I got a question about references for post-Keynesian theories of interest rates. My answer to this has a lot of levels, and eventually turns into a rant about modern academia. Since I do not want a good rant to go to waste, I will spell it out here. Long-time readers may have seen portions of this rant before, but my excuse is that I have a lot of new readers....
Bond Economics
A Response To A Question About Post-Keynesian Interest Rate Theories (...And A Rant)Brian Romanchuk
14 comments:
“ The best way to summarise the consensus MMT position is that the effect of interest rates on the economy are ambiguous,”
That’s political cover for current Biden/Democrat policies….
Uh, I don't think that Montreal-based, Canadian western populist (a particular political tradition) Brian Romanchuk is much concerned with Biden/Democrat policies. And noting the ambiguous nature of interest rates on an economy is merely telling the truth -- a fellow like Randal Wray is no enthusiastic Bidenite, eh! Wray and co. have never, for instance, denied Mike Norman's position; they have just, being honest academics, tempered their conclusions either way from lack of irrefutable causality.
Is it YOUR view, Matt Franko, that the FED's current interest rate policy is stimulative?
Disconnect between Fed policy and risk asset prices will worsen from 2024.
Growth of debt issuance has a significant impact on bond yields and stock market performance. Debt issuance is becoming a primary determinant of risk asset prices.
There is a lot of debt issuance (and duration) growth up ahead. Not only that the nominal amount will grow, but the rate of growth of debt will also rise.
Expect a Q1 2024 low point for stock markets, but offhand, massive debt issuance tells us that both risk asset prices AND the 10Yr Yield will rise for most of 2024.
https://seekingalpha.com/article/4662885-start-listening-to-janet-yellen-fiscal-policy-is-now-calling-shots-for-risk-asset-prices
There's a lot of detail in there by Robert in the link posted, even as a MMT'r my head started to hurt half way through.
But for me it is based on Bank of America's forecast
" Bank of America's forecast for Treasury bond issuance in February 2024 has been revised upward to a record $1.34 trillion in 10-year equivalents, an increase of $90 billion from earlier predictions. The revisions come as rising interest rates are expected to intensify US deficits and impact deficit spending, leading to a larger UST issuance and a spiral effect due to increased financing costs.
Bank of America also projects the fiscal year 2023 deficit to rise from $1.8 trillion in 2024 to $2 trillion by 2026, while net interest payments are anticipated to constitute a record 3.5% of GDP in 2026.
As a result, the Treasury Department is likely to continue issuing debt, further expanding the already sizeable $25.8 trillion market. The ex-Fed 10-year bond supply is anticipated to reach a record $1.53 trillion in 2024 due to quantitative tightening. "
That's based on more hikes and surely that's only going to happen now if oil prices spike upwards due to the madness in the middle east. Otherwise they'll probably start slashing rates ?
Unless, Robert thinks they are about to go on a big spending spree again as they slash rates. Issue $ for $ debt as they prime the pump. Why he says keep a close eye on the fiscal.
Marian it’s the Biden fiscal that caused the price instability…
You can’t give people 1.9T of free munnie and then tell them not to go to work…
So any talk of interest rates just is a political cover for this Democrat fiscal policy that has resulted in very politically unpopular price increases… which the incumbent party is going to take the blame for…
All the MMT people are biased partisan Democrat…
“ Is it YOUR view, Matt Franko, that the FED's current interest rate policy is stimulative?”
No… the recipients of the interest are just saving EVEN MORE… deficit is increasing..
Atlanta Fed has us at about +2% GDP which is about what it was during 8 Obama years with rates at zero the whole time…
All the rate increases have done is discounted the NPV of all financial assets and exacerbated the fiscal driven price increases of real assets..
S&P hasn’t made a new high in over 2 years…
Derek you have to start to consider a Trump presidency..,
He’s going to direct his Fed to significantly lower the policy rate…
Just as Biden has directed his to increase the policy rate..,
“ That's based on more hikes and surely that's only going to happen now if oil prices spike upwards due to the madness in the middle east.”
Trump would never stand for that..
First thing trump going to do is fire Powell and put in people who see the current higher rate as exacerbating the current price instability and discounting financial assets.,,
Hi Matt Franko,
Very plausible reply.
You write that the "Biden fiscal caused the price instability… ... So any talk of interest rates just is a political cover for this Democrat fiscal policy that has resulted in very politically unpopular price increases… which the incumbent party is going to take the blame for…"
Well, the Bank of Canada seems to be dealing with something similar, except it's pretty opaque:
see Bank of Canada INJECTS More Liquidity into the Repo Market https://www.youtube.com/watch?v=btTZR0KhDUM
Did the prices increase after Biden fiscal or were they on its way up before?
Link to cpi
https://www2.nhes.nh.gov/GraniteStats/SessionServlet?page=CPI.jsp&SID=5&country=000000&countryName=United%20States
Mostly post Trump…
Marian similar to US the banks are having to possess more reserve balances due to LCR denominator increasing due to general increase in USD net withdrawal volumes … increase in cumulative amounts of net withdrawals chasing higher yields etc…
LCR formula here:
https://www.occ.gov/topics/supervision-and-examination/capital-markets/balance-sheet-management/liquidity/Basel-III-LCR-Formulas.pdf
The unprecedented Biden desperate Hail Mary monetarist rate increases (which Canada has glommed on to) have generally destabilized the system after 12 years of stability at ZIRP… …. so LCR denominator is going to increase….. requiring banks to increase numerator in response to maintain constant LCR….
So CB has to accommodate this regulatory requirement by providing more reserve balances in case of Canada…
US has excess reserve balances in system they have like $7T in system and banks currently requiring only about $3.5T which is up 500B from recent..,
@Matt Franko -- very useful. thanks
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