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re: Discussion of Fed Liquidity’s Impact on Equity Markets
Posted on 10/22/20 at 3:29 pm to CorkRockingham
Posted on 10/22/20 at 3:29 pm to CorkRockingham
I’d be curious to get WTF’s thoughts as well, but as far as who does the money printing, that’s the Treasury.
Considering all of this in a vacuum:
The Treasury prints each year, which amount is directed to them by the Fed.
The amount the Fed directs them to print is based on how much currency the Fed’s member banks need.
The amount of currency the Fed’s member banks need depends on what the demand for dollars is. That demand is higher when commercial banks are generating loan growth.
Thus, when reserves from the Fed are used as collateral by commercial banks to lend against, that eventually results in new dollars being printed.
But when excess reserves just sit on the balance sheets of commercial banks, the Treasury doesn’t have to print any additional money.
So the Fed is a step or two removed from making actual dollars, just as apple seeds are a step or two removed from actual apples. The seeds (reserve credits) could become apples (dollars), but only if you plant those seeds to produce apple trees (loans).
Considering all of this in a vacuum:
The Treasury prints each year, which amount is directed to them by the Fed.
The amount the Fed directs them to print is based on how much currency the Fed’s member banks need.
The amount of currency the Fed’s member banks need depends on what the demand for dollars is. That demand is higher when commercial banks are generating loan growth.
Thus, when reserves from the Fed are used as collateral by commercial banks to lend against, that eventually results in new dollars being printed.
But when excess reserves just sit on the balance sheets of commercial banks, the Treasury doesn’t have to print any additional money.
So the Fed is a step or two removed from making actual dollars, just as apple seeds are a step or two removed from actual apples. The seeds (reserve credits) could become apples (dollars), but only if you plant those seeds to produce apple trees (loans).
1
Posted on 10/22/20 at 3:54 pm to RedStickBR
Yes but according to what your saying those apples are already in circulation. Like if you lend against the apple seeds and there are no new apples your lending against current money in circulation whether it be physical digital.
That doesn’t make sense because then the only way for money creation would be when the treasury uses money in fiscal policy which actually gets out into the open market.
I really want to nail this down I feel like this a crucial point. I’m thinking about calling the closest federal reserve bank lol.
That doesn’t make sense because then the only way for money creation would be when the treasury uses money in fiscal policy which actually gets out into the open market.
I really want to nail this down I feel like this a crucial point. I’m thinking about calling the closest federal reserve bank lol.
Posted on 10/23/20 at 9:05 am to CorkRockingham
quote:
If the banks were not able to access (physically) touch and lend the money in their federal reserve accounts then there would be no new creation of money.
They don't have access to it because it's not actually cash. It's a number in an account that never leaves the bank's balance sheet. That's why M2 is not a relevant number anymore. The only way new money gets issued is through the Treasury or commercial lending against reserves (which isn't happening), if there is other ways I'm unaware. I believe the difference is base money vs. broad money. This is probably where somebody like Russian could help since he worked in that world. I have limited knowledge.
quote:
That doesn’t make sense because then the only way for money creation would be when the treasury uses money in fiscal policy which actually gets out into the open market.
/\ lot's of people believe this is happening here. Banks aren't making new loans resorting to government spending.
I think what you're getting caught up in is that there isn't enough physical cash to go around, which is true. That is the nature of a fractional reserve banking system. Jay Powell is begging Congress for stimulus I believe because of this as well. There simply is way too little physical money to service way too much debt. Unless I'm misunderstanding what you're asking.
Yo, RSBR - Stephanie Kelton is on Macrovoices
This post was edited on 10/23/20 at 9:17 am
Posted on 10/23/20 at 9:21 am to wutangfinancial
No that’s what I’m after really.
If the commercial banks can just lend against the reserve credits then they have to find the cash they have on hand to do so. So they aren’t creating money. They also could just give someone digital money because most likely who ever is the end receiver of that money will make it digital money and not keep it in cash.
Only through fiscal policy is how I’m seeing physical money supply increasing.
This make it seem to me that in the event of a downturn or where people want cash, that the debt of cash owed to people versus actual cash is just growing.
That’s kind of alarming if I’m understanding it correctly.
If the commercial banks can just lend against the reserve credits then they have to find the cash they have on hand to do so. So they aren’t creating money. They also could just give someone digital money because most likely who ever is the end receiver of that money will make it digital money and not keep it in cash.
Only through fiscal policy is how I’m seeing physical money supply increasing.
This make it seem to me that in the event of a downturn or where people want cash, that the debt of cash owed to people versus actual cash is just growing.
That’s kind of alarming if I’m understanding it correctly.
Posted on 10/23/20 at 9:30 am to wutangfinancial
quote:
Yo, RSBR - Stephanie Kelton is on Macrovoices
Thanks for the heads up. I'll check it out. I mentioned to you I was going to read her book in the interest of remaining well-rounded, but then I read this book review and decided it may be a complete waste of time on account of the fact that even she doesn't know what she really believes:
LINK
Posted on 10/23/20 at 9:40 am to CorkRockingham
quote:
If the commercial banks can just lend against the reserve credits then they have to find the cash they have on hand to do so. So they aren’t creating money. They also could just give someone digital money because most likely who ever is the end receiver of that money will make it digital money and not keep it in cash.
I admittedly don't understand all the moving parts here, but I think you're overthinking this a bit. Here's how I'd think about it:
1. Commercial bank has a reserve requirement, which is comprised of actual cash and reserve credits in its name at the Fed
2. Bank can lend against this reserve requirement, so long as its reserve requirement doesn't fall below the specified level.
3. In normal course, the money supply is constantly changing on account of normal bank business, short-term Fed actions (repos, reverse repos, etc.), repatriation of U.S. dollars held abroad, etc.
4. But if you get into a situation like QE where reserves are expanding not just by a normal amount but by an extraordinary amount, the Fed likely has no choice but to direct the Treasury to print money if in fact the banks put those reserves to work in the form of loans.
5. If banks don't lend against all these QE-created reserves, then there's no need for the printing because the reserves are more or less idle.
quote:
Only through fiscal policy is how I’m seeing physical money supply increasing.
No, the physical money supply can increase on account of the above, too, but only if loan demand warrants it. This would tend to result in a more permanent increase in the money supply, whereas fiscal action tends to be more transitory:
1. Treasury sells bonds to banks; banks pay for bonds with cash (cash leaves economy)
2. Treasury gives out stimulus payments or PPP funds (cash comes back into economy)
The net result here is basically no change in currency outstanding. The bigger changes to currency outstanding comes from the fractional reserve lending discussed above.
Posted on 10/23/20 at 9:46 am to RedStickBR
Let me explain the interview:
1) She thinks economists just make stuff up about inflation and they don't really know
2) She then starts making stuff up about government debt and inflation that have never been true throughout history
She's a central planner through and through. Essentially she thinks that since were doing it now and it hasn't blown up (it has but government stepped in) we should do more of it and use it to fix inequality.
Doesn't her theory get blown up when the demand for dollars evaporate?
Edit: I forgot to also mention that she says the deficit spending has limits when the economy becomes less productive. Which is exactly what increasing the degree of the deficit spending has done and will continue to do to our economy.
1) She thinks economists just make stuff up about inflation and they don't really know
2) She then starts making stuff up about government debt and inflation that have never been true throughout history
She's a central planner through and through. Essentially she thinks that since were doing it now and it hasn't blown up (it has but government stepped in) we should do more of it and use it to fix inequality.
Doesn't her theory get blown up when the demand for dollars evaporate?
Edit: I forgot to also mention that she says the deficit spending has limits when the economy becomes less productive. Which is exactly what increasing the degree of the deficit spending has done and will continue to do to our economy.
This post was edited on 10/23/20 at 9:57 am
Posted on 10/23/20 at 9:50 am to RedStickBR
Well so what Steven in that podcast was saying is a bit inaccurate. This is what threw me through a loop when he said QE decreases liquidity. That’s where my brain exploded.
If the banks do lend the money out then actual cash will be printed by the treasury and it will flow into the economy.
I guess what he’s trying to say is that you could redeem those bonds on hand for actual cash but now the banks have to create new loans to create actual cash.
Also when you said “cash leaves the economy” when banks buy bonds from the treasury that doesn’t make sense. That money would then flow out into the economy from government spending unless I’m missing something.
If the banks do lend the money out then actual cash will be printed by the treasury and it will flow into the economy.
I guess what he’s trying to say is that you could redeem those bonds on hand for actual cash but now the banks have to create new loans to create actual cash.
Also when you said “cash leaves the economy” when banks buy bonds from the treasury that doesn’t make sense. That money would then flow out into the economy from government spending unless I’m missing something.
Posted on 10/23/20 at 10:08 am to CorkRockingham
quote:
Also when you said “cash leaves the economy” when banks buy bonds from the treasury that doesn’t make sense. That money would then flow out into the economy from government spending unless I’m missing something.
You’re exactly right. My point was that it only temporarily leaves the economy for an amount of time equal to the difference between when the Treasuries are sold and when FedGov spends that money back into the economy.
quote:
Well so what Steven in that podcast was saying is a bit inaccurate. This is what threw me through a loop when he said QE decreases liquidity. That’s where my brain exploded.
If the banks do lend the money out then actual cash will be printed by the treasury and it will flow into the economy.
His point is that QE doesn’t directly increase liquidity. It only indirectly does so if the banks turn around and lend against the newly created excess reserves. And if they don’t do that, liquidity actually decreases, as a highly marketable Treasury security is much more liquid than a reserve credit that they can’t directly convert to dollars. If the banks sold the Treasuries to, say, investors instead of the Fed, it would be a wash. But by selling them to the Fed, they are effectively removing those Treasuries from the market similar to when a company does a share buyback.
His overarching thesis is that the economy will continue to suck, that this is due to the coronavirus yes but also due to excessive government debt and artificially low interest rates, and that all of this will lead to deflation, which he sees as bullish for the USD and for bonds.
So, he is presupposing that the reserves won’t be lent against, but there’s data showing that assumption is correct.
quote:
I guess what he’s trying to say is that you could redeem those bonds on hand for actual cash but now the banks have to create new loans to create actual cash.
The banks could sell the bonds to market participants instead of the Fed, but that would amount to a net wash in terms of new money creation. Basically, there’s two legs to the transaction: the Treasury leg and the Fed leg. It’s only the Fed leg that has the potential to cause lasting increases in the supply of currency. The other transactions, such as when FedGov initially sells the Treasuries to banks or when banks resell said Treasuries on the secondary market, result in no change to the supply of currency (assuming both parties to the transaction are U.S.-based).
Posted on 10/23/20 at 5:19 pm to RedStickBR
Very weird macro stuff going on. Long bonds getting crushed at the same time as DXY, gold and oil.
Posted on 10/24/20 at 12:43 pm to wutangfinancial
Just listened to Kelton on MV. No sense in any kid going into Econ for their college major because, according to her, it’s all BS. Quantity Theory of Money and the Equation of Exchange are essentially antique farm equipment. Taxes, debt, and interest rates are all of secondary importance - printing money reigns supreme. Supply and Demand are distractions.
Posted on 10/24/20 at 1:52 pm to wutangfinancial
I’m not seeing this. Could you elaborate on what you are seeing?
Posted on 10/24/20 at 4:27 pm to CorkRockingham
Posted on 10/25/20 at 2:09 pm to CorkRockingham
Here you go, Cork. Kiril Sokoloff and Lacy Hunt. Listen to the whole thing, but especially the discussion beginning around the 14 minute mark. Dr. Hunt explains why QE is not money printing or even digital money printing. It’s mere reserve creation.
LINK
Summary:
LINK
Summary:
quote:
Kiril Sokoloff interviews Dr. Lacy Hunt of Hoisington Investment Management, the world’s greatest monetary economist and expert on bonds, on the most important issues of the day. Dr. Hunt explains in very lucid language why many of today’s beliefs about the global economy are incorrect: The Fed is not printing money now. QE1, QE2 and QE3 were also not printing money. The current massive U.S. fiscal programs will not stimulate the economy, only accelerate its long-term downward-growth trajectory. The productivity of debt has fallen sharply, and with it, the velocity of money. The best that can be expected from global growth post-COVID is 1% in real per-capita terms. Having reached the zero bound, current monetary policy may be counterproductive. The U.S. has no net national savings and is dissaving for the first time since the 1930s. This means there will not be capital to invest. Based on an examination of 24 over-indebted economies between 1900 and 2008, the over-indebtedness was solved through austerity. The Fed has the power to lend. It does not have the power to spend. However, if the Federal Reserve Act is changed to give the Fed the power to spend, it would result in hyperinflation. The early warning signs are there. The Bank of England may have crossed the Rubicon by giving £500 billion to the UK government to pay its bills. Filmed May 18, 2020.
This post was edited on 11/1/20 at 11:34 pm
Posted on 10/28/20 at 10:39 am to RedStickBR
S&P 500 Buybacks Decline 55.4% in Q22020
quote:
Q2 2020 share repurchases were $88.7 billion – the lowest since March 2012 and a 55.4% decline from Q1 2020 and 46.4% decline from Q2 2019.
quote:
252 issues reported little or no buybacks for the quarter, compared to 105 in Q1 2020 and 133 in Q2 2019.
quote:
The issues which did do buybacks dominated the expenditures, as the top 20 issues accounted for 87.2% of the Q2 2020 buybacks, up from 46.7% in Q1 2020 and the historical average of 44.5%.
quote:
Reduced Q2 2020 expectations were fulfilled as companies prioritized their expenditures and protected their liquidity. Significantly reduced expectations continue for Q3 2020, especially for financial issues, where big-banks have suspended their buybacks; issues with strong cash-flow are expected to continue buybacks.
quote:
"Looking beyond Q3, Q4 2020 remains contingent on the economy, which is contingent on the COVID-19 recovery," Silverblatt continued. "As businesses reopen and the economy picks up, companies will need to address prior actions as well as initiate new procedures and policies to function in the new environment, including potential reorganization to address employee location needs and shifts in customer base and cycles. These expenditures could limit the discretionary buybacks they’re able to do."
Posted on 10/28/20 at 12:41 pm to wutangfinancial
quote:
Reduced Q2 2020 expectations were fulfilled as companies prioritized their expenditures and protected their liquidity.
Uh, oh. You know what that means in light of the fact that:
a. Corporate earnings have been flat since 2012, leaving buybacks as the only way to increase EPS;
b. Taxes and interest rates are each the lowest they've been in decades;
c. FedGov is more indebted to GDP today relative to any other time in history, which will drastically mitigate the positive effect of any additional fiscal stimulus;
d. Fed is at ZLB.
If the present value of equities is influenced by earnings growth, the risk free rate and the equity risk premium and if growth is non-existent and the risk-free rate can't go any lower, what drives the discount rate lower from here? An even lower equity risk premium? Perhaps, but I find that to be very hard to believe in light of the current state of the world. If anything, the equity risk premium should be pricing in more risk, not less.
Posted on 10/28/20 at 8:05 pm to RedStickBR
I will check net flows tomorrow but it's not good when you have the VIX and MOVE rising together. Q4 is going to be fun.
Posted on 10/28/20 at 9:04 pm to wutangfinancial
Will be fun indeed. Dollar finally started acting right today. It seems the dollar tracks closer to a 1:1 inverse correlation with stocks as Vix levels increase. So the correlation is weak at the beginning of a sell off but tightens as the sell off extends. I haven’t put any numbers around that, but just feels that way.
This post was edited on 10/28/20 at 9:04 pm
Posted on 10/31/20 at 12:32 pm to RedStickBR
FYI at the 34 min mark of the End Game Ep. 9 podcast, Felix Zulauf also discusses why QE isn’t inflationary when there’s no loan growth against the reserves.
This post was edited on 10/31/20 at 12:34 pm
Posted on 11/1/20 at 11:23 pm to RedStickBR
quote:
Here you go, Cork. Kiril Sokoloff and Lacy Hunt. Listen to the whole thing, but especially the discussion beginning around the 14 minute mark. Dr. Hunt explains why QE is not money printing or even digital money printing. It’s mere reserve creation.
Revisited this today. The 40-min mark and on are fundamental to the broader discussion we’ve been having in this thread. Also, watching these two distinguished gentlemen crack up in laughter at the 45-ish-min mark when discussing the Bank of England being dumb enough to consider creating legal tender was a great joy of my day today
In addition, this is a very well put together piece discussing all the themes we’ve been hitting in this thread. Only quibble is the one time they conflate QE with cash creation, when we all now know that’s not true. But the rest of the article is spot on:
The Fed will monetize all of the debt issuance
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