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(Global Geopolitics)   BRICS nations get a little itchy-biatchy over US money printing, decide to mitigate the impact of a stronger U.S. Dollar   (glblgeopolitics.wordpress.com) divider line 25
    More: Interesting, BRIC, note, BRICS nations, capital controls, U.S. Federal Reserve, Xi Jinping, global economy, financial markets  
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1382 clicks; posted to Business » on 25 Jun 2013 at 8:37 AM (1 year ago)   |  Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



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2013-06-25 08:46:04 AM
Hmm. Mitigate a stronger US dollar? This would be the first time in history that something was made more valuable by creating 85 billion more of them per month.
 
2013-06-25 08:56:59 AM
The official gave no details about any concrete action that could be taken

In the absence of specific details, this sounds like idle posturing...
 
2013-06-25 09:12:57 AM

wadek5: Hmm. Mitigate a stronger US dollar? This would be the first time in history that something was made more valuable by creating 85 billion more of them per month.


If you read the TFA, they're concerned about the dollar strengthening because of the potential tapering of that $85b per month (and other QE). To the extent the fed stops or slows down printing, absent a corresponding reduction in the deficit or mortgage origination, treasuries and mortgage backed securities are going to get funding from somewhere, including but not lImited to outside the us.
 
2013-06-25 09:32:01 AM

Monty845: The official gave no details about any concrete action that could be taken

In the absence of specific details, this sounds like idle posturing...


Exactly.
 
2013-06-25 09:33:35 AM

Speaker2Animals: Monty845: The official gave no details about any concrete action that could be taken

In the absence of specific details, this sounds like idle posturing...

Exactly.


The best kind of posturing.
 
2013-06-25 09:41:15 AM

Monty845: The official gave no details about any concrete action that could be taken

In the absence of specific details, this sounds like idle posturing...


meh, this guy's blog is all posturing, no detail, no substance... I think I'm just gonna stop giving the clickthroughs, hopefully then he'll stop paying fark and fark will stop greenlighting crappy wastes of time with interesting headlines.
 
2013-06-25 09:46:39 AM
QE is not printing money.

People should stop getting their economics information from the Pauls.
 
2013-06-25 10:02:36 AM

Ricardo Klement: QE is not printing money.

People should stop getting their economics information from the Pauls.


What is it then when the fed buys mortgages and treasuries each month? It isnt literally printing cash, but it is crediting the reserve accounts of banks for the securities they sold to the fed. The $85b per month or whatever it is is being conjured out of thin air. If a bank or other counterparty wanted cash, it could convert it's reserve account balance into literal cash.
 
2013-06-25 11:39:16 AM

Debeo Summa Credo: Ricardo Klement: QE is not printing money.

People should stop getting their economics information from the Pauls.

What is it then when the fed buys mortgages and treasuries each month? It isnt literally printing cash, but it is crediting the reserve accounts of banks for the securities they sold to the fed. The $85b per month or whatever it is is being conjured out of thin air. If a bank or other counterparty wanted cash, it could convert it's reserve account balance into literal cash.


This isn't printing money because the short-term interest rates are basically zero, money and short-term bonds are the same thing. Exchanging money for short-term debt has no effect, and giving banks more money is exactly the same as giving them short-term debt.

That's not to say that QE is harmless. Long-term debt has its uses, especially putting off inflation. So buying it back means that you undo that putting-off of inflation. But it is still not the same as CREATING the inflation in the first place. It already exists, we just sold it to the future.
 
2013-06-25 12:15:07 PM

Ricardo Klement: Debeo Summa Credo: Ricardo Klement: QE is not printing money.

People should stop getting their economics information from the Pauls.

What is it then when the fed buys mortgages and treasuries each month? It isnt literally printing cash, but it is crediting the reserve accounts of banks for the securities they sold to the fed. The $85b per month or whatever it is is being conjured out of thin air. If a bank or other counterparty wanted cash, it could convert it's reserve account balance into literal cash.

This isn't printing money because the short-term interest rates are basically zero, money and short-term bonds are the same thing. Exchanging money for short-term debt has no effect, and giving banks more money is exactly the same as giving them short-term debt.

That's not to say that QE is harmless. Long-term debt has its uses, especially putting off inflation. So buying it back means that you undo that putting-off of inflation. But it is still not the same as CREATING the inflation in the first place. It already exists, we just sold it to the future.


Huh? I don't understand. When the fed buys treasuries, which it is doing to a significant extent, it is trading newly created cash, more or less, for govt debt. The govt uses the cash to fund food stamps or aircraft carriers or whatever. So all the money used to buy those food stamps and aircraft carriers was just conjured from nothing, increasing the money supply, essentially printing money.

The fact the treasuries the fed has purchased will eventually mature has no bearing on the fact that they printed money to buy them now. If the govt does eventually pay off the notes, without just refinancing them
with the fed (ie the fed shrinks it's balance sheet) then the fed will be reducing the money supply. But while it continues to expand its balance sheet it is in fact "printing money".

I'm no paullist and I understand why they've needed to take the steps they have, but I think the phrase "printing money" is accurate and appropriate.
 
2013-06-25 12:52:54 PM

Debeo Summa Credo: Ricardo Klement: Debeo Summa Credo: Ricardo Klement: QE is not printing money.

People should stop getting their economics information from the Pauls.

What is it then when the fed buys mortgages and treasuries each month? It isnt literally printing cash, but it is crediting the reserve accounts of banks for the securities they sold to the fed. The $85b per month or whatever it is is being conjured out of thin air. If a bank or other counterparty wanted cash, it could convert it's reserve account balance into literal cash.

This isn't printing money because the short-term interest rates are basically zero, money and short-term bonds are the same thing. Exchanging money for short-term debt has no effect, and giving banks more money is exactly the same as giving them short-term debt.

That's not to say that QE is harmless. Long-term debt has its uses, especially putting off inflation. So buying it back means that you undo that putting-off of inflation. But it is still not the same as CREATING the inflation in the first place. It already exists, we just sold it to the future.

Huh? I don't understand. When the fed buys treasuries, which it is doing to a significant extent, it is trading newly created cash, more or less, for govt debt. The govt uses the cash to fund food stamps or aircraft carriers or whatever. So all the money used to buy those food stamps and aircraft carriers was just conjured from nothing, increasing the money supply, essentially printing money.

The fact the treasuries the fed has purchased will eventually mature has no bearing on the fact that they printed money to buy them now. If the govt does eventually pay off the notes, without just refinancing them
with the fed (ie the fed shrinks it's balance sheet) then the fed will be reducing the money supply. But while it continues to expand its balance sheet it is in fact "printing money".

I'm no paullist and I understand why they've needed to take the steps they have, but I think the phr ...


But it's not issuing anything without taking something IN.  Because it is taking its bonds back, it's doing an even trade and not printing money at all.  It doesn't expand its balance sheet at all, because for every dollar it hands the bank, the bank hands back a dollar of debt.  You're just changing the notation on the red-side of the ledger from "bond" to "cash" - the red side doesn't change value, so no money is created (or destroyed).
 
2013-06-25 01:32:41 PM
us.i1.yimg.com
Curse you, BRICS!
 
2013-06-25 01:56:03 PM

Debeo Summa Credo: Ricardo Klement: Debeo Summa Credo: Ricardo Klement: QE is not printing money.

People should stop getting their economics information from the Pauls.

What is it then when the fed buys mortgages and treasuries each month? It isnt literally printing cash, but it is crediting the reserve accounts of banks for the securities they sold to the fed. The $85b per month or whatever it is is being conjured out of thin air. If a bank or other counterparty wanted cash, it could convert it's reserve account balance into literal cash.

This isn't printing money because the short-term interest rates are basically zero, money and short-term bonds are the same thing. Exchanging money for short-term debt has no effect, and giving banks more money is exactly the same as giving them short-term debt.

That's not to say that QE is harmless. Long-term debt has its uses, especially putting off inflation. So buying it back means that you undo that putting-off of inflation. But it is still not the same as CREATING the inflation in the first place. It already exists, we just sold it to the future.

Huh? I don't understand. When the fed buys treasuries, which it is doing to a significant extent, it is trading newly created cash, more or less, for govt debt. The govt uses the cash to fund food stamps or aircraft carriers or whatever. So all the money used to buy those food stamps and aircraft carriers was just conjured from nothing, increasing the money supply, essentially printing money.

The fact the treasuries the fed has purchased will eventually mature has no bearing on the fact that they printed money to buy them now. If the govt does eventually pay off the notes, without just refinancing them
with the fed (ie the fed shrinks it's balance sheet) then the fed will be reducing the money supply. But while it continues to expand its balance sheet it is in fact "printing money".

I'm no paullist and I understand why they've needed to take the steps they have, but I think the phrase "printing ...


The US budget operates independently of treasury sales.  Though the debt limit sets a maximum to the amount of treasuries which can be sold, the spending is authorized regardless of whether those treasuries actually sell or not.  As such, the Fed purchases of treasuries do not inject money into economic circulation, they only serve to restrain interest rates.
 
2013-06-25 01:58:58 PM

Debeo Summa Credo: wadek5: Hmm. Mitigate a stronger US dollar? This would be the first time in history that something was made more valuable by creating 85 billion more of them per month.

If you read the TFA, they're concerned about the dollar strengthening because of the potential tapering of that $85b per month (and other QE). To the extent the fed stops or slows down printing, absent a corresponding reduction in the deficit or mortgage origination, treasuries and mortgage backed securities are going to get funding from somewhere, including but not lImited to outside the us.


Basically, subby can't read.  Or rather, he meant to say "over US printing less money", which would tend to strengthen the dollar.
 
2013-06-25 02:25:53 PM

Stile4aly: Debeo Summa Credo: Ricardo Klement: Debeo Summa Credo: Ricardo Klement: QE is not printing money.

People should stop getting their economics information from the Pauls.

What is it then when the fed buys mortgages and treasuries each month? It isnt literally printing cash, but it is crediting the reserve accounts of banks for the securities they sold to the fed. The $85b per month or whatever it is is being conjured out of thin air. If a bank or other counterparty wanted cash, it could convert it's reserve account balance into literal cash.

This isn't printing money because the short-term interest rates are basically zero, money and short-term bonds are the same thing. Exchanging money for short-term debt has no effect, and giving banks more money is exactly the same as giving them short-term debt.

That's not to say that QE is harmless. Long-term debt has its uses, especially putting off inflation. So buying it back means that you undo that putting-off of inflation. But it is still not the same as CREATING the inflation in the first place. It already exists, we just sold it to the future.

Huh? I don't understand. When the fed buys treasuries, which it is doing to a significant extent, it is trading newly created cash, more or less, for govt debt. The govt uses the cash to fund food stamps or aircraft carriers or whatever. So all the money used to buy those food stamps and aircraft carriers was just conjured from nothing, increasing the money supply, essentially printing money.

The fact the treasuries the fed has purchased will eventually mature has no bearing on the fact that they printed money to buy them now. If the govt does eventually pay off the notes, without just refinancing them
with the fed (ie the fed shrinks it's balance sheet) then the fed will be reducing the money supply. But while it continues to expand its balance sheet it is in fact "printing money".

I'm no paullist and I understand why they've needed to take the steps they have, but I think the phrase "printing ...

The US budget operates independently of treasury sales.  Though the debt limit sets a maximum to the amount of treasuries which can be sold, the spending is authorized regardless of whether those treasuries actually sell or not.  As such, the Fed purchases of treasuries do not inject money into economic circulation, they only serve to restrain interest rates.


Assume the treasury has to issue $60b per month to fund the deficit.

If all $60b of that comes from investors, there is no money created. Every dollar that went to buy treasuries already existed and was held by investors prior to buying treasuries.

If the fed is buying $40b of those treasuries (these numbers are realistic in today's environment), only $20b comes from outside. The other $40b was created by the fed to buy treasuries. The fed basically says to the treasury: here's $40b of crisp new dillar bills to buy stuff with, pay us back later. Yes, interest rates are affected by this, because the newly created dollar bills are a supply of capital that drives down equilibrium interest rates. But new money is created. If and when the fed shrinks it's balance sheet, money supply is reduced.
 
2013-06-25 02:36:50 PM

Debeo Summa Credo: Assume the treasury has to issue $60b per month to fund the deficit.

If all $60b of that comes from investors, there is no money created. Every dollar that went to buy treasuries already existed and was held by investors prior to buying treasuries.

If the fed is buying $40b of those treasuries (these numbers are realistic in today's environment), only $20b comes from outside. The other $40b was created by the fed to buy treasuries. The fed basically says to the treasury: here's $40b of crisp new dillar bills to buy stuff with, pay us back later. Yes, interest rates are affected by this, because the newly created dollar bills are a supply of capital that drives down equilibrium interest rates. But new money is created. If and when the fed shrinks it's balance sheet, money supply is reduced.


But there's no difference between having a bond that says $1 on it than having a piece of cotton paper that says $1 on it.  Not while interest rates are effectively 0.  Trading one for the other isn't creating anything, just changing the name.  In both cases, there's $1 in your hands, and $1 in that of the feds.  You can trade those two all year long, and both sides will still only have one thing with $1 on it.  Nothing is made.  No money is printed.
 
2013-06-25 03:50:00 PM

Ricardo Klement: Debeo Summa Credo: Assume the treasury has to issue $60b per month to fund the deficit.

If all $60b of that comes from investors, there is no money created. Every dollar that went to buy treasuries already existed and was held by investors prior to buying treasuries.

If the fed is buying $40b of those treasuries (these numbers are realistic in today's environment), only $20b comes from outside. The other $40b was created by the fed to buy treasuries. The fed basically says to the treasury: here's $40b of crisp new dillar bills to buy stuff with, pay us back later. Yes, interest rates are affected by this, because the newly created dollar bills are a supply of capital that drives down equilibrium interest rates. But new money is created. If and when the fed shrinks it's balance sheet, money supply is reduced.

But there's no difference between having a bond that says $1 on it than having a piece of cotton paper that says $1 on it.  Not while interest rates are effectively 0.  Trading one for the other isn't creating anything, just changing the name.  In both cases, there's $1 in your hands, and $1 in that of the feds.  You can trade those two all year long, and both sides will still only have one thing with $1 on it.  Nothing is made.  No money is printed.


Think of a world where there's exactly $100 in currency outstanding.

The govt decides to fund a deficit financed stimulus program. They borrow another $20 to fund this stimulus spending.

Rather than go to market to finance the deficit, which would require investors to pull $20 from elsewhere to buy the govt debt, the govt goes to the central bank to finance the deficit.

The central bank prints $20 and gives it to the govt, and the govt gives the central bank an IOU for $20. The govt spends this $20, which when added to the original $100 in outstanding currency (which was untouched), results in a new total currency supply of $120.

At some point, at least in theory, the treasury will redeem the IOU by giving the central bank $20 back, which the central bank will take out of circulation, reducing the money supply to the original $100.

But until that point, the process of the central bank buying treasury securities is effectively no different than if the govt said "fark it, we're cutting out the
middle man, going full Zimbabwe and just printing the $20 ourselves.
 
2013-06-25 04:36:07 PM

Debeo Summa Credo: Think of a world where there's exactly $100 in currency outstanding.

The govt decides to fund a deficit financed stimulus program. They borrow another $20 to fund this stimulus spending.

Rather than go to market to finance the deficit, which would require investors to pull $20 from elsewhere to buy the govt debt, the govt goes to the central bank to finance the deficit.

The central bank prints $20 and gives it to the govt, and the govt gives the central bank an IOU for $20. The govt spends this $20, which when added to the original $100 in outstanding currency (which was untouched), results in a new total currency supply of $120.

At some point, at least in theory, the treasury will redeem the IOU by giving the central bank $20 back, which the central bank will take out of circulation, reducing the money supply to the original $100.

But until that point, the process of the central bank buying treasury securities is effectively no different than if the govt said "fark it, we're cutting out the
middle man, going full Zimbabwe and just printing the $20 ourselves.


Don't confuse government spending with QE.  QE is not spending.
 
2013-06-25 04:38:43 PM
Here you go: John Cochrane is an economist with CATO.org.  If you're not familiar, that's a libertarian think-tank.

Here's his take on QE.
 
2013-06-25 05:03:51 PM

Ricardo Klement: Debeo Summa Credo: Think of a world where there's exactly $100 in currency outstanding.

The govt decides to fund a deficit financed stimulus program. They borrow another $20 to fund this stimulus spending.

Rather than go to market to finance the deficit, which would require investors to pull $20 from elsewhere to buy the govt debt, the govt goes to the central bank to finance the deficit.

The central bank prints $20 and gives it to the govt, and the govt gives the central bank an IOU for $20. The govt spends this $20, which when added to the original $100 in outstanding currency (which was untouched), results in a new total currency supply of $120.

At some point, at least in theory, the treasury will redeem the IOU by giving the central bank $20 back, which the central bank will take out of circulation, reducing the money supply to the original $100.

But until that point, the process of the central bank buying treasury securities is effectively no different than if the govt said "fark it, we're cutting out the
middle man, going full Zimbabwe and just printing the $20 ourselves.

Don't confuse government spending with QE.  QE is not spending.


QE is buying assets in the marketplace with cash.   The asset is removed from the marketplace and cash is injected into the economy.  Forget about government spending.  Think about Fed purchases of mortgages, which is again about 40 or 50 billion a month.  Banks lend money to homeowners, who buy housing stock, creating demand for all the things related to housing.  Now the banks have mortgages, which they sell to Fannie or Freddie, which package them into bonds that sell them to investors, including the Fed.

So lets follow the cash here -

lenders loan cash to borrowers, borrowers spend cash in housing market (let's call this 'the economy').  borrowers cash position is back to where it was at the beginning.
banks sell mortgages to GSEs.  Now the banks' cash position is back to where it was at the beginning
GSEs package mortgage debt and sell to Fed.  Now the GSEs' cash position is back to where it was at the beginning.

So the borrowers, lenders, and GSE's cash positions are all flat.  But the economy has had cash injected into it in the process.  How did that happen?  Well, it came from the Fed.  The Fed "printed" cash which they used to facilitate their purchase of GSE mortgage bonds.
 
2013-06-25 05:15:45 PM

Ricardo Klement: Here you go: John Cochrane is an economist with CATO.org.  If you're not familiar, that's a libertarian think-tank.

Here's his take on QE.


Thanks for the link.  Very interesting and he has some interesting stuff on his blog as well.

His point is that the fed is injecting cash into the economy, but its coming right back out again by banks increasing their excess reserves at the Fed.    That would be correct if banks reserve balances are increasing at the same rate as the feds holdings of treasuries and mortgage securities, and that the QE was the cause of such correlation.  I can't find a link that compares the two, however suggesting that banks were offsetting fed purchases by increasing excess reserves would mean that fed policy was useless in improving liquidity.

This guy is a professor of economics at the U of Chicago business school, so he's likely smarter than me.  But is he smarter than Bernanke and the other regional fed presidents who have been approving QE thinking it would help the economy?
 
2013-06-25 06:05:23 PM

Debeo Summa Credo: Ricardo Klement: Here you go: John Cochrane is an economist with CATO.org.  If you're not familiar, that's a libertarian think-tank.

Here's his take on QE.

Thanks for the link.  Very interesting and he has some interesting stuff on his blog as well.

His point is that the fed is injecting cash into the economy, but its coming right back out again by banks increasing their excess reserves at the Fed.    That would be correct if banks reserve balances are increasing at the same rate as the feds holdings of treasuries and mortgage securities, and that the QE was the cause of such correlation.  I can't find a link that compares the two, however suggesting that banks were offsetting fed purchases by increasing excess reserves would mean that fed policy was useless in improving liquidity.

This guy is a professor of economics at the U of Chicago business school, so he's likely smarter than me.  But is he smarter than Bernanke and the other regional fed presidents who have been approving QE thinking it would help the economy?


FWIW, Cochrane isn't just a UofC professor - he's considered legendary over there.  So is he smarter than Bernanke?  Tough to say.  At that point, their brains are so galactic in capabilities it becomes difficult to compare.

But I'll note that Bernanke isn't going the Keynesian route of creating a lot of inflation to help unemployment, either, so Ben is not exactly reckless.
 
2013-06-25 06:14:02 PM

Ricardo Klement: Debeo Summa Credo: Ricardo Klement: Here you go: John Cochrane is an economist with CATO.org.  If you're not familiar, that's a libertarian think-tank.

Here's his take on QE.

Thanks for the link.  Very interesting and he has some interesting stuff on his blog as well.

His point is that the fed is injecting cash into the economy, but its coming right back out again by banks increasing their excess reserves at the Fed.    That would be correct if banks reserve balances are increasing at the same rate as the feds holdings of treasuries and mortgage securities, and that the QE was the cause of such correlation.  I can't find a link that compares the two, however suggesting that banks were offsetting fed purchases by increasing excess reserves would mean that fed policy was useless in improving liquidity.

This guy is a professor of economics at the U of Chicago business school, so he's likely smarter than me.  But is he smarter than Bernanke and the other regional fed presidents who have been approving QE thinking it would help the economy?

FWIW, Cochrane isn't just a UofC professor - he's considered legendary over there.  So is he smarter than Bernanke?  Tough to say.  At that point, their brains are so galactic in capabilities it becomes difficult to compare.

But I'll note that Bernanke isn't going the Keynesian route of creating a lot of inflation to help unemployment, either, so Ben is not exactly reckless.


My question is the relationship between QE and the increase in excess bank reserves. If there is a direct causal relationship, then QE is just pushing on a string. Any additional liquidity injected by the fed is extracted immediately by banks increasing reserves.

If they are not related, and the money creation of QE just happens to be offset by money supply reduction due to bank reserve growth, absent QE we'd be seeing liquidity constraints and likely deflation, and if banks start lending we could be subject to significant inflation unless the fed brakes quickly.

Anyway, the guy has some very interesting things on his blog. I'm actually smarter for having been involved in a fark thread. Thanks again.
 
2013-06-25 06:58:27 PM

Debeo Summa Credo: My question is the relationship between QE and the increase in excess bank reserves. If there is a direct causal relationship, then QE is just pushing on a string. Any additional liquidity injected by the fed is extracted immediately by banks increasing reserves.

If they are not related, and the money creation of QE just happens to be offset by money supply reduction due to bank reserve growth, absent QE we'd be seeing liquidity constraints and likely deflation, and if banks start lending we could be subject to significant inflation unless the fed brakes quickly.

Anyway, the guy has some very interesting things on his blog. I'm actually smarter for having been involved in a fark thread. Thanks again.


No problem.  I find these exchanges interesting and educational as well.
 
2013-06-25 08:47:35 PM

wadek5: Hmm. Mitigate a stronger US dollar? This would be the first time in history that something was made more valuable by creating 85 billion more of them per month.


The US dollar has risen 19% against the Australian dollar so far this year.
 
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