An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Friday, October 14, 2022
MAGA breakdown of inflation report
GOP playing this perfectly:
Biden's Latest Inflation Report Is The Worst Economic Data Seen In Our Lifetimes:
401k' are now 101k's:
Too much munnie printing:
Election too soon for Dems to do anythng about it....
China and India telling Putin to wind it down too…
Everybody seems to be front running a GOP landslide…
And Dems kind of have to as when GOP takes over they will as usual go fiscal conservative to thwart Dems fiscal priorities so all GOP would have to say was "inflation!"... then what will Dems be able to say?
GOP already posting up media of the Democrats own Larry Summers saying Dems not doing enough against inflation…
Episodes of Fed tightening are often brutal for the rest of the world. This one is especially ferocious. The broad dollar index is at an epic high, which means slow torture for emerging and frontier markets with $4.2 trillion of debt denominated in dollars. There is $13.4 trillion of offshore dollar debt outside US jurisdiction (BIS data) with no clear lender-of-last-resort. South Korea is already having to approach the Fed for dollar swap lines.
Borrowers are being hit by the double shock of both the higher dollar and surging dollar loan-rates. Some of this debt must be rolled over on the three-month lending markets, with a rising risk premium for good measure.
Not only is the Fed rushing through jumbo rises of 75 points each meeting, it is also draining global dollar liquidity with $95bn a month of quantitative tightening (QT). It has never done the two together before. And it does not understand how QE/QT actually works, as admitted cheerfully by one Ben Bernanke, Nobel Prize laureate as of yesterday.
Its model deems QT to be little more than background noise. The San Francisco Fed says $2.5 trillion of balance sheet reduction equals a rate rise of just 50 points. Bond traders think the authors must be living on another planet.
Monetarists have been warning for months that the Fed model misunderstands the potency of QT. They have been screaming from the rooftops that key measures of the money supply are collapsing on both sides of the Atlantic. They fear that the world will careen into a horrible slump unless the central banks ease off soon.
As I recall from the last time something like this happened, if the Fed doesn't supply those dollars, it means the people who need dollars start selling US bonds and the Fed has to respond in any event.
(A-L)/A = 0.07 to 0.08 just maintain the ratio within those limits it’s 8 grade algebra.,, they are too dumb..,
That won't help. Assets are risk-weighted. In 2008, they got the weighting wrong. Two banks with the same equity ratio can be completely different in terms of risk.
To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.
But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.
If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.
But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.
In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?
Canada is the world's role model for banking. This from Mark Carney when he was governor of the Bank of Canada:
In 2008, major banks in the United States, the United Kingdom, Germany, France, Ireland, Switzerland, the Netherlands and Belgium either failed or were rescued by the state. Gallingly, on the eve of their collapse, every bank boasted of capital levels well in excess of the standards of the time.
How was this possible? In some cases, “off-balance-sheet” exposures proved to be very much the responsibility of the banks when push came to shove. In others, balance sheets were stuffed with supposedly risk-free structured products that turned out to be lethally toxic. In the end, the old risk-based capital standards were both too weak and too porous. This proved fatal when banks’ loss absorbency was called upon.
Belt and suspenders
The belt and suspenders approach of the capital and leverage ratios establishes two tests for the maximum amount of assets that financial institutions may hold relative to equity. An issue is which of these should bind first. If the leverage ratio does, banks will load up on riskier assets and push assets off their balance sheets in ways that satisfy accountants but not, ultimately, creditors. That is why a complex risk-weighted test is also necessary, and should be calibrated to bind before the leverage ratio in normal circumstances.
“ That won't help. Assets are risk-weighted. In 2008, they got the weighting wrong.”
No that’s not what happened… the only risk is the risk that the Fed will regulate the system into violation of their own regulations… like they are doing now.,,
The Fed added like 1.2T of reserves to bank’s assets in September 2008 and banks didn’t have the regulatory assets to support that and the credit providing function had to cease..,
It’s (A-L)/A so if you add reserves the numerator doesn’t change (deposit liabilities increase $4$ with reserve assets) but the denominator increases… if they add too many reserves it puts the system into violation…,
I suspect Dems might pivot back to “transitory” if they get wiped out…
ReplyDeleteGive Summers the heave ho…
Biden also lame duck facing continuous onslaught of criminal evidence and accusations…
China and India telling Putin to wind it down too…
ReplyDeleteEverybody seems to be front running a GOP landslide…
And Dems kind of have to as when GOP takes over they will as usual go fiscal conservative to thwart Dems fiscal priorities so all GOP would have to say was "inflation!"... then what will Dems be able to say?
GOP already posting up media of the Democrats own Larry Summers saying Dems not doing enough against inflation…
The consensus for interest rates seems to be higher and for longer. Ambrose Evans-Pritchard argues against that. A few selected quotes:
ReplyDeleteRejoice: we may be very close to Fed capitulation
Episodes of Fed tightening are often brutal for the rest of the world. This one is especially ferocious. The broad dollar index is at an epic high, which means slow torture for emerging and frontier markets with $4.2 trillion of debt denominated in dollars. There is $13.4 trillion of offshore dollar debt outside US jurisdiction (BIS data) with no clear lender-of-last-resort. South Korea is already having to approach the Fed for dollar swap lines.
Borrowers are being hit by the double shock of both the higher dollar and surging dollar loan-rates. Some of this debt must be rolled over on the three-month lending markets, with a rising risk premium for good measure.
Not only is the Fed rushing through jumbo rises of 75 points each meeting, it is also draining global dollar liquidity with $95bn a month of quantitative tightening (QT). It has never done the two together before. And it does not understand how QE/QT actually works, as admitted cheerfully by one Ben Bernanke, Nobel Prize laureate as of yesterday.
Its model deems QT to be little more than background noise. The San Francisco Fed says $2.5 trillion of balance sheet reduction equals a rate rise of just 50 points. Bond traders think the authors must be living on another planet.
Monetarists have been warning for months that the Fed model misunderstands the potency of QT. They have been screaming from the rooftops that key measures of the money supply are collapsing on both sides of the Atlantic. They fear that the world will careen into a horrible slump unless the central banks ease off soon.
[off topic]
ReplyDeleteThe Daily Star has a live feed of Liz Truss and a lettuce.
Will Liz Truss still be Prime Minister within the 10 day shelf-life of a lettuce?
LIVE: Can Liz Truss outlast a lettuce?
#LizVsLettuce
There was a mention of dollar swap lines with South Korea in the quotes above. This article just showed up. Time to brush up on how swap lines work.
ReplyDeleteCue Dollar Squeeze Panic: Fed Sends A Record $6.3 Billion To Switzerland Via Swap Line
As I recall from the last time something like this happened, if the Fed doesn't supply those dollars, it means the people who need dollars start selling US bonds and the Fed has to respond in any event.
They’re doing the samevth7ng they did in 2008 only in 2008 they mooned the denominator and now they are crushing the numerator…
ReplyDelete(A-L)/A = 0.07 to 0.08 just maintain the ratio within those limits it’s 8 grade algebra.,, they are too dumb..,
(A-L)/A = 0.07 to 0.08 just maintain the ratio within those limits it’s 8 grade algebra.,, they are too dumb..,
ReplyDeleteThat won't help. Assets are risk-weighted. In 2008, they got the weighting wrong. Two banks with the same equity ratio can be completely different in terms of risk.
David X. Li's Gaussian copula function...
Recipe for Disaster: The Formula That Killed Wall Street
To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.
But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.
If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.
But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.
In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?
re: belt and suspenders
ReplyDeleteCanada is the world's role model for banking. This from Mark Carney when he was governor of the Bank of Canada:
In 2008, major banks in the United States, the United Kingdom, Germany, France, Ireland, Switzerland, the Netherlands and Belgium either failed or were rescued by the state. Gallingly, on the eve of their collapse, every bank boasted of capital levels well in excess of the standards of the time.
How was this possible? In some cases, “off-balance-sheet” exposures proved to be very much the responsibility of the banks when push came to shove. In others, balance sheets were stuffed with supposedly risk-free structured products that turned out to be lethally toxic. In the end, the old risk-based capital standards were both too weak and too porous. This proved fatal when banks’ loss absorbency was called upon.
Belt and suspenders
The belt and suspenders approach of the capital and leverage ratios establishes two tests for the maximum amount of assets that financial institutions may hold relative to equity. An issue is which of these should bind first. If the leverage ratio does, banks will load up on riskier assets and push assets off their balance sheets in ways that satisfy accountants but not, ultimately, creditors. That is why a complex risk-weighted test is also necessary, and should be calibrated to bind before the leverage ratio in normal circumstances.
source: Some Current Issues in Financial Reform
The risk-weighted test should bind first...
“ That won't help. Assets are risk-weighted. In 2008, they got the weighting wrong.”
ReplyDeleteNo that’s not what happened… the only risk is the risk that the Fed will regulate the system into violation of their own regulations… like they are doing now.,,
The Fed added like 1.2T of reserves to bank’s assets in September 2008 and banks didn’t have the regulatory assets to support that and the credit providing function had to cease..,
It’s (A-L)/A so if you add reserves the numerator doesn’t change (deposit liabilities increase $4$ with reserve assets) but the denominator increases… if they add too many reserves it puts the system into violation…,
They did the same thing in March 2020…. stocks and bonds crashed..
ReplyDeleteWhy did they create the RRP account now? Jerking off?
ReplyDelete