tag:blogger.com,1999:blog-6704573462403312459.post5607452715030050795..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: Market monetarists and "buying up everything"JP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger39125tag:blogger.com,1999:blog-6704573462403312459.post-25188605952662782292013-09-15T10:21:48.338-04:002013-09-15T10:21:48.338-04:00Was thinking more about moneyness and "buying...Was thinking more about moneyness and "buying up everything". I wonder if the benchmark is not "market value" but moneyness value. Use haircuts or bid-ask spreads as an example since they represent the ability to convert to money. QE of Tsys has no effect because repo haircuts and bid-ask spreads are so small (1%,0.05%, respectively). The stimulative effect of market-value purchases of MBS is higher (5% and 0.2%). Houses even higher (25% and 15%).jt26noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-69581513560480589002013-08-16T19:28:31.975-04:002013-08-16T19:28:31.975-04:00Great piece JP! While some might think the Fed has... Great piece JP! While some might think the Fed has the power of Archimedes-or Promsethus who rolls his boulder up a hill-Bernanke is certainly not one of them. He certainly thought the Federal Reserve Act placed limits on him back in September 2008 which is why he told Paulson the TARP had to go through Congress for two reasons:<br /><br /> 1. The Fed lacked the tools to fix the financial crisis by itself<br /><br /> 2. Small d-democratic legitimacy required it go through the fiscal authorities-Congress. <br /><br /> http://www.amazon.com/How-Markets-Fail-Economic-Calamities/dp/0312430043/ref=sr_1_1?s=books&ie=UTF8&qid=1376695626&sr=1-1&keywords=how+markets+fail<br /><br /> See page 328Mike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-56263396437816121962013-08-15T17:24:57.144-04:002013-08-15T17:24:57.144-04:00Chris:
In #3, do you mean the aggregate value of ...Chris:<br /><br />In #3, do you mean the aggregate value of ALL google shares? In that case #3 is wrong. But the price per share would normally not increase as a result of google creating and selling new shares.<br />Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-13270424918867462512013-08-14T15:13:44.693-04:002013-08-14T15:13:44.693-04:00The Act doesn't allow the Fed to buy "a c...The Act doesn't allow the Fed to buy "a collection of awful paintings", or "a rail car full of almost rotten carrots" either but that doesn't stop you discussing it.<br /><br />What's your view on the legality of the Treasury minting any-denomination platinum coins and depositing them at the Fed? Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-47714922280781627152013-08-14T15:04:15.896-04:002013-08-14T15:04:15.896-04:00you pay your taxes with a bank deposit, but then y...you pay your taxes with a bank deposit, but then your bank has to pay the Treasury on your behalf with central bank deposits. Debiting your bank deposit is only the first step. The payment is completed when your bank's reserve account is debited.Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-72485492889007508262013-08-14T14:08:22.883-04:002013-08-14T14:08:22.883-04:00Welcome, Chris.
I'm not quite getting it. Why...Welcome, Chris.<br /><br />I'm not quite getting it. Why can't all three be consistent with each other?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-29901600726318352872013-08-14T14:07:29.179-04:002013-08-14T14:07:29.179-04:00I pay taxes with my bank account, not Fed notes or...I pay taxes with my bank account, not Fed notes or deposits. <br /><br />But if it was the case that the only way to offset a tax liability was to pay with these instruments, then yes, that would constitute their fundamental value. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-86215256751096961242013-08-14T14:05:41.108-04:002013-08-14T14:05:41.108-04:00In theory, the Act could be changed to allowe Fed ...In theory, the Act could be changed to allowe Fed purchases of my grandmother's dirty stockings, but in reality the Act doesn't allow such a thing. Go <a href="http://www.federalreserve.gov/aboutthefed/fract.htm" rel="nofollow">give it a read</a>, you'll see that it's very specific.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-488422192785123842013-08-14T13:30:49.240-04:002013-08-14T13:30:49.240-04:00Central bank liabilities are also the only thing t...Central bank liabilities are also the only thing that can be used to pay taxes to the Treasury. Isn't that a fundamental value?Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-28926505539484214882013-08-14T13:00:52.437-04:002013-08-14T13:00:52.437-04:00"I think the MM's claim the portfolio bal..."I think the MM's claim the portfolio balances effect leads to inflation".<br /><br />Scott Sumner apparently denies that things like portfolio rebalancing effects are required for there to be an effective 'transition mechanism' for monetary policy. He seems to believe that people will simply believe a central bank's promise to create inflation and thus bring about that inflation themselves by automatically putting all prices up, or something. It doesn't seem to matter to him that there isn't necessarily a concrete way in which the CB can actually cause inflation itself other than through this 'expectations' or 'blind faith in CB powers' channel.Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6891173278327986102013-08-14T12:52:49.055-04:002013-08-14T12:52:49.055-04:00couldn't the Treasury in theory buy all its de...couldn't the Treasury in theory buy all its debt from the Fed with things like million/billion/trillion dollar coins (or US notes) for example? Then the Fed would have assets to put on its balance sheet in place of the bonds.<br /><br />Or they could just change the Federal Reserve Act to do what Michael Byrnes suggests, of course. What effect might that have?<br />Jamesnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6417876266174380602013-08-14T03:08:44.942-04:002013-08-14T03:08:44.942-04:00Nominal vs. real.
Protection of liabilities vs. e...Nominal vs. real.<br /><br />Protection of liabilities vs. equity is a nominal protection.<br />Strategy of paying non-decreasing dividends is a real strategy.<br /><br />In case of central banks, protection of liabilities is trivial and it means that you have to pay zero interest, and you can't write off your liabilities.<br /><br />If you do a forward-looking valuation of central bank liabilities, purchases of risky assets will automatically reduce the value of liabilities, if central bank follows a dividend paying strategy that preserves the real value of dividends, and pays out extra profits in case of asset appreciation.Vaidashttps://twitter.com/VaidasUrbanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-69857551909677597492013-08-13T20:12:02.608-04:002013-08-13T20:12:02.608-04:00"The point of our disgareement is then, wheth..."The point of our disgareement is then, whether money has any fundamental value at all besides liquidity..."<br /><br />Yes, that's the crux of it, and I was trying to draw this out with my Google parable. You say central bank notes & deposits are <a href="http://jpkoning.blogspot.ca/2013/03/selling-out-of-bitcoin-ledger.html?showComment=1364691950851#c4079067532095035160" rel="nofollow">pure balls of liquidity</a>, I say that they are claims that an issuing central bank will be expected to repurchase with future revenues. And that they also have a liquidity premium on top of fundamental value. Whichever it is, the implications for policies like QE are probably large. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-36982965715126745992013-08-13T20:02:23.593-04:002013-08-13T20:02:23.593-04:00Sure, but dividends are paid out after interest, s...Sure, but dividends are paid out after interest, so debt will always be protected to the downside relative to equity.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-36658301011455056732013-08-13T16:26:01.102-04:002013-08-13T16:26:01.102-04:00Hi JP
(I'm new to you're blog). I think t...Hi JP<br /><br />(I'm new to you're blog). I think there's a logical inconsistency in your argument (unless I've misunderstood, which is more than likely). Consider the three statements:<br />1. Google creates and sells more shares.<br />2. The price of shares relative to other goods doesn't decline.<br />3. The value of google doesn't increase.<br /><br />If 2 of the statements are true, the other cannot be, yet you're argument seems to require all three to occur. Now where might I have gone wrong?Chris Papadopoullosnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91375412008241091132013-08-13T15:26:12.860-04:002013-08-13T15:26:12.860-04:00Suppose the central bank increases dividend payout...Suppose the central bank increases dividend payouts when assets appreciate, and does not reduce them when assets lose value. This is a very natural strategy that you are missing.Vaidashttps://mobile.twitter.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2628762332718751782013-08-13T14:28:47.254-04:002013-08-13T14:28:47.254-04:00Yes - so if money and Treasuries were completely r...Yes - so if money and Treasuries were completely replicable with each other, inflating the supply of one would automatically bring down the value of both claims.<br /><br />The only reason that doesn't happen in the real world is because Treasuries and money *are* different - though both could be used as numeraires without breaking any arbitrage condition. <br /><br />You are completely right when you say that it is not possible for a central bank to achieve arbitrary levels of inflation when the notes it issues have some fundamental value besides liquidity. And, in the current setup of things, Treasuries *do* have a fundamental value besides liquidity (the future revenues of the US government).<br /><br />The point of our disgareement is then, whether money has any fundamental value at all besides liquidity - which I say it doesn't - and that's totally debatable (you might say the paper it's printed on or due to some market frictions, "money" has some value - in which case you can't increase its supply forever and expect inflation).<br /><br />As for assets belonging purely to Category A, there are none besides dollars themselves (by design).Akshayhttps://www.blogger.com/profile/12286425806950859284noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-42065757392817166742013-08-13T14:20:53.376-04:002013-08-13T14:20:53.376-04:00Welcome Vaidas,
On your final point, don't yo...Welcome Vaidas,<br /><br />On your final point, don't you mean to say that if purchased assets lose value, equity depreciates while central bank liabilities don't change? If not, what am I missing?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-83559232969699453432013-08-13T12:48:17.480-04:002013-08-13T12:48:17.480-04:00JP Koning has asked me to transfer my tweets here:...JP Koning has asked me to transfer my tweets here:<br /><br />Google example confuses equity vs. debt. Central banks buy assets with liabilities, not equity.<br /><br />If purchased assets appreciate, value of central bank liabilities does not change, central bank equity appreciates instead.<br /><br />If purchased assets lose value, central bank liabilities lose value, while equity value is preservedVaidashttps://twitter.com/VaidasUrbanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-54473961760214422772013-08-13T10:23:48.222-04:002013-08-13T10:23:48.222-04:00"even US Treasuries also fall into that categ..."even US Treasuries also fall into that category becaue not only are they a claim on future cashflows of the Treasury, they are also a claim on the Treasury's ability to pay those claims."<br /><br />"the Fed has complete freedom to pay those claims in dollars themselves."<br /><br />We could simply have the Treasury be the issuer of dollars, ie. just consolidate the Fed within the Treasury, and that means dollars are ultimately "a claim on the Treasury's ability to pay those claims."<br /><br />So what does the Treasury promise to pay? In setting an inflation target, it promises to buy back all outstanding claims in order to ensure that their price doesn't fall below target. They effectively promise to pay the holder of Treasury dollar liabilities a fixed amount of CPI goods (although they settle their obligation by open market sales of bonds, not actual CPI goods).<br /><br />If you de-amalgamate the Fed from the Treasury, I don't see things as being any different. It would be somewhat arbitrary say that some line is being crossed when the Fed becomes the issuer of central bank liabilities and not the Treasury.<br /><br />So I'd say money falls into Category B, just like Treasury debt. <br /><br />But you really haven't given any examples of what else falls in category A apart from Fed dollars, so I am having troubles understanding what you mean by your distinction.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-15490057354999053602013-08-12T17:58:13.306-04:002013-08-12T17:58:13.306-04:00"But if the liquidity premium on the 10 year ..."But if the liquidity premium on the 10 year Treasury, the most repo-able collateral in the world, disappears, its price doesn't fall to 0"<br /><br />Which is a result that relies on the assumption of there existing an arbitrage opportunity between a 10y UST and a perfectly replicable portfolio made of nothing but future cashflows in dollars. If no-arbitrage exists between a UST and such a setup, then the value of claims on the Treasury are zero, indeed.<br /><br />A bit of an arbitrage-pricing theory primer would help clarify my point:<br /><br />1. There are some assets (or "contingent claims" like US Treasuries) in the world whose payoffs are perfectly replicable by some combination of future cashflows involving just dollars (this is static replication - if we want dynamic replication, we say there exists *some* deterministic portfolio-allocation strategy that allows for even stochastic price movements of an asset to be perfectly replicated by pure dollar cashflows). But let's stick with static replication for now to make things simpler - similar arguments hold for dynamic replication as well. Let's call this category of assets Category A.<br /><br />2. There are some assets which, no matter what magic you perform, are not replicable with dollar-based cashflows. For example, Google's shares - they are a claim on revenues earned by Google which are a component of the value gained by advertisers for whose ads Google is able to supply "eyeballs". No matter what combination of swaps, money-market funds, bonds etc you concoct, you will *not* be able to present advertisers with a utility-proposition which is equivalent to their ads being seen by users (which is the essential service Google provides). Let's call the category of such assets Category B.<br />(In the Arrow-Debreu world this is known as an incomplete market - and it requires some prices to be taken at face-value for the market to reach equilibrium via no-arbitrage - we call such state-prices as "fundamental values/returns")<br /><br />Most assets in the world we see - houses, cars, food, stocks etc - fall into Category B - i.e., they are not perfectly replicable with money ("But we pay for them with money!" - you say - I'll come to that later). And to be honest, even US Treasuries also fall into that category becaue not only are they a claim on future cashflows of the Treasury, they are also a claim on the Treasury's ability to pay those claims (which they may not be able to due to purely legal/operational reasons rather than financial ones - something known as a technical-default) - ie a claim on the hazard-rate/credit-quality of the US government - which is a quantity independent of the interest-rates on dollars in the market (hence a CDS *does* trade on the US government with non-zero spread).<br /><br />So - what happens when you pump an infinite amount of dollars into the market? The value of things in Category A goes to zero (but wait, didn't UST's or even T-bills surge when QE began? Well, as I said, USTs really belong to Category B - and it's their non-zero "safety" premium combined with a low-interest yield curve which led to that surge)<br /><br />What happens to things in Category B? Their prices surge leading to inflation as their "fundamental" risk/return profiles remain the same while the risk-free rate goes down.<br /><br />Now what about dollars themselves? They fall into Category A - so even though people holding banknotes have claims on the Fed, the Fed has complete freedom to pay those claims in dollars themselves. So, the "fundamental" value of money doesn't even come into the picture at all.<br /><br />Lastly, to clarify the "But we pay for tomatoes with money!"-bit - yes we do, but it's because the market for tomatoes, potatoes and money comes into an equilibrium when the supply of money is finite.<br /><br />Apologies for the long comment - but I hope it clarifies things a bit.Akshayhttps://www.blogger.com/profile/12286425806950859284noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-39341073521812586242013-08-12T10:55:47.255-04:002013-08-12T10:55:47.255-04:00...and banks will only make central bank reserves ......and banks will only make central bank reserves the index for bank deposits when the broad public desires them. When citizens of a nation start to choose dollars over the local pricing unit (partial dollarization) the liabilities of the central bank become steadily less unique as their role as unit of account is displaced.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27158543576103216872013-08-12T10:29:34.411-04:002013-08-12T10:29:34.411-04:00Welcome to my blog.
I agree that if you have infi...Welcome to my blog.<br /><br />I agree that if you have infinite liquidity, the liquidity premium on money goes to zero, as does the premia on bonds, bills, houses, MBS, and other marketable assets. In a world where everything is perfectly liquid, monetary phenomena disappear. <br /><br />But if the liquidity premium on the 10 year Treasury, the most repo-able collateral in the world, disappears, its price doesn't fall to 0. Though repoability is no longer valued on the margin, the 10 year remains a claim on its issuer, and that should be sufficient to give it a positive market price, though that price will be somewhat lower than before. The same goes for the debt issued by a central bank. When the liquidity premium that banknotes and deposits enjoy disappears, like the 10 year these instruments remain claims on the issuer, and the market will see it fit to endow them with a positive price.<br /><br />The transmission mechanism in my Google share example doesn't require banks. Say that Google wants a higher inflation target, so they pay silly prices for assets. All that is required for transmittal is intelligent agents who notice the decline in fundamental value intentionally engineered by Google's CEO. These agents act on that information by shorting overvalued Google and buying up undervalued assets with the proceeds, thereby enjoying excess returns. They rinse and repeat until they've driven up the price level.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-25166020796877727512013-08-12T01:06:47.165-04:002013-08-12T01:06:47.165-04:00Seems to me Reserves are only the unit of account ...Seems to me Reserves are only the unit of account when banks make them so (i.e. when they convert them to currency or use them for payments). Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-34158434394734538872013-08-11T16:13:46.480-04:002013-08-11T16:13:46.480-04:00Money's fundamental value derives from the liq...Money's fundamental value derives from the liquidity discount between fair price and market price of an asset.<br /><br />If you have infinite liquidity, the liquidity premium that money enjoys goes to zero - its value tends to zero and prices surge. The reason why monetary injections can fail to create inflation is not because of money's fundamental value but transmission failure or failure insetting expectations.<br /><br />The transmission intermediaries (banks) might be susceptible to default risk (systemic leverage too high), doubtful recovery rates (deflating collateral) or plain poor AD. But very little of it has got to do with some magical "fundamental" value of money. Value of money is what it is (with a term structure). In such transmission-failure cases, the CB could do helicopter drops (addresses AD), selective asset purchases (collateral) or recapitalization (leverage) and support issuance-based fund-raising for corporates by widening the collateral acceptable for repos.<br /><br />Forward guidance on top of that is supposed to smooth out consumption during the monetary therapy period (ie "setting expectations"/forward guidance is actually about reducing uncertainty).<br /><br />Not all of it works, of course, because the diagnosis of the problem is usually not correct. But CBs do have the tools to reflate economies. And none of it takes any radical new thinking beyond what Japan has already done and is doing - ie reducing term-risk, finetuning the yield-curve and forward guidance. <br /><br />Wallace-neutrality based arguments against monetary policy's futility don't work because liquidity transformation is a major (if not the biggest) transmission mechanism.Akshayhttps://www.blogger.com/profile/12286425806950859284noreply@blogger.com