no you did not, but you stated yesterday evening all the reason why "it is ridiculous to have a real cash rate of around -2%." Your points are solids and I just think the fed could raise even if i believe it missed the point a long time ago and may go in reverse early next year .
Note I have never expected you or anyone else to have a crystal ball into the future or give advices
Anyway i shut up and will just keep reading this thread passively
... can someone explain to me the difference between QE and Federal deficit spending unbacked by fresh Treasury issuance? No? Didn't think so. Their impact on the monetary base is identical!
In one case the spending attached to the monetary expansion is dictated by the private markets. In the other, it is by the government. Further, in the US, when QE took place, the additional money supply mostly sat on the Fed balance sheet as excess reserves. Monetary velocity of zero. The private market chose not to spend the cash. So we were left with the portfolio effects channel....high prices of liquid assets trying to stimulate real activity.
Nowadays, the big idea of the second is that the CBs looking to ease further might do so via direct asset purchases. That is, buying the underlying assets like factories and buildings... Pretty far-fetched in my view. But these are pretty far-fetched times.
It is now being explicitly discussed by Fed members as opposed to hints or statements of what must eventually happen.
Financial markets thrive on guesswork, partly because they constantly need to create 'events' to trade on.
But there should be no wild guesswork with regard to the Fed's expected policy changes. Any good Fed-watcher knows that a quick look at Fed's money market operations and at systematic balance sheet actions will show the kind of policy move being prepared.
...
There is nothing that I can see to suggest that the Fed is poised for an interest rate increase. In fact, there is evidence that a mild contraction of monetary creation earlier this year was reversed in June. Since then, the monetary base (the liability side of the Fed's balance sheet) has been expanding. Between the end of June and the middle of October, the Fed's monetary base increased by 3.5 percent.
Clearly, that is not a sign that the Fed is ready to initiate what is widely known as an interest rate normalization process, or, put more simply, the departure from the current 0-0.25 percent interest rate target. This key policy rate is systematically kept around the middle of that range.
Dr. Michael Ivanovitch is an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia Business School.
Sometimes there is a benefit in watching someone speak. After yellen testified the markets priced in about 20% more chance of a rate hike. Interestingly, Yellen said nothing not already said previously in printed form. When I saw her speak I immediately doubled my exposure on a EUR/USD short. It was the way in which she said it, the words she chose, and the order of those words.
The rate set by the Fed is a function of the size of the monetary base relative to GDP. It is not a matter of jawboning.
Here's someone smarter than me saying it
http://www.cnbc.com/2015/10/25/fed-...balance-sheet-show-no-plan-for-rate-hike.html
This chart courtesy of John Hussman:
http://www.hussmanfunds.com/wmc/wmc130304.htm
View attachment 64987
he Fed will raise rates and then, well after that, figure out what it wants to do with the money base. At present, it does not intend to shrink the balance sheet beyond interest payments for several years.
It is important to realize that the Fed only directly controls one out of many different interest rates. The Fed has direct leverage over what is known as the Federal Funds rate. The Fed Funds interest rate is directly linked to the amount of monetary reserves in the banking system. To increase the Fed Funds rate, the Fed will drain reserves from the banking system by selling some of its inventory of government debt to banks. To decrease the Fed Funds rate, the Fed will increase banking system reserves by purchasing some of the government debt present in the banks asset portfolio. By changing the Fed Funds rate we assume that all other financial interest rates change by a similar magnitude and in the same direction.
...
In a nutshell, this is how Fed policy works. The Fed is always monitoring the economy for undesirable future changes. When the policy committee of the Fed, known as the Federal Open Market Committee (FOMC) decides that thinks look rough, they will initiate or continue either an expansionary or restrictive monetary policy. With the new policy, the New York branch of the Fed rapidly begins a net purchase or sale of government debt in exchange with various banks in order to change the level of banking reserves and the Fed Funds rate. Almost immediately, financial markets adjust other interest rates based on Fed policy.
At present, it does not intend to shrink the balance sheet beyond interest payments for several years.
I will need that explained to me like I'm a 5 year old please.
To me this is the most important point. In such an event, an "increase in reserves held at the Fed" (read expansion in the volume of and dilution of base money) is not so much "unspent" private sector money but actually the nasty hangover of already spent Government sector consumption. Such an action undertaken by the CB of most countries, I think we can all agree, would have an immensely inflationary impact on the local currency unit.
* So at least from the interpretation above - feel free to point out where I'm going wrong - how is QE viewed? Well, the Bernanke Fed was swapping debt for base money.
Imagine that next, the Fed comes along and buys all of those problem bonds off the banks and pays with an expansion in the volume of the monetary base. The banks no longer have bad assets on the books, and their books are not exposed to currency inflation risk from such an action (in fact they have an advantage over most other economic actors by being the first to loan that newly printed base money). The real value of the loan to the factory owner is significantly reduced and therefore much easier to repay. Nor does the Fed need to take a factory or building onto its balance sheetThe only people who get screwed in this situation are those who have chosen to defer their consumption by holding USD denominated credit money.
That's hyperinflation. Everyone's happy (except for those saving in the local currency unit). Does it make sense that the US will (has already begun) happily throw the "USD as global reference point" and the USD savers under the bus in the race to meet a giant wall of credit deflation? I personally think so.
http://www.colorado.edu/economics/courses/econ2020/section11/section11.html
The claim is not that "the Fed can't hike because the balance sheet is big". Nor is the relationship shown by Hussman akin to the Taylor Rule, the latter being a prescription for the way things should be, while the former is merely a record of the way things have played out in reality. But as you can see from the above, it is "like they teach in school"
The claim here is rather that, given the observed relationship and understanding that the mechanism of transmission between policy and the desired FFR is via changes in the volume of the monetary base (via net exchanges of Government Treasury debt) as a ratio of GDP, speculation about the path of future rates can be inferred by forecasts of monetary base volume and GDP.
Given that nominal GDP has been consistently below Fed forecasts, and the monetary base has continued to grow we can see why the FOMC has consistently remained steady despite all the talk about (and subsequently crushed trades betting on) hiking rates.
Those forecasting rate normalisation are implicitly giving a pretty strong forecast of GDP growth or commensurately strong forecast of monetary base reduction.
Love it.
This obsession with the volume of money is rather dated and are remnants of the pre-Volcker era monetary policy. For any given level of money supply, there are a wide range of potential levels of output. Creation of credit occurs within the limits of prudential standards and is affected by the prevailing level of interest rates as determined by the various relevant authorities which leaves a rather large amount of money supply as an endogenous issue. Sure, you can helicopter drop cash and create inflation with immediate expenditure, or you can increase the balance sheet sizes and watch them sit idle as a lowflation environment remains in place. Money volume increment via official channels by itself does not drive economic activity. The money multiplier is more an outcome, rather than a strong, direct, economic driver. Fed officials are also not paid by the word spoken.
This is the full data set for US Money Supply to GDP.
View attachment 51740
When demand is outstripping supply, monetary policy works like pulling on a string. When supply outstrips demand it flips to be like pushing on a string.
Last time the demand/supply balance flipped in 1929 it took up to and including WW2 before the excess supply was absorbed and the liquidity had to be drained.
Money supply is a symptom not a cause of imbalances in the global economy – and that imbalance is too much supply which is directed at consumer bases without the demographics or productivity to afford it.
Currency is just a small part of the money supply.
Currency is a liability for the Fed. If they purchase 'already existing debts' then they add to liquidity by enlarging their balance sheet but not to the money supply. If they add 'new' assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply. If they printed currency (debt for them) but did not enlarge the balance sheet by recording it as a debt and the corresponding asset owed to it by whoever the money was given too (ie the government) then you would have true inflationary currency printing.
A lot of what people call running the printing press is not even adding to the money supply it is just providing liquidity (and transferring default risk to the public) The remainder of the feds "printing” is nothing more then equivalent to money creation in the private sector and it is not keeping up with private deleveraging.
The reality is almost diametrically opposed to the “printing press” myth. It was the run up to the GFC when people should have been talking about the printing press -when it was getting a real work out by the private sector and sovereigns with trades surpluses and pegged currencies.
The liquidity will only become a problem if an appetite for private borrowings returns and it is not efficiently drained at that time, until then it simply exists as excess reserves.
Thought for the moment: When people talk about the option value of cash, how are you supposed to figure out what that value is? This type of assessment is needed so you can determine whether it is better just to invest in something else that you think might make you money.
Trigger for thought: Recent El Erian article in FT.
Except that's not what they have been doing.
....which would all be fine if it were actually true. Except it really doesn't work at the magnitude implied.
Clearly, that is not a sign that the Fed is ready to initiate what is widely known as an interest rate normalization process, or, put more simply, the departure from the current 0-0.25 percent interest rate target. This key policy rate is systematically kept around the middle of that range.
More recently, since GFC, the money base expanded hugely. It wasn't to push the Fed rate towards zero. It was to push the longer end of the curve down and lubricate the credit mechanism. The Fed could have held the Effective Rate at close to zero without needing to expand the balance sheet to this degree. Instead, it chose to also reduce the rate at the end of the curve.
This money volume debate has been going on for some time. A couple of my previous posts - which is still how I see it.
This is the full data set for US Money Supply to GDP.
The monetary base should not be confused with the money supply which consists of the total currency circulating in the public plus the non-bank deposits with commercial banks.
Currency is just a small part of the money supply.
Currency is a liability for the Fed.
THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.
If they add 'new' assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply.
1. That section was supposed to be a hypothetical demonstration of political expediency. But I do find it strange to claim they haven't been doing this when the Fed bought literally half of all gross MBS issuance in 2014...
2. It is true. Again find it a bit strange to hear a claim like this after having it explained by a former Fed economist.
3. When you say it doesn't work at the magnitude implied, I'll point out that there is no implication that there is a one-to-one relationship between the FFR and monetary base. Only that the monetary base is directly linked as the transmission mechanism to the FFR. The relationship as shown in the scatterplot is monetary base as a ratio of GDP. Consider as an example the case of a strongly growing GDP, the ratio of MB to GDP would be naturally falling (i.e. implied raising of rate) and so the Fed must increase the monetary base by a little (commensurate amount) just to stay steady.
4. But regardless, just to demonstrate the point (since the rather clear scatterplot does not seem to be sufficient).
View attachment 64999
I guess you must consider the trends and timing of peaks and troughs here to be mere coincidence?
Yes.
1 March 2015
Quick Take-outs:
+ Downgrade based on lower than forecast Assisted Repro cycles (ARS). Has every reason to rebound to historical norms unless infertile women have stopped wanting babies and/or men have stopped wanting to try put babies in them. I have no evidence of either.
10 March 2015
ART is cyclical. It is a 'luxury', unlike pharma or getting so sick you end up in hospital. They are price sensitive and appear impacted by macro conditions. For DCF, some allowance for this is probably sensible.
25 Nov 2015
Adding to the list of curious stats.... I understand that IVF treatment cycles are picking up. Now that's a sign of confidence in the economy more broadly than just the rarified air of ill-gotten gains.
18 Feb 2015
Wife: "yeah, but it can go down as well".
Today: Yeah baby
That's what they say when couples successfully conceive with MVF.
It feels like a no brainer with the industry data at hand... I traded some VRT on the back of the news as well and worked a treat - even though VRT didn't nearly get enough cheering on its own AGM.
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