Last month, I was in Brussels for a client event. Instead of the usual keynote address, I did a fireside chat with one of their senior market analysts. He put seven questions to me and then moderated an extended Q&A with the audience. It was a lot of fun.
Unfortunately, because it was a private event, there’s no recording for me to share with you. But I thought the questions—and my responses—might be of interest. To avoid writing one really long post, I’ve decided to divide it into a seven-part series.
I’ll answer the first question today, but here’s a preview of what’s to come.…
The Lens
Should Congress Shrink the Deficit to Fight Inflation?Stephanie Kelton | Professor of Public Policy and Economics at Stony Brook University, formerly Democrats' chief economist on the staff of the U.S. Senate Budget Committee, and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders
Also
The 4th Annual MMT Conference
https://stephaniekelton.substack.com/p/should-congress-shrink-the-deficit
Bravo!
The event is entirely virtual this year. It’s also free and open to the public.
The 4th Annual MMT Conference
There was no deficit for the two months December and January…
ReplyDeleteI'd like to see correlation graphs produced that show stocks rise when there is a deficit and stocks fall when there is a surplus.
ReplyDeleteI actually Believe they don't exist in the real world.
Way too much importance being put on the deficit lately in my opinion. Means absolutely nothing when talked about in isolation.
Clinton budgets surpluses
https://www.factcheck.org/2008/02/the-budget-and-deficit-under-clinton/
What are we talking about here 1997- 2002 ?
Let's say we are talking about a 5 year period between 1997- 2002 ?
5 years is a long time. Clinton actually started to slash the deficit in 1994. It was pure deficit reduction for a 10 year period.
What did the stock market do between 1997 - 2002?
It went up from 7100 to 8397
If you had shorted the market just based on the budget surpluses alone the market has never been below 7100 ever since.
You would have been tapped out a long time ago.
Never started to go down until Sept 2001. For 4 years it kept going up as Clinton ran his surpluses.
When the government runs surpluses for 5 years. How do you measure bank lending so that you are confident enough to say it is okay. Bank lending is carrying the load ?
Can't imagine it being easy?
And figure out how the trade balance is moving things and private sector debt.
ReplyDeleteAt what point do you say okay bank lending is carrying the load as the government runs surpluses, but private sector debt is too much now ?
Impossible in my opinion.
People are looking at the housing market now and can't figure it out.
ReplyDeleteThe portion of disposable income relative to house prices is higher than the housing bubble.
https://mobile.twitter.com/cullenroche/status/1517353562820399104?cxt=HHwWgMCq6dXB3I4qAAAA
Way too much importance being put on the deficit by everyone at the moment ?
ReplyDeleteYes/ No ?
Worthless info in isolation ?
Yes/ No?
For me if the swimming pool gets drained by surpluses
ReplyDeleteA model needs to be created that shows how bank lending fills it back up.
At what point that becomes very dangerous.
As the Clinton surpluses showed playing the market during that period would have given me a stroke. I would be sitting outside train stations selling homeless magazines.
Derek they weren’t doing QE during the 90s… so bank credit could increase properly commensurate with the increase in fiscal flows for the Y2K upgrades…
ReplyDeleteI think right now fiscal is running at about 600B per month… bank credit is up a bit but probably not as much as would be ideal for a 600b leading flow…
ReplyDeleteSo part of the current inventory shortages is probably a lack of access to credit.., other part ofc is real shutdowns due to CCP virus…
Credit shortage due to a collapse in bank HQLA values to 2 year lows from the rate increases and monetarist Fed policy rhetoric…
We really need some QT at this point to take some pressure off bank leverage levels… then credit can adjust up to more appropriate for 600b/mo fiscal flow…
What you looking at as appropriate for 600b ?
ReplyDeleteHow do you work it out Matt ?
What figure gives you the confidence to say yup that's looking good now.
When it comes to households government surpluses force households to borrow as their savings diminish and larger budget deficits are supposed to reduce household bank lending as they use their savings instead.
It must be very difficult to model what is going on overall ?
I'd love you to do it Matt and asked you before.
You must be able to by now graph/ create pictures of your thought process. To show the correlations between how You think it through and the results it produces ?
Get your thought process put down on paper and graph it. Show how it all collerates. Similar to what Balan does ?
Plus it is easier to learn in picture form. Well for me anyway.
ReplyDeleteNeil used to produce a 5 sector sectoral balances graph.
ReplyDeleteThat divided households and businesses.
Just by looking at that it gave you a much better idea what was happening but always a quarter behind what was happening.
Rather than just looking at the deficit ?
You can no longer see the graphs
http://web.archive.org/web/20171025093442/http://www.3spoken.co.uk/2016/01/uk-sectoral-balances-q3-2015.html
But the 5 sector sectoral balances graph could give you into like this..
" five sector chart shows the household/corporate distinction much more clearly. The household sector is now into its third year of borrowing more than it is saving in aggregate, and the level of borrowing from other sectors continues to increase.
The household sector is now 28% of the overall 'deficit' from the deficit sectors. The pattern continues as the corporate sector prefers to hoard rather than invest and the government tries to push debt onto the backs of the household sector. "
Rather than just the size of the budget deficit.
“ Plus it is easier to learn in picture form. Well for me anyway.”
ReplyDeleteYes technical trained people use diagrams… not dialogues..
Thing is Derek the actual policy makers keep making numerous changes and sometimes adjustments to their operations so I don’t think it would be a very beneficial use of time to develop some type of static model of what is happening… beyond some sort of top level understanding…
e.g. I don’t think you can day trade this information…
Look at upcoming QT effect on Depository system asset levels, you might say “well depository assets are going to reduce by 65b in June” but then Treasury policy could adjust TGA down from 865 to 800 during the same time and it would offset… and there would be no effect…
You would have to have advance information of what the policy makers are going to do which is impossible…
I think QT is going to help the current situation but it is going to take some time and you’re going to have to see it’s effect in the H.4.1 list of factors… this week it’s at 3.3T non risk reserve assets at the Depositories so you’re going to have to see that 3.3T start to reduce towards 3.0 then hopefully below…
And even then what is Fed going to do with the risk free rate at the same time? If Fed increases the risk free too much at same time it’s going to continue to reduce NPV of depository system HQLA and best we will have to hope for is a neutral effect..,
You’d have to be a mind reader of the policy makers to be able to front run it.,,
Now sometimes they do make forward looking statements but then they don’t always do what they previously said … we’ve seen that often…
Bottom line is we have Art Degree morons trying to run it and to try to scientifically model that is probably a waste of time.,,
Would just be better to get qualified and competent people to run it..,
Would be better for everybody…
Probably why those who do try and front run it and using a hundred and one different types of seasonal liquidity models concentrate on the futures markets.
ReplyDeleteHedge and over hedge and it works like a constantly moving spread in both directions. On a very short term basis rather than the big macro outlook.
I don't trade the financial markets but like to learn new stuff and new understanding. Only vice I have left. But for me the deficit on its own is a wash. Even though the 5 sector sectoral balances graph gave you so much more information albeit with a quarterly lag. It was still just aggregates and needed to dig deeper to find out what was going on.
I'd love to see how Minsky made his money in the markets even after all these years you can't find anything on what he did.
Not to trade like him, but it would be interesting. I'm happy with my little niche that turns over a little bit every year. Way less stressful.
“ Only vice I have left.”
ReplyDeleteDon’t be too hard on yourself … I think it’s probably a noble pursuit but fyi not even Jesus Christ could figure out these Art Degree morons…
“Why are you dialoging scant of faith?” Mat 16:8
He didn’t (couldn’t?) understand these gutter level lower than whale shit disgraced human morons either..
So the bar is pretty high…
That guy born from a virgin in a stable apparently.
ReplyDeleteAslan had them figured out too
. "I shall be telling you all the time … But I will not tell you how long or short the way will be; only that it lies across a river. But do not fear that, for I am the great Bridge Builder."
The voyage of the Dawn Treader 19:52
Bible, lion witch and the wardrobe, financial markets.
All man made all based on fiction.
That guy born from a virgin in a stable apparently.
ReplyDeleteThe mock is strong in this one.