The Fed could just stop paying interest on reserves and make the same aggregate level of reserves mandatory. “Financial repression!” you say. Yep. But it is an available policy alternative. And that means that losing money is just a choice that the Fed is making.
As Mr Grey (in the library with the candlestick) points out, there’s diversity in bank solvency. To me that says that making unpaid reserves mandatory would be pretty deflationary, even if they were set below the current level, because it would impact some banks a lot more than others. Imagine that the fed started out with a low percent of assets having to be mandatory unpaid reserves, then increased it over time. Non-mandatory reserves could still receive interest. Surely that would have a significant and increasing disinflationary impact while also helping reduce the fed’s losses. That said, it would be a regime change, which is dangerous in troubled times.
Those things can't be separated. You have to actually blow up the insolvent banks to find out what other banks are exposed to their contagion. 'We are solvent even without IOR payments' is not the same statement as 'we are solvent even if no banks are receiving IOR payments'- and we saw in 2008 no one was sure who was solvent once one insolvency event happened.
Either Kling was unclear in what he wrote (that would surprise me) or there is something I misunderstand. Maybe both.
In 2008 the Fed starting paying interest on bank reserves they hold. Reserve requirements have also gone up but reserves went up more. In Sept they were $3.1T. The Fed also started QE. In Sept those debt assets totaled $8.8T. QE is financed through reserves and monetary expansion (printing money). New money is interest free. Is Kling just talking about the smaller part of debt financed by reserves?
US total debt is $31T. Isn't the (bigger) part of debt not held by the Fed more important? How much of that is short term?
>>Instead, they issued long-term debt and sold it to Wall Street investment banks, which in turn sold it at a profit to the Fed, which funded it with short-term debt.<<
The Gov't consortium selling & buying from Wall Street, at a big Wall Street profit, is one of the key selling points. To the Bankster donors of the Big Gov't parties.
Another part of it is obscure what it's really doing with multiple orgs who, themselves, might not always be aware of who is profiting most directly from their actions, so they're not lying when they say they're mostly subsidizing Wall Street.
If the Fed starts loosing money, with its directors have bonuses cut? or salaries? If not, why not?
- I expect not, which is typical with gov't jobs, which is why they are so reckless, which is why more of that finance chain should be privatized.
With required systemic risk insurance for the top 30 revenue finance companies.
1. Fed stops rate raises at 5% or lower because it will be too expensive for the govt to borrow, (current year spending & debt rollover), and somehow this is sufficient.
2. We return to QE infinity in order to reduce the cost of borrowing for the govt. and give the mild illusion of a good economy in asset prices.
If #2, (which i expect) - how will we use the time that it buys us? theoretically, this money printer go brrrr strategy drives more inflation. "inflate away the debt" only works if you taper your borrowing while the money devalues. Is that going to happen?
QE gave the illusion of working when the inflation it created was manifest in asset prices, but not in wages. But then house prices got too far out of whack and the supply disruptions from Covid policy produced insane price hikes in housing materials.
The inflation horse finally got out of the barn and it is running full sprint.
Here's the conundrum. For a decade plus the Central Bank complained it's efforts to create inflation were failing. Now, we get to see them try to stop inflation. My hunch is they will only succeed in stopping inflation when the economic structures causing it are broken down. It is not enough to raise interest rates. The economy has to be broken.
Their predicament is that their policy stance is that they are counter cyclical- they boost economic growth when it slows and slow economic growth when it over heats- however right now with IOR costing them more than they make in interest payments they need to print (essentially) to cover the losses. This is pro cyclical- they are increasing the money supply when inflation has risen and they want to decrease it.
Who said that the Fed carrying out its mandate had to be profitable for the Treasury year in and year out? :) It just does not seem to me to be a big enough problem to be labeled a "predicament."
No one said that, or implied that. The issue is that their mandates become contradictory at times which makes any decision that benefits one come at the cost to another. If* IOR is stabilizing the banks and preventing a financial event then that is meeting their 'full employment' mandate, but if they have to print to pay IOR then that is hurting their 'stable prices' mandate.
I would not disagree that their having to pay more on reserves than they earn on longer term assets does "go against their stable prices mandate; there is a bit more federal debt that they have to deal with. I'm only saying that it's not a big deal, nothing that makes it impossible to carry out their mandate. Let's not argue about the word "predicament."
If this was the only effect running counter to their goals then the effect would be small, but its not. The Fed's bond holdings have lost ~1-1.5 trillion dollars in mark to market accounting- so if the Fed uses the sale of bonds to perform QT they will sell those bonds at a loss, while also pushing up interest rates which means future sales will likely be at a larger loss. The gap now becomes ~ $100 billion a year in forgone remittances, + $100 billion a year + 10-15% of QT sales (spread out over multiple years in forgone remittances). $1 trillion dollars in QT sales now has the measured impact of $550-700 billion in sales. If you try to offset this with 1.5 trillion in sales to get to $1 trillion in tightening you are pushing rates up higher, which begs the question are you going to keep increasing IOR rates? If so your transfer to banks increase, your paper losses increase, your future remittances decrease and you expand the 'simulative' effect you are trying to fight.
Are we definitely at the point where the Fed can't tighten monetary policy? No, not by a long shot, but this isn't some minor blip- and most importantly it can't be solved with either of the Fed's two primary tools, printing bank reserves or raising interest rates.
If we are NOT at a position where the Fed is unable to achieve it's targets, then it's not a "predicament." I'm not too worried about (and am not competent to worry about) the details of which instruments the Fed uses to achieve it's targets when.
Slightly off topic, what do you see as the policy implication of this? Who should do what?
I wouldn’t say it was pointless. It gave them time to change their ways in an orderly, non catastrophic way. They’ve just wasted that time.😂
Pinin' for the Potomac
The Fed could just stop paying interest on reserves and make the same aggregate level of reserves mandatory. “Financial repression!” you say. Yep. But it is an available policy alternative. And that means that losing money is just a choice that the Fed is making.
That assumes the banks are solvent without the IOR payments they are receiving.
As Mr Grey (in the library with the candlestick) points out, there’s diversity in bank solvency. To me that says that making unpaid reserves mandatory would be pretty deflationary, even if they were set below the current level, because it would impact some banks a lot more than others. Imagine that the fed started out with a low percent of assets having to be mandatory unpaid reserves, then increased it over time. Non-mandatory reserves could still receive interest. Surely that would have a significant and increasing disinflationary impact while also helping reduce the fed’s losses. That said, it would be a regime change, which is dangerous in troubled times.
No - it means the banks which need IOR payments are insolvent, and the more prudent banks are not.
Those things can't be separated. You have to actually blow up the insolvent banks to find out what other banks are exposed to their contagion. 'We are solvent even without IOR payments' is not the same statement as 'we are solvent even if no banks are receiving IOR payments'- and we saw in 2008 no one was sure who was solvent once one insolvency event happened.
Either Kling was unclear in what he wrote (that would surprise me) or there is something I misunderstand. Maybe both.
In 2008 the Fed starting paying interest on bank reserves they hold. Reserve requirements have also gone up but reserves went up more. In Sept they were $3.1T. The Fed also started QE. In Sept those debt assets totaled $8.8T. QE is financed through reserves and monetary expansion (printing money). New money is interest free. Is Kling just talking about the smaller part of debt financed by reserves?
US total debt is $31T. Isn't the (bigger) part of debt not held by the Fed more important? How much of that is short term?
>>Instead, they issued long-term debt and sold it to Wall Street investment banks, which in turn sold it at a profit to the Fed, which funded it with short-term debt.<<
The Gov't consortium selling & buying from Wall Street, at a big Wall Street profit, is one of the key selling points. To the Bankster donors of the Big Gov't parties.
Another part of it is obscure what it's really doing with multiple orgs who, themselves, might not always be aware of who is profiting most directly from their actions, so they're not lying when they say they're mostly subsidizing Wall Street.
If the Fed starts loosing money, with its directors have bonuses cut? or salaries? If not, why not?
- I expect not, which is typical with gov't jobs, which is why they are so reckless, which is why more of that finance chain should be privatized.
With required systemic risk insurance for the top 30 revenue finance companies.
This is why one of two things will happen:
1. Fed stops rate raises at 5% or lower because it will be too expensive for the govt to borrow, (current year spending & debt rollover), and somehow this is sufficient.
2. We return to QE infinity in order to reduce the cost of borrowing for the govt. and give the mild illusion of a good economy in asset prices.
If #2, (which i expect) - how will we use the time that it buys us? theoretically, this money printer go brrrr strategy drives more inflation. "inflate away the debt" only works if you taper your borrowing while the money devalues. Is that going to happen?
QE gave the illusion of working when the inflation it created was manifest in asset prices, but not in wages. But then house prices got too far out of whack and the supply disruptions from Covid policy produced insane price hikes in housing materials.
The inflation horse finally got out of the barn and it is running full sprint.
Here's the conundrum. For a decade plus the Central Bank complained it's efforts to create inflation were failing. Now, we get to see them try to stop inflation. My hunch is they will only succeed in stopping inflation when the economic structures causing it are broken down. It is not enough to raise interest rates. The economy has to be broken.
I don't understand "predicament." The Fed undershot its inflation targets 2009-2020 and overshot in 2022-2022. Their bad, but "predicament?"
Their predicament is that their policy stance is that they are counter cyclical- they boost economic growth when it slows and slow economic growth when it over heats- however right now with IOR costing them more than they make in interest payments they need to print (essentially) to cover the losses. This is pro cyclical- they are increasing the money supply when inflation has risen and they want to decrease it.
Who said that the Fed carrying out its mandate had to be profitable for the Treasury year in and year out? :) It just does not seem to me to be a big enough problem to be labeled a "predicament."
No one said that, or implied that. The issue is that their mandates become contradictory at times which makes any decision that benefits one come at the cost to another. If* IOR is stabilizing the banks and preventing a financial event then that is meeting their 'full employment' mandate, but if they have to print to pay IOR then that is hurting their 'stable prices' mandate.
*I'm talking from the Fed's POV here, not mine.
I would not disagree that their having to pay more on reserves than they earn on longer term assets does "go against their stable prices mandate; there is a bit more federal debt that they have to deal with. I'm only saying that it's not a big deal, nothing that makes it impossible to carry out their mandate. Let's not argue about the word "predicament."
If this was the only effect running counter to their goals then the effect would be small, but its not. The Fed's bond holdings have lost ~1-1.5 trillion dollars in mark to market accounting- so if the Fed uses the sale of bonds to perform QT they will sell those bonds at a loss, while also pushing up interest rates which means future sales will likely be at a larger loss. The gap now becomes ~ $100 billion a year in forgone remittances, + $100 billion a year + 10-15% of QT sales (spread out over multiple years in forgone remittances). $1 trillion dollars in QT sales now has the measured impact of $550-700 billion in sales. If you try to offset this with 1.5 trillion in sales to get to $1 trillion in tightening you are pushing rates up higher, which begs the question are you going to keep increasing IOR rates? If so your transfer to banks increase, your paper losses increase, your future remittances decrease and you expand the 'simulative' effect you are trying to fight.
Are we definitely at the point where the Fed can't tighten monetary policy? No, not by a long shot, but this isn't some minor blip- and most importantly it can't be solved with either of the Fed's two primary tools, printing bank reserves or raising interest rates.
Have a look at this this.
https://www.econlib.org/five-perspectives-on-fed-losses/
If we are NOT at a position where the Fed is unable to achieve it's targets, then it's not a "predicament." I'm not too worried about (and am not competent to worry about) the details of which instruments the Fed uses to achieve it's targets when.
Slightly off topic, what do you see as the policy implication of this? Who should do what?
LOL!
???
"Undershot" is hilarious.
How would you say "failed to keep inflation up to its target level?"