tag:blogger.com,1999:blog-2499715909956774229.post4291963309055099436..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: More Thoughts on Bernanke's SpeechStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger18125tag:blogger.com,1999:blog-2499715909956774229.post-39429228709489689992014-10-17T01:32:34.115-07:002014-10-17T01:32:34.115-07:00I enjoyed reading your articles. This is truly a g...I enjoyed reading your articles. This is truly a great read for me.I have bookmarked it and I am looking forward to reading new articles.<br />To get new information visit here <br /><a href="http://hfcahobart.com.au/" rel="nofollow">home loans hobart</a><br /><a href="http://hfcahobart.com.au/" rel="nofollow">loans hobart</a><br />Anonymoushttps://www.blogger.com/profile/00892423934226303686noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40714830796243836362010-08-31T11:47:27.352-07:002010-08-31T11:47:27.352-07:00I find it more useful to stick to the quantities o...I find it more useful to stick to the quantities on the Fed's balance sheet, i.e. outside money - currency and reserves. Under current circumstances I can think of of reserves as essentially T-bills. What makes the reserves different from T-bills is that they can be converted at will into currency by the banks holding the reserves. Now, think of the price level as being determined by the quantity of currency in circulation and the demand for it. What will come into play is alternative media of exchange (transactions accounts at banks) and the willingness of banks to hold reserves. There's nothing special about the stuff we normally include in M1 or M2. All intermediation matters, not just what the banks are doing - it's only a matter of degree (maybe Tobin said something like this). If I think about things that way, I can convince myself that if some MBS run off, under current circumstances, it will work like the process I described here.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1905565111618248532010-08-30T21:00:38.705-07:002010-08-30T21:00:38.705-07:00Sorry, I've been atypically brief here, for no...Sorry, I've been atypically brief here, for no reason at all, really.<br /><br />My original comment was:<br /><br />"MBS prepayments destroy broad money as well as bank reserves. That's deflationary in terms of the broad money effect."<br /><br />MBS prepayments into Fed held MBS result in debits to both M1 and bank reserves - they "destroy" both forms of money in the process of reducing outstanding MBS balances.<br /><br />The Fed's balance sheet expansion to date has created both incremental M1 and bank reserves. (They haven't been buying MBS directly from bank portfolios.)<br /><br />I don't particularly care about the bank reserve effect - that's just a byproduct of the main action in my view. As far as M1/M2 is concerned, the effect was to mitigate a slowdown/contraction in money stock growth that would have been much worse without the intervention. I'm not a fan of monetarism at all, but the M data would have been quite alarming without the effect of Fed balance sheet intervention.JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26008791979473165682010-08-30T14:19:01.963-07:002010-08-30T14:19:01.963-07:00"2nd derivatives and counterfactuals. It was ..."2nd derivatives and counterfactuals. It was dis-deflationary in the broad money effect." <br /><br />You'll need to expand on that. Do you mean we had a huge increase in the demand for base money?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11800919007377571812010-08-30T06:40:55.544-07:002010-08-30T06:40:55.544-07:00Of course, in my comment I meant to say
"Pr...Of course, in my comment I meant to say <br /><br />"Profit-seeking financial intermediaries will go relatively longer the long end and relatively shorter the short end, causing longer-maturity bond prices to rise, i.e., yields to decline."Jordanhttps://www.blogger.com/profile/14105013641621616215noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85202063145067672042010-08-30T05:27:47.794-07:002010-08-30T05:27:47.794-07:00Also, I noted only the broad money effect - not ne...Also, I noted only the broad money effect - not necessarily the effect of broad money on CPI inflation.JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-46917747197826629362010-08-30T05:25:11.035-07:002010-08-30T05:25:11.035-07:00"So you must think that the huge expansion in..."So you must think that the huge expansion in base money we have had should have been inflationary. Why wasn't it?"<br /><br />2nd derivatives and counterfactuals.<br /><br />It was dis-deflationary in the broad money effect.JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58770403371148801702010-08-29T21:05:08.212-07:002010-08-29T21:05:08.212-07:00"If the Fed can change market asset prices by..."If the Fed can change market asset prices by issuing short maturity liabilities and buying long maturity assets, it must be that the Fed has some cost advantage over the private sector in this type of intermediation. Outside of the circumstances of the financial crisis, what would that advantage be?"<br /><br />I think that one of the key observations here is that financial intermediaries that engage in maturity transformation are risk averse. As a result, shocks to demand/supply for specific maturities are not completely transmitted across the term structure.<br /><br />As an example (one that is out of the paper I linked to a previous comment), imagine that the Fed lowers short rates through a typical open market operation. Profit-seeking financial intermediaries will go relatively longer the long end and relatively shorter the short end, causing longer-maturity bond prices to decline, i.e., yields to rise. But intermediaries do not engage in this trade to the extent that the initial shock to the short rate is absorbed across all maturities, because this carry trade is risky. By engaging in the carry trade they are exposing themselves to the risk of interest rate increase. <br /><br />The more risk averse are financial intermediaries, the less responsive the long end will be to the decrease in the short rate. During times of high risk aversion, it follows, direct intervention by Central Banks into markets for longer term bonds might be more effective policy to influence bond yields.<br /><br />I agree however, that if financial intermediaries are risk neutral, than the Fed has no "advantage" and won't be able to accomplish much by long-term Treasury purchases.Jordanhttps://www.blogger.com/profile/14105013641621616215noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32819311785653898202010-08-29T21:02:44.250-07:002010-08-29T21:02:44.250-07:00This comment has been removed by the author.Jordanhttps://www.blogger.com/profile/14105013641621616215noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-90193269163382340942010-08-29T07:23:42.324-07:002010-08-29T07:23:42.324-07:00"What has changed is that Fannie expands its ..."What has changed is that Fannie expands its balance sheet while the commercial banking system shrinks its balance sheet."<br /><br />But some private sector entity has to hold the Fannie Mae debt. That could be a commercial bank or some other private entity - doesn't really matter much.<br /><br />"MBS prepayments destroy broad money as well as bank reserves. That's deflationary in terms of the broad money effect."<br /><br />So you must think that the huge expansion in base money we have had should have been inflationary. Why wasn't it?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89531946154244522702010-08-29T06:23:27.167-07:002010-08-29T06:23:27.167-07:00"What has changed?"
What has changed is..."What has changed?"<br /><br />What has changed is that Fannie expands its balance sheet while the commercial banking system shrinks its balance sheet. MBS prepayments destroy broad money as well as bank reserves. That's deflationary in terms of the broad money effect.<br /><br />In addition, Fannie either absorbs the interest rate risk associated with the MBS or transmits it to its liability holders. Either way, what's changed is that the private sector must absorb the interest rate risk instead of the Fed. That's deflationary for the private sector.JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44849092738763005282010-08-28T17:20:53.722-07:002010-08-28T17:20:53.722-07:00Anon:
If Europe recovers faster & stronger, t...Anon:<br /><br />If Europe recovers faster & stronger, that'd be good for net exports. A bit of dollar depreciation now would be good news. I'd think German corporate debt or equities might start looking better than Bunds, but whatever. "Substantial" switch? Dunno, but this scenario doesn't sound to me like a sudden attack of the bond vigilantes. <br /><br />Ditto re the euro becoming the new reserve currency. Sure, that's possible, but it ain't gonna happen overnight. I don't think you need to break out the life vest yet.<br /><br />PSpsummershttps://www.blogger.com/profile/16146930482281058979noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-26197918231815509542010-08-28T15:42:26.150-07:002010-08-28T15:42:26.150-07:00Stephen and psummers: In my view, the US can handl...Stephen and psummers: In my view, the US can handle a lot of debt, especially if it's mainly domestically owned and long maturity. But, the more the US deviates from this (conservative) scenario, the higher the likelihood of either default light (paying, say 80 cents on the $ or extending maturity) or default. <br /><br />Also, the fact that the $ is THE trading/reserve currency of the world, makes it much easier for the US to take on new debt without forcing the $ to zero. <br /><br />What if Europe recovers much faster and stronger than the US? Would foreign buyers of US debt substantially reduce their demand and prefer, say, German Bunds instead? Could the euro become the new trading/reserve currency? If yes, prepare the "life boats" here in the US.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59549923077525510712010-08-28T15:29:48.995-07:002010-08-28T15:29:48.995-07:00I wish I could remember where I read this, but the...I wish I could remember where I read this, but there's a quote out there somewhere that says "in international finance, the role of Argentina is usually played by Argentina."<br /><br />Another data point: CDS spreads on US 10-yr treasurys (5yr CDS) went up 4bps in the last month, currently 39 bps. The Austerian Republic of Germany is at 35.psummershttps://www.blogger.com/profile/16146930482281058979noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88735808285051968552010-08-28T15:03:51.001-07:002010-08-28T15:03:51.001-07:00Not that I think that anything is imminent, but my...Not that I think that anything is imminent, but my Argentinian colleagues assure me that when a loss of confidence happens, it doesn't give you much warning.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44389578692876634852010-08-28T14:25:23.192-07:002010-08-28T14:25:23.192-07:00Steve: sure, this is a 'potential' problem...Steve: sure, this is a 'potential' problem for the US. I'm pretty sure even Krugman's said that. So far though, there's zero evidence that I can see for a quick loss of confidence. On the contrary, I had a quick look through a few recent 10-yr Treasury auctions -- they were over-bid by a factor of 3. <br /><br />Anon: I'm curious why 'especially China & Japan' might be problematic. They've shown a remarkable appetite for our debt (yeah, things can change quickly, yadda yadda). Anyway, the latest TIC data shows overall net purchases from Japan & "other Asia" declining. In fact I read the other day (WSJ maybe? can't remember) that overall foreign demand has fallen & been offset by higher domestic demand. <br /><br />Again, not much evidence that things that might happen show any signs of being imminent.<br /><br />PSpsummershttps://www.blogger.com/profile/16146930482281058979noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-15675557348065682822010-08-28T13:12:53.310-07:002010-08-28T13:12:53.310-07:00Yes, exactly. If the debtholders lose confidence q...Yes, exactly. If the debtholders lose confidence quickly, you can't roll it over, or can do so only with a very large premium. Some people think that this is not a potential problem for the United States. What do you think?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65181891875762178852010-08-28T12:37:33.282-07:002010-08-28T12:37:33.282-07:00Having to constantly roll debt AND often selling a...Having to constantly roll debt AND often selling a lot of it to foreign countries, especially China and Japan, exposes the US to a lot of risks.Anonymousnoreply@blogger.com