called free market economies.

In sum, the Fed is pivotal for the creation of the profit/interest/financial wealth of the US economy respectively its oligarchic owners. Actually, that's the Fed's main task.

How does this work over the interest rate cycle? Remember how Mr. Volker pushed the interest rate up to exorbitant heights and how it then fell gradually to the zero lower bound?

Everybody knows that there is an inverse relation between the interest rate and the current value of a bond. So, bondholders (banks, funds, asset management groups, investment management groups, etc.) could realize capital gains all the way down from the Volker peak until the interest reached the zero lower bound.

At this point, the easy part of the game was over. The Fed could not lower the interest rates any further and everybody knew that nominal/real capital losses would be inevitable as soon as the Fed would raise interest rates again. But the Fed wouldn't commit such financial cruelties to the esteemed holders of public debt? So, somehow the Fed was trapped at the zero lower bound.

At this point ― lowest interest rate and highest bond value ― the Fed started QE i.e. buying bonds from its financial market “customers/partners/colleagues” who swapped their bonds for liquidity a.k.a central bank balances.

Smart move, because in this way the big Wall Street players avoided any nominal/realized losses when the interest rate increases eventually happened. As they did when the Fed declared to fight inflation at any cost. Those who were hit immediately with nominal losses were some banks and institutional investors who traditionally hold bonds to maturity ― and, of course, the Fed itself with its gargantuan QE assets.

Over the interest rate cycle, the losses of the Fed during the current phase of rising interest rates are the counterpart of the realized capital gains of fixed-interest securities during the phase of falling interest rates. In other words, with QE the Fed acted as a direct Profit Pump for the Oligarchy.

Seen from the Oligarchy, the Fed's generation of profit, interest, and capital gains is second to none.

Egmont Kakarot-Handtke