Food for thought here on Fed day.
With $18T of Treasuries outstanding every 25 bps increase in rates equates to a $45 billion fiscal injection.
— Michael Norman (@mikenorman) December 15, 2015With $18T of Treasuries outstanding every 25 bps increase in rates equates to a $45 billion fiscal injection.
— Michael Norman (@mikenorman) December 15, 2015
34 comments:
Its going to be less than that Mike given that only about $10T of that $18T is held by non-Govt post QE. And $4t trillion of that $10T is going to foreigners so we'll see if that impacts the exports and the trade balance. But of course its a great point that it seems like very few mainstreamers consider.
Not sure the injection achieves meaningful near term velocity domestically though.
And of the remaining $6T most of it will go to already wealthy people, corporations etc. which won't likely spend more of their "elite welfare" surplus of more yachts and mansions anyway. Well maybe some real estate in NY or Silicon Valley will get even more pricey?
The impact of such hike would be negligible IMO. And no one who is not crazy believes that the FED will do any meaningful rate hike (> 25bps). On the other side hiking rates (even more) is going to unravel (even more) the ongoing high yield bond market rattle. All that "quality" "growth" during the "recovery" ...
Those fiscal injections are paid out by the Treasury. And in order for them to make higher interest payments they have to either increase their tax revenues or sell more treasuries, which in turn drain dollars from the private sector. Changes in the level of treasury rates doesn't increase or decrease dollars, other factors being equal; it just changes the volume of inflow/ouflow, and also the way in which dollars are redistributed.
"And in order for them to make higher interest payments they have to either increase their tax revenues"
Bzzzzz. Stock/Flow mismatch error.
Tax revenues automatically increase if the state spends more. For every $100 the Treasury spends it gets about $90 in taxes and creates another $10 in additional savings - all depending upon what the gross saving rate happens to be. And it does that for any positive tax rate.
So you get an increased flow in the time period you're talking about, and the increased spending creates the tax and Treasury sales that 'pays' for it. It is that way around because government cheques don't bounce and 'intra day clearing'. Stating that it is the other way around *is wrong* - systemically, dynamically and structurally.
It would have been helpful if Mike had said 'per year' so that we know we're talking in dollars per year, rather than dollars. But I'd suggest that is inferred - particularly around here.
Dan
Selling try cds most certainly does not drain dollars any more than any other term deposit M2 drains dollar. All govt IOUs are dollars and money
@Neil Wilson: So the rate rise is net stimulative?
Wait. Don't understand. How does rate hike impact existing bondholders? If I've got a 3% bond, it's still going to pay me $30/year.
Dan Kervick,
They don't raise taxes. It's called deficit spending.
"Drain dollars." How did the dollars get there in the first place? You gotta do an add before you can do a drain.
"@Neil Wilson: So the rate rise is net stimulative?"
If it causes more spending from the government sector to the non-government sector then yes it is - subject to the propensity to consume/invest.
And it continues to be so until the borrowing/saving ratio in the private sector shifts and creates additional paradox of thrift effects to offset it.
It all sort of depends how they do it.
Saver's interest income is going to go up... this includes households, private defined benefit retirement funds, state/local govt retirement funds, all ERISA accounts, etc...
Its going to help the current situation and likely lead them to keep increasing as things improve adding fuel to the fire....
+0.25% and USD is immediately OFF....
She just said they increased ior to 0.50% and will keep rolling over all the redemptions...
Sheeh, I remember when I could get 16% on a term deposit.
Dont put it past them again Bob...
The fiscal injection is definitely a good point, but it could be a drop in the bucket compared to the tightening of the private sector money supply. Loans create deposits, afterall. And raising rates is supposed to reduce lending, at least in theory!
They don't raise taxes. It's called deficit spending.
In the US, Mike, deficit spending is accomplished by selling government debt. That drains dollars and replaces them with securities.
"Drain dollars." How did the dollars get there in the first place? You gotta do an add before you can do a drain.
In the US, virtually all additional dollars get into the system via the centralized banking system via balance sheet expansion. Treasury operation do not add dollars.
Saver's interest income is going to go up... this includes households, private defined benefit retirement funds, state/local govt retirement funds, all ERISA accounts, etc...
Higher interest payments to savers in government debt will be funded by increased debt sales to other savers in government debt.
deficit spending is accomplished by selling government debt. That drains dollars and replaces them with securities.
But then the government spends and reinjects the previously "drained" dollars.
But then the government spends and reinjects the previously "drained" dollars.
But it hasn't created more dollars. It just moved them from one part of the economy to another.
But the government has created new financial assets for the private sector that are almost as liquid as dollars: Treasury Securities.
And if the commercial banks (instead of the non bank private sector) buy said securities then new dollars (deposits) will have been created.
Dan what you are saying is true but good things still happen in the process...
Think of a residence using water... now it is late fall 55 degrees here today... so no watering the lawn, no watering the garden, no filling the swimming pool, no washing the cars...
Any water used is going back out the sewer pipe.
If you put a meter on the municipal water supply to the house and put a meter on the sewer pipe flowing out, the two would equal...
So one might say "you didnt use any water!"
BUT, clothes are being washed, bodies are being bathed and dishes/silverware are being sanitized while "no water is being used!"
Dan=
If you consider term deposits at private commercial banks as money (M2) then TSY CDs at the Fed are also money. Its not really that complicated. SO there is no such thing as TSY sales draining dollars or QE adding dollars. There's only three choices for Govt economic policy in the aggregate
Add Govt IOUs through lending and deficit spending
Remove Govt IOUs through non-Govt to Govt loan repayment and budget surpluses
Change the mix of Govt IOUs between reserves and securities (demand deposits and term deposit balances).
The accounting is beyond reproach and its just about the only thing that lets us make definitive statements on economics and monetary operations. All Govt spending everywhere and every time adds to the deposits of the non-Govt, which increases the amount of Govt IOUs there are in existence. And all Govt IOUs are money good.
A higher interest rate means dollars moving to the private sector from the public sector, but is this a fiscal injection? If both sectors are "willing spenders" then there is not a net increase. If however, the public sector increases its spending by having a higher deficit to account for the increased interest payment to the private sector, then we will have a fiscal stimulus.
Yet, one of the previous commenters is correct - if the private sector simply buys more treasuries with its $45B windfall, then we have accomplished practically nothing.
Midman-
"Yet, one of the previous commenters is correct - if the private sector simply buys more treasuries with its $45B windfall, then we have accomplished practically nothing."
This is wrong and Dan (the previous commenter) is wrong.
TSY CDs do not drain dollars.....they are dollars!!!
Say the Govt increases it spending on interest by $100B per year. Well thats $100B in additional Govt IOUs that the Non-Govt has as wealth. Well, guess what happens to their wealth if the Tsy issues $100B in new CDs and the interest income receivers put all $100B into those CDs......NOTHING!!!!
When you trade your checking account balances for term deposit balances at Chase (say you buy $100K in 12-mo CDs from Chase) you are no poorer the day after the trade than the day before. And the money supply is at the exact same level. Chase had $100K in checking account IOUs and now it has $100K in term deposit IOUs. So nothing has changed from an aggregate accounting POV.
This is no different to how TSY CDs work. If you trade $100K in checking account balances for $100K in TSY term deposit balances at the Fed, you are no richer the day after the trade then the day before. And Likewise from the Govt's POV, nothing has changed. They had $100K in outstanding Govt IOUs in checking account balacnes at the Fed, and now they have $100k in term deposit IOU balances at the Fed.
If you dont get the accounting right, you cant get the economics right.
"Higher interest payments to savers in government debt will be funded by increased debt sales to other savers in government debt."
We went thru this before the Dealers repo with the Fed to create the USD balances to purchase the Treasury securities in the Primary Market as inventory THEN the Dealers sell the securities to entities in the Secondary Market who can use the balances received from the additional Treasury spending enabled by the coordinated leading process between the CB/Dealers/Treasury who are also maintaining a policy interest rate via the rates used in the same process...
Treasuries are money with a maturity and interest income. There is a mismatch between when the security is issued and when is redeemed, creating a period during which interests are paid.
Because the debt is rolled-over and never paid, the mismatch period increases the 'injections' to the debt owners while not subtracting on aggregate through the process of leverage, and because the principal is 'eroded' by inflation. There is also the effect of arbitration, where credit is created by the private sector, at lower rates (or in current environment pretty much zero) and then 'invested' into govt securities with higher profit rates, although because these securities have their own demand curves (due to collateral requirements), it can end up being that the arbitration turns negative (with negative rates! as it's happening in the EMU).
All this is problematic if a govt tries to balance the budget or reduce debt, because the aggregate rolling over stops, the leverage is reduced, and the money has to come from private sector savings.
Right Matt-
The mechanics of the whole system is set up to facilitate Govt fiscal and monetary policy. Its like Neil says.....there is nobody with the authority to bounce a Govt check. COngress appropriates spending and taxes, and the Fed\Tsy implement those policies. The market has no power here as the Govt is 100% in control of its own IOU system. So what if Congress puts in place hoops to jump through with their decisions to not allow TSY overdrafts or direct TSY CD purchases by the Fed? None of that matters, the Fed\Tsy still have to implement Congressional law. Just because you have to launder reserves through the primary dealers doesnt change anything, Eccles said that 70 FUCKING years ago.
For the life of me, I just cant understand why people have this obsession with the differences between Govt IOU types. As if there is some magical good embedded in reserves, and some magical evil embedded in securities. I have never seen anyone explain why one type of Govt IOU is dangerous when nobody ever cares about Commercial bank CDs and depositor liabilities.
Auburn I think this system/process is harder to get a handle on than we think...
Eccles probably possessed advanced cognitive abilities for systemic understanding... to the others with less ability for abstract systemic thought, it is just words... they end up only able to repeat the words in regular patterns of speech... "printing money causes inflation..." "government has to borrow money....", etc... they cant understand it beyond the words...
They use ritualistic language to achieve their understanding not abstract systemic cognition like we do....
think "rote" vs. "creative learning"...
WE are "creative learners" and they are "rote"....
like the whole "common core" debate that you see going on in the national politics... imv the "common core" represents a change over to 'creative learning' and away from "rote" learning... many on the right dont want this...
Eccles was attacked rhetorically and accused of being a crypto-communist... Same for many 'chartalists' or functional finance guys (ie. Lerner) before MMT. All they accused of being 'socialists', 'communists' etc.
This is the kind of people we have to deal with, the managerial and capitalist class does not want a systemic understanding on this because their bottom line depends on a permanent state of despair and fear of the population (which they then come with crackpot theories to explain, like the NAIRU).
Ignacio its not that they 'dont want it' its that they cant understand it other than thru the rote/repetitive/ritualistic false language they have listened to and keep repeating among themselves...
"with a view towards the systematizing (methodeian) of the deception" Eph 4:14
To get around the false one has to be able to analyze things from the systemic pov ... they simply cannot... all they have to rely on are (false) words...
"In the US, virtually all additional dollars get into the system via the centralized banking system via balance sheet expansion. Treasury operation do not add dollars."
Yes they do. The operations add dollars *intra day*.
The private sector breathes in dollars from the intra day spending pool before it breathes them out as Treasury purchases.
Government cheques don't bounce, and you get a better price for your securities if your clients are flush with cash first.
You'll find that the intra day pool expands massively during the day, and then shrinks down towards the end of the day. It's like blowing a balloon up a lot and then not quite letting all the air out.
You can only tell it is happening by looking at the wrinkles :)
The net effect is that Treasury buys things with Treasury bonds, and Treasury bonds are just another form of cash deposit. That is what 'deficit spending' is.
There is no magic in bonds, any more than there is magic in $100 bills over $1 bills.
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