Thursday, September 9, 2010
Pea brain automaton of Peter Schiff--Michael Pento--doesn't see the illogic of his own argument!
Pento is a Schiff automaton who went on CNBC recently and was so rude that usually docile Erin Burnett went ballistic and basically sent him out the door from CNBC with a kick in the ass.
Leaving that aside for a moment, listen to what Pento says in response to Burnett's comment that despite the fact that the debt has risen sharply, interest rates are at historic lows.
Pento says it's because "The Fed is keeping rates low by buying securities."
Duh!! Yes!!! That's how it works, Pento!!! The Fed sets rates, just as you stated, not the Chinese or Japanese savers or anyone else. These idiots--Pento, Schiff--are so blind it's amazing. I'm very happy that Burnett has pretty much banned this Schiff automaton from CNBC (quite a bit of moxie on her part), but it would have been great if she caught him on that piece of illogical reasoning.
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31 comments:
Mike, if our gloriously inept central planners at he Fed can always keep interest rates low without negative consequences then why did interest rates go above 20 percent in the early 1980's? At some point, if the Fed continually increasees the credit money supply in anever ending spiral how to we avoind large-scale monetary debasement. Can phony credit creation by artificial banking procedures ever replace real savings? Lastly, you pointing out another person's rudeness is a bit rich given your past behavior.
Ummm....Joseph....maybe you weren't around back then or have an aversion to reading but since you haven't heard I'll clue you in: Rates went to 20% because the Fed put them there. Yes, Joe, the Fed CAN raise rates as well as lower them. That's all part of the interest rate setting authority the Fed has.
My past behavior? There has never been anything wrong with my behavior.
By the way, your buddy Schiff got kicked off of Fox by Neil Cavuto because he threw a temper tantrum on account of his interview being dropped due to a breaking news story. How's that for behavior? Not very grown up. Send him a pacifier for Christmas.
Mikeydoggy you seem to have this perception that the Fed is somehow supernatural and that the laws of physics and nature dont apply to them or the USA.
I hate to break it to you but if (or WHEN) the world loses confidence in the Fed's handling of this, and stop buying the debt, leaving the Fed to monetize the lot, the USA will then have two choices, hyperinflation of 20% (min) + interest rates.
Both will destroy you, the Fed are just trying to delay it as long as possible, but you seem to be advocating they just bring it on ASAP?
In that way you and Schiff are actually more similar than you think.
Burnett is a bimbo who framed her discussion with untruths from the start, and couldnt handle being called on her bullshit, Pent own that exchange completely to anyone with the faintest clue.
should say "hyperinflation OR 20% minimum...."
Mike,
Maybe finally after so long a time (it will be the two year anniversary of some measures of "money supply" increasing 12,000% in a couple of weeks from now), some of the on-air talent is finally starting to wake up to this line of debt-doomsday reasoning.
I think this last bond market rally has really caused alot of these reporters to re-examine their beliefs...I think this rally has really surprised a lot of people.
Ive mentioned what I perceive as the thoughtful engagement you have received at the RT, now here is Burnett challenging Pento and bouncing him, you mentioned above that Neil bounced Schiff (I dont think he would do that if he didnt think at some level he was FOS), Warren Mosler got on Bloomberg the other day live from Flushing and was treated VERY well by Kathleen Hays imo.
Some of the ice could be breaking finally...I think you may be on the verge of breaking Varney at Fox. He seems to be losing his normally unflappable British composure when you challenged him in your recent appearance there, I dont see him normally getting that animated. He cannot respond to your reference to the accounting identities and this really seems to make him uncomfortable.
Keep up the great work!
I wonder if Schiff and all his followers are putting their money where their mouth is and shorting Treasuries, waiting for the bond bubble to burst and hyperinflation to set in, so they can clean up.
Funny how Bill Gross has done really well betting with the government. It just doesn't seem fair, does it?
mike, we all know fed set the rates, but you seem to think theres no negative consequence to it. If thats so, why not keep it zero ALL the time. What you will see, is, you basically advocating high inflation as a good thing
Bill Mitchell, The natural rate of interest is zero!
The fed influences interest rates by buying long term debt. They don't conjure up the money they use to buy this debt out of thin air (well, they do kind of with the fiat currency). So I would say that there is a very limited amount of time that the fed can "control the yield curve". Before it is no longer effective. When will that happen? A deficit of $3 Trillion? $4 Trillon?
So should the US be looking at the relatively low cost to service debt and use it as an excuse to borrow more? No. Should I go out and buy a million dollar house right now because mortgage rates are low? That is dumb as many people in the US found out not so long ago.
Also, Pento wasn't rude. He spoke over Burnett a little, but for a "moderator" she should be better at controlling the interview. Without having to resort to calling her "guests" rude.
Schiff was dead-on last time and he is dead-on this time. The only thing that will save the US right now is if Obama loses both houses of congress this Nov. and a republican is elected next.
Uh, QE does not increase the deficit. It is a monetary operation, not fiscal. When the Fed buys a bond, it simply shifts a nongovernment interest-bearing account to a nongovernment account that either bears no interest or much lower interest. Plus, the Fed gets the interest instead, and then transfers its net earnings to Treasury, thus reducing the deficit.
Nongovernment net financial assets don't change, other than interest income is extracted from the economy, which is disinflationary rather than inflationary. Only the composition of assets already held changes. This is supposed to increase liquidity, implying that the money what was being saved in a bond will be spent on goods and services, or in bidding housing up out of the tank.
But that is not happening, and it won't happen until the economy turns around owing to an increase in effective demand through income growth spurring consumer spending and a consequent closing of the output gap.
Burnett had no argument. All she could say was, it (the Treasury market crash) hasn't happened yet. Likewise, for Balestrino. At least, she admitted Pento had presented an argument. She got upset because she tried to pin Pento down with regard to what would be the exact trigger for the collapse, which of course, no one can do. And, Pento didn't go for it.
Smack down!!
Thanks for sharing that :)
So when the fed buys these bonds to influence the yield curve they are not actually using real money?? They are just creating it electronically? (so they do conjure it out of thin air) It's worse than I thought. That must be why Schiff is so worried about hyperinflation! And what happens when the only one buying these bonds is the US fed using devalued USD? Bad to worse.
Bob, here is what happens. Say you sell a bond to me. I pay you the money, the bond is transferred to me, and your deposit account is credited (gets marked up electronically), while mine is debited (gets marked down electronically). Nothing was created or destroyed. It was a simple transfer of assets, altering the composition for both parties with respect to liquidity. One party was willing to give up the future interest to the other party to get more current liquidity.
The same happens when the Fed buys a bond. The bond goes on the Fed balance sheet as an asset, and your bank is credited with bank reserves in that amount, a Fed liability. The reserves are a bank asset, which it then credits to your deposit account, which becomes your asset instead of the bond. But that money in your deposit account is the bank's liability, offset by the bank reserves. When you write checks on the account, the bank's reserves decline and so does their liability to you.
Where did you get the bond? You paid for it with your money, which the bank then used as bank reserves to purchase the bond for you from the previous owner or the primary dealer. Your deposit account decreased, as did your bank's reserves. The counterparty got the money via the interbank clearing of the reserves.
If the counterparty is the Fed and the Fed buys a bond, the Fed's reserve account is marked down on the FRS spreadsheet. If the Fed sells a bond, its reserve account is marked up. This is just switching the composition of assets around.
As you can see,this is just switching assets from more to less liquid for one party and vice versa for the counterparty to the transaction.
When someone purchases a bond, the money used for the purchase is just switched into an interest-bearing asset. When the bond is sold, vice versa. Every transaction involves a counterparty, so this is just switching the composition of assets in terms of liquidity preference. One party wants more liquidity and is willing to take less or no interest, and vice versa for the counterparty.
In QE, the Fed is the counterparty taking the less liquid but interest-bearing instruments on its books temporarily. When conditions change, it will reverse the operation as nongovernment desires more interest and less liquidity.
You and Schiff are seeing things that aren't there. Do the accounting, and then you will get it.
Bob,
The Fed uses Reserve Balances, not money. This is the tool they use to implement Monetary Policy (ie set interest rates). You need to educate yourself in this area, you obviously do not know how the Treasury and CB perform their legally authorized tasks.
Resp,
Thanks Matt. For your patronizing comment. I understand that I do not know as much about these transactions as say you or Tom, but I think I understand them well enough. Personally, I think I said exactly the same thing Tom said, only I did it in one sentence. I know what a bond is and I know about assets and liabilities and balance sheets. At some point you will have to convince people with more than just sneering and condescendingly saying: Trust us we know, we can quote this textbook over here.
You guys are squarely in the 'there is nothing to see here folks' camp (from Tom: Nothing was created or destroyed. It was a simple transfer of assets). But I am looking at the forest and you guys are concentrating on describing three trees. Either it is an illusion or the fed IS wrecking its balance sheet. Either way as someone said it will destroy confidence and the house of cards will fall. I think that through these purchases the money supply (held by the banks as reserves) is being increased (dramatically and quickly) which is why I am with Schiff in thinking we will experience inflation.
Peter Schiff was correct about the housing bubble and he held strong when all the tv hosts were bringing him on their shows to laugh at him. He made them all look like morons. I can't wait to see it all again. I am prepared for it (I own gold which has netted me a nice return so far) and I am currently shorting the Canadian stock market. So there, I do have my money and my mouth in the same place.
Bob - Calling the Housing Bubble and understanding MMT are mutually exclusive. There are debt-deflationists such as Roubini that called the bubble also. He also called deflation, not hyperinflation, after the bubble.
Bob,
Sorry if i seem patronizing. I get frustrated when I see folks such as yourself who seem intelligent, just refuse to engage on this and educate themselves, and instead switch over to buying this sophomoric debt doomsday drivel. If interest rates go up it will be because the Fed wants them there, not because of what Pento says here in this video.
It cant be summend up in one sentence like you say, but it is not that hard otherwise.
Suggest you stay with it here and ask questions if you dont understand something. Tom has written the process up in his comment above about as clearly and concisely as it can be done. He has given you a free gift should you choose to accept it.
Resp,
Bob, youre smart enough to at least question your assumptions by visiting this site. Now take that extra step to acknowledge that what you think you know, may be wrong.
What Tom wrote explaining the process is one of the most succinct and accurate summaries for the process. Rather than being indignant and argumentative about your beliefs, open your mind and better educate yourself on the subject.
Bob, let me make one more stab at it. It's a long post so it will appear in segments.
Operationally, there are two types of money creation, vertical or exogenous/outside relative to the economy, and horizontal or endogenous/relative inside to the economy. Both are generally misunderstood.
Vertical money is created exogenously when through budgetary and special appropriations. Congress, with the approval of the president (unless there is a veto override) directs various agency to disburse funds. The Treasury, as the "banker" for the agencies, cuts the checks or marks up deposit accounts electronically. It needs reserves to clear these checks and account withdrawals, which it must get from its "banker," the Fed. Since the Treasury is not allowed by law to issue funds directly or run overdrafts at the Fed, it issues Treasury securities in exchange for reserves. But by law the Fed cannot "buy" Treasuries directly so its auctions them to primary dealers, who distribute them.
The funds that Treasury disburses adds to nongovernment net financial assets since there is no corresponding debt. The tsy's just shift the reserves added to the settlement system (FRS) by the disbursements to tsy's. It is a change of asset form. All the funds disbursed by government deficit spending are thus transferred at the macro level to savings in the form of tsy's. The accumulated deficits are the national (government) "debt" that equates to the nongovernment savings of net financial assets. While this is on the order of many trillions, it is dwarfed by the creation of horizontal money.
(continued below)
Horizontal money is created when commercial banks make loans. Loans creates deposits, and deposits are money that gets circulated. All deposits are offset by a corresponding loan, so net financial assets do not increase; they net to zero.
Banks create deposit by making loans against their capital. They put capital at risk. Therefore loans are made to creditworthy customers on terms that are favorable enough for the bank to undertake the risk involved.
Note that reserves are NOT involved in this process, as is ordinarily presumed. (The "money multiplier" is an in the developed world accounting phenomenon rather than an ex ante cause. It doesn't really exist). Reserves only come into the picture for settlement purposes after a loan is extended, since loans are taken to be used. If the bank does not have excess reserves, it borrows them at the going rate in the overnight market.
The Fed sets the overnight rate (FFR), and also stands ready as the lender of last resort to lend at the discount window at a penalty rate if need be. The Fed always makes sure that reserves are available to clear, reserving the right to set the rates for doing so. The issuance of tsy's drains excess reserves so that the Fed can hit its target rate, since otherwise excess reserves would send the overnight rate to zero, unless the Fed stepped in and paid a support rate greater than zero (as it does currently. but not usually).
Thus, Congress and the president determine the amount of net financial assets that will be created through a deficit or removed through a surplus and the Treasury carries this out fiscally, with the Fed involved monetarily. Banks determine the endogenous money supply through credit extension and this occurs independently of the amount of reserves since the Fed always make reserves available at the price it determines (FFR and discount rate). These rates affect spreads, which in turn affect the cost and therefore the demand for credit.
The Fed can also use QE to affect the yield curve by purchasing or selling bonds of longer maturities. This does not create new money. It just changes the ratio of reserves to interest-bearing securities, increasing reserves (liquidity) with buying, and decreasing reserves (liquidity) with selling. The Fed uses OMO to set the FFR, and QE to affect the yield curve. Both are monetary operations that affect yield rates but not the amount of nongovernment net financial assets. These monetary operations do not directly affect the horizontal money supply either, since the Fed cannot force banks to lend.
In summary, Congress and the president can affect changes in nongovernment net financial assets exogenously (vertically), using the agency of the Treasury and Fed. The Fed has control over interest rates through monetary operations, but monetary operations only affect change in the composition of assets and do not change the amount of nongovernment net financial assets. Banks control the endogenous money supply through credit extension, and they are influenced in this to some degree by the Fed's setting of rates, since rates affect spreads and thereby demand for credit. Credit money created by banks nets to zero and does not change nongovernment net financial assets.
I hope this gives a better picture of what is actually happening operationally than the conventional wisdom being bandied about it.
Oops, sorry, "in the developed world" should have been ex post accounting phenomenon.
Mike, Tom & Matt......
So where do you think the Fed will go with these rates? More down or maybe up? Why?
I tend to think with excess production capacity companies don't and won't expand; therefore, no new jobs on the way, headwinds for pay raises to those in the workforce leading to little demand and probably low rates for a long time, maybe even lower for elections?
Next, if we(U.S.)are buying fewer Chinese junk, China has less US$ to invest in US Treasuries.
Was that why China was buying so many UST before in the 1st place.....because we had such a huge trade deficit with them? If they don't buy our stuff they probably just buy bonds to offset the $$ not being put to use.
@ Brantley: So where do you think the Fed will go with these rates? More down or maybe up? Why?
Fed will keep rates low as long as there is disinflation and the threat of deflation. The domestic private sector is saving and delevering. This is a balance shhet recession, and it won't be over until balance sheets are repaired.
I tend to think with excess production capacity companies don't and won't expand; therefore, no new jobs on the way, headwinds for pay raises to those in the workforce leading to little demand and probably low rates for a long time, maybe even lower for elections?
Without increased deficits to offset lagging demand due to the public's desire to save and delver, the economy will remain weak. Real financial reform is also needed to clean out the toxic debt that this weighing down the banks.
Next, if we(U.S.)are buying fewer Chinese junk, China has less US$ to invest in US Treasuries.
Yes. China is just saving funds earned from exports to the US instead of repatriating the funds and risking rising inflation in their hot economy. The US not "borrowing" funds from China. China is saving in dollars its earnings in dollars. If it earns less dollars, it has less dollars to save.
Was that why China was buying so many UST before in the 1st place.....because we had such a huge trade deficit with them? If they don't buy our stuff they probably just buy bonds to offset the $$ not being put to use.
A current account deficit has to be offset by a capital account surplus as an accounting identity. If China wishes to export large scale to the US, then it has to be willing to fund the US capital account surplus.
BTW, according to MMT, imports are a benefit and exports a cost. We get real resources from China to use now, they get to store dollars for later use. They lose a bit through inflation/devaluation, but that is an acceptable cost of doing business to them.
we will not return to the 80's with Volcker.
the war run up and it's hyperinflation have already occurred.
we just only put off the high rates to stoke the inflation.
so now there will be a massive deflation spiral again.
the war is the "debt"
Brantley,
I think the Fed, with its dual mandate of full employment with price stabilty (although they run it as price stability with the least amount of unemployment they can get away with), cannot raise rates until unemployment starts to fall down to 7% or below.
Rates for borrowing are already pretty low (maybe mortgages could go down a little more), and for savers rates are as low as they can go. Tbonds are pretty high here but out the curve rates could go even lower if the Fed desires it and implements theu more QE.
That said, I believe there are parties in the financial sector that would like rates to increase alot. I fear that they would like to see the Fed crank policy rates back up to 20% like they did back in 1981 and then start another 25 year "loan origination fest". I hope they are not successful.
To get this policy, there would have to be some substantial price instablity exhibited that they would then try to spin politically as "inflation", 3 reasons for this off the top of my head would be an oil supply shock (new mid east WAR?) or a large increase in import prices (China floating yuan?), or perhaps a collapse in cheap imports caused by a trade war (US imposes import restrictions from China?)....stay vigilant.
Resp,
The Zombie banks who are keeping all the dough are obviously the ones sitting on the money waiting ... just waiting for the rates to skyrocket.
They would get rich with each passing day the interest rate increases.
However, Bernanke or anyone in government and hopefully normal Americans will prevent this.
The only solution would be Japan part two - where we draw this out over years
Tom, what you and others like you don't understand is that however YOU think it works, it only does, while it's ALLOWED to by your creditors.
they can pull the rug any time it suits them, and if you think China et al are going to continue funding the US so that they can continue to use those funds to militarily surround and harass them, openly provoke / intimidate them in the seas off their own doorsteps forever, then you are as visionless as those funny, funny real estate agents.
common sense in seeing the big picture is NOT mutually exclusive, its mutually INCLUSIVE.
a few have it, too many do not.
anybody who keeps answering any question directed at them with..
"well the Fed this, the Fed that, the US this, the US that.." is looking at his own feet while the 18 wheeler is barrelling down the road at him.
good luck with that.
doggings,
The Chinese latest CA surplus with the US is approx 25B/mo, that equates to 300B annual rate.
Tom Hickey here has Chinese GDP at 2T/year. So if the Chinese stopped selling us stuff for our USD, they would have an immediate collapse of 15% in annual output (GDP)...causing chaos within China, I cant see this happening with foresight...
Resp,
@Doggings:
How are the Chinese our creditors? They sell us a bunch of stuff, get dollars in exchange and hold their dollars in a savings account called a Treasury. How is that being a creditor???
Mike Norman said...
Being called on her bullshit?? Are you fucking kidding me???
Diggings, Pento says the Chinese have stopped buying Treasuries (the Doomsday scenario talked about by Schiff and others), yet concedes that rates are still low. Why? Because as he himself states, the Fed is SETTING the rates low! HE STATES THAT THE FED SETS INTEREST RATES!! He admits it and doesn't seem to even realize that he admitted it. That's how fucking stupid this guy is.
By his own logic, why in the world should we even worry about the Chinese or Japanese or anyone else not buying when the Fed is the interest rate setter??
These guys are so stupid they don't even see the ridiculousness of their own arguments. A bunch of total stooges.
you dumb MFer.
the fed set rates so low, while the economy is so bad, that all the big banks and alot of the world has purchased treasuries with terrible returns, even long term notes.
now when the fed raises rates, what are they going to do with those treasuries? you begin to see the light? they can keep those on their balance sheets but who is going to buy them? like the housing market but worse. at least the houses have some collateral value based in reality. meanwhile the purchasing power of the t-bills that supposedly back those long term notes will be severely damaged, especially if the rest of the world gives up trying to compete with a devaluing dollar. mmmm... yes... see the light
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