tag:blogger.com,1999:blog-6704573462403312459.post4871655967219818134..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: Cracks in the zero-lower boundJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-6704573462403312459.post-84807093379772384942015-01-10T22:57:52.684-05:002015-01-10T22:57:52.684-05:00JKH, thanks for the clarification. Sometimes I nee...JKH, thanks for the clarification. Sometimes I need to be hit over the head with a bat before things settle in my brain.<br /><br />I understand now what you mean by emphasizing 'liability management' vs 'asset management', and I pretty much agree with you on that count.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-84278697236262284412015-01-10T01:36:16.302-05:002015-01-10T01:36:16.302-05:00excellent post btw
:)excellent post btw<br /><br />:)JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-55117611956927455862015-01-10T01:29:49.766-05:002015-01-10T01:29:49.766-05:00And it looks like your first point (Sumner's p...And it looks like your first point (Sumner's point I guess) is the medium of account argument that supports your second point (the list of countermeasures). The two together make sense to me at least directionally.<br /><br />I have no idea how well this would work in total. But again, its not going to work that well through bank reserves directly, because banks have so many options to protect their interest margins without expanding their balance sheets through assets initiatives that might be driven by negative interest rates on reserves.<br /><br />Again, I realize this is only a tangential observation to the main points of your post.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-35000019040630688182015-01-10T01:13:44.944-05:002015-01-10T01:13:44.944-05:00I think the comment I had made elsewhere and quote...I think the comment I had made elsewhere and quoted above is in agreement with your post. If cash were eliminated, there are a number of initiatives that vendors can take in order to convert what might be in effect zero interest liabilities to interest rate sensitive liabilities. That way, they avoid being gamed by those who may be seeking out ways of creating relatively high yielding zero interest assets in an environment of generally negative interest rates.<br /><br />Banks in particular if they earned negative interest on reserves would take measures to protect their interest margins through negative rates and/or fees etc. on the liability side of their balance sheets. My point there more generally is that banks will attempt to deflect the “hot potato” impetus of any low or negative interest rate on excess reserves back to the deposit side of the bank.<br /><br />So I’m agreeing with your post directionally in terms of these kinds of countermeasures when currency is withdrawn, and just adding something about bank reserves and deposits. That point is that whether or not currency disappears, it is important to differentiate between the reserve and deposit sides of banking when looking at monetary inflation. JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-36509713023326021822015-01-09T09:42:53.865-05:002015-01-09T09:42:53.865-05:00Sorry for the delay, swamped these days. Can you t...Sorry for the delay, swamped these days. Can you tell me what exactly you disagree with in my post? Is it my first point or the second point? What specific line is jumping out at you?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2921694239454480832015-01-06T06:46:22.355-05:002015-01-06T06:46:22.355-05:00It’s an oblique point about banks that perhaps I’m...It’s an oblique point about banks that perhaps I’m overemphasizing here.<br /><br />The point is that the banking system as a whole will do whatever it takes to deflect or “fend off” the hot potato effect - in the sense that it will respond in the most effective ways it can to protect interest margins in the case of negative interest rates and that this importantly will include liability management as much as or more so than asset management. That deflects the hot potato transmission from bank reserves back to customer deposits. Significant asset initiatives (i.e. new risky assets) require additional bank capital, other things equal. But QE does nothing directly to increase bank capital, other things equal – not in the very direct way that it increases reserves. So banks will attempt to re-price their administered rate liabilities and/or charge fees, etc. in order to protect their margins.<br /><br />Banks individually also understand that the reserve system is closed to them collectively, and that playing hot potato with reserves can be counterproductive beyond a point. An individual bank is aware than loading up on junk bonds (as an extreme example) won’t chase reserves out of the system. Reserves will return somewhere. Also, junk bonds require capital, and QE doesn’t provide capital in the way it provides reserves.<br /><br />Anyway, banks will attempt to deflect or “fend off” the hot potato effect away from transmission through their own asset portfolios (including reserves) and back toward the liability side. They will try to redirect the QE transmission mechanism from reserves to deposit liabilities in other words.<br /><br />Perhaps this is more generally understood, but I don’t see much reference to it in write-ups about QE effects. Banks are special in this particular way, in the sense that QE expands the broad money supply that exists on bank balance sheets - in the first order of things - since most bonds sold don’t come originally from bank portfolios. So the distinction between reserve portfolios and deposit portfolios seems relevant when imagining how QE “works” with positive or negative rates.<br /><br />And then I’m saying that the general response of zero rate liability issuers of many types in the face of negative interest rates would be similar to how banks would react with respect to protect interesting margins against reserve portfolios paying negative interest. And banks already act this way to some degree - even earning positive 25 points on reserves – in the sense that this return constitutes a tiny contribution to their interest margins and potentially means an inadequate return after expenses and taking into account funding liabilities that must still exist somewhere on their balance sheets against those reserves (even though reserves are risk free from a credit standpoint). So instead of concentrated, aggressive initiatives on the asset side, they will also fine tune pricing on the liability side.<br /><br />Of course, other financial institutions have their own capital allocation paradigms. But those institutions are primarily the active sellers of bonds into QE, and therefore will have something in mind for their own portfolio management. Banks aren’t in that favored position, as they are passive recipients of the first order deposit and reserve effect of QE. And households have their own less sophisticated intuitions about “capital allocation” (meaning “saving allocation”), but at that point maybe the pure liquidity effect begins to kick in more so as a deposit hot potato.<br /><br />(Separate observation: capital allocation for the private sector (requiring saving) is in a sense complementary/analogous to fiscal policy in the government sector (deficits create private sector saving). In this sense, monetary policy is fighting for priority over fiscal policy and capital allocation norms.)<br /><br />So I’m not saying inflation is not possible – just commenting on how this is likely or not likely to happen, and where the money effect will most likely come from.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-14510020940097545222015-01-05T15:57:15.607-05:002015-01-05T15:57:15.607-05:00JKH: I'm not really following you here. Are yo...JKH: I'm not really following you here. Are you saying that a reduction of interest rates to something like -4% won't cause inflation? That banks will somehow counteract the actions of the central bank?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-39229815874306340662015-01-05T15:00:32.509-05:002015-01-05T15:00:32.509-05:00Yes, limiting duration is one step to preventing i...Yes, limiting duration is one step to preventing issuers from being stuffed with funds, although there has to be a way to prevent constant rolling over. Fees would do the trick. I'm not sure what you mean by 'fending off the hot potato', since it wouldn't prevent a central bank from creating inflation.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-1061224415906259312015-01-05T11:23:33.004-05:002015-01-05T11:23:33.004-05:00This “problem” and the types of solutions availabl...This “problem” and the types of solutions available is actually a transformation of something that already exists for banks at the zero bound without negative interest rates.<br /><br />The monetarist prescription (simplified) as I understand it is that the Fed should have done more QE or better yet should have committed to permanent QE. This presumably is hinged to belief in the hot potato.<br /><br />But the hot potato thinking seems to assume that banks will not take action in their own liability management. It is all a question of degree. Whether banks earn 25 basis points, 0 basis points, or minus some number of basis points on reserves, they will respond with liability management pricing techniques (which they already have) that will shift the potato back in the other direction. What they will not do is force their own asset allocation and capital deployment rules in the direction of taking on new risk that requires an additional allocation of capital, other things equal.<br /><br />Liquidity management does not drive capital management in banking.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-74099996796451742712015-01-05T10:53:46.224-05:002015-01-05T10:53:46.224-05:00The first order of business on those zero interest...The first order of business on those zero interest liabilities would be to introduce appropriately constraining term structures in order to limit the liability - e.g. short duration gift certificates (which is already the case to some degree), similar duration rules for outstanding cheques, and so on. Makes the "problem" more manageable for the issuer.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-78775987377921587602015-01-05T10:47:47.660-05:002015-01-05T10:47:47.660-05:00May as well include what I said there:
"I th...May as well include what I said there:<br /><br />"I think its questionable to assume that these various issuers of zero interest liabilities will not respond with some form of proactive liability management - instead of passively allowing themselves to be stuffed with funds they can only invest at a negative spread. Banks for example factor mortgage prepayment risk into their pricing (and charge prepayment penalties for it at least in Canada), and negative interest rates won't suddenly pre-empt that pricing strategy. Other examples offered by Cochrane similarly could be subject to pricing or quota controls.<br /><br />The hot potato theory seems to assume that such evasive liability management responses will not be forthcoming.<br /><br />Liability management fends off the hot potato.<br /><br />It still ends up being about interest rates."<br /><br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-53036698472925435582015-01-05T10:32:43.813-05:002015-01-05T10:32:43.813-05:00on "alternative escape routes" -
http:/...on "alternative escape routes" -<br /><br />http://macromarketmusings.blogspot.ca/2015/01/solving-zlb-problem-without-eliminating.html?showComment=1420441100490#c6342453080893300490JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-62076024087760191372015-01-05T10:11:28.276-05:002015-01-05T10:11:28.276-05:00There is a good possibility that foreign cash migh...There is a good possibility that foreign cash might begin to circulate in any country that decides to eliminate cash. Even if this happens, the domestic central bank's deposits are likely to remain the nation's medium of account, so it shouldn't affect the nation's ability to break through the ZLB.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-48922101106156436042015-01-04T23:03:06.150-05:002015-01-04T23:03:06.150-05:00so far much of the discussions seem to revolve aro...so far much of the discussions seem to revolve around a closed economy. what are your predictions for an open economy (large or small) when it unilaterally decides to eliminate cash?LALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.com