tag:blogger.com,1999:blog-6704573462403312459.post574955861184412389..comments2024-03-19T04:32:14.899-04:00Comments on Moneyness: 1,682 days and all's wellJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-6704573462403312459.post-48346945031587021742013-11-17T03:14:13.244-05:002013-11-17T03:14:13.244-05:00It is hard to imagine stupider economics than what...It is hard to imagine stupider economics than what Eccles says here. The rich are plenty able to consume a ton of stuff: just look at the budget of any 22-year-old pro athlete that just signed a multi-million-dollar contract. Marx and Engels roundly mocked this idea, noting that busts come when workers wages are at their HIGHEST, not at their lowest. Please, let's not take such rubbish seriously!gcallahhttps://www.blogger.com/profile/10065877215969589482noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-19265343293142739152013-11-15T21:04:24.010-05:002013-11-15T21:04:24.010-05:00Glad you guys liked it.
"Do you have a favo...Glad you guys liked it. <br /><br />"Do you have a favorite reading list for the GD?"<br /><br />My favorite Great Depression book is Grapes of Wrath, but I really liked Lords of Finance. Right now I'm reading the Battle of Bretton Woods.<br /><br />"-perhaps there isn't evidence from this that they do?"<br /><br />Evidence would have to come in the form of a decline in the distant fed funds rate, say a fall in the 2-5 year fed funds futures market immediately after the sterilization announcement.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-86972845583032600212013-11-15T08:40:36.457-05:002013-11-15T08:40:36.457-05:00"BTW really enjoyed this post" -me too"BTW really enjoyed this post" -me too <br />stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-80188364590971367142013-11-15T08:04:23.797-05:002013-11-15T08:04:23.797-05:00"Not sure exactly what you mean with your SNB..."Not sure exactly what you mean with your SNB analogy."<br />Sorry, my remark was muddled. I meant, the base is a side effect of some other action. With the SNB, increasing base was a side effect of targeting FX. In the 1936 case, the halt in base growth was a side effect of cutting fiscal stimulus.<br />BTW really enjoyed this post; have had a long fascination with the economic history of this period since high school. Recently read, Lords of Finance (good) and The Forgotten Man (not so good). Do you have a favorite reading list for the GD?<br /><br /><br /><br />jt26noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-69554688344715662362013-11-15T04:15:23.315-05:002013-11-15T04:15:23.315-05:00Perhaps it is all obvious old hat stuff but this s...Perhaps it is all obvious old hat stuff but this seems a relavent quote from that link<br />http://www.levyforecast.com/assets/Profits.pdf<br />"Government expenditures add to business sector revenue both directly through<br />government purchases of goods and services and indirectly by increasing the income of households, which then buy from business. Flows to the government either increase business expenses or reduce business revenue. If the government sector saves (spends less than it receives), the subtractions from profits will more than offset the additions to profits; a government surplus is a negative source of profits.Conversely, a government deficit is a positive source of profits because more money flows from the government sector to become business revenue than government takes away from business."stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-87691857613633034302013-11-15T03:40:54.420-05:002013-11-15T03:40:54.420-05:00JPKoning, I totally agree when you say, "I th...JPKoning, I totally agree when you say, "I thought Stone's point was that sterilization would only have amounted to a fiscal tightening if taxes and not bonds are used to sterilize." I just checked http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo3.htm<br />Getting my calculator out it looks as though the deficits were <br />1935=$5.1B<br />1936=$2.6B<br />1937=$0.8B<br />1938=$3.3B<br />To me that makes it look as though the gold sterilization WAS conducted by using taxes/spending cuts and not bonds to gather the funds to sterilize.The "recovery" was simply government deficits passing through to be captured as profits and the gold sterilization program crunched those deficits down by a big amount, profits collapsed and the stock crash and recession were simply a manifestation of that.<br />Basically it looks to me as though it could well have been entirely immaterial whether those deficits were leading to an increased stock of treasuries or an increased stock of monetary base. We perhaps have no reason to try and explain how further increases to an already excessive stock of monetary base might shift expectations -perhaps there isn't evidence from this that they do?<br />It seems like how they describe things in these links:<br />http://www.levyforecast.com/assets/Profits.pdf<br />http://www.businessinsider.com/goldmans-jan-hatzius-on-sectoral-balances-2012-12<br /><br />I do wonder though whether a vast stock of monetary base MAY shift expectations because it may make it subsequently impossible for the central bank to raise rates once the central bank has a very large balance sheet of assets that pay very low rates. stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27321439559417762192013-11-15T00:10:32.329-05:002013-11-15T00:10:32.329-05:00Not sure exactly what you mean with your SNB analo...Not sure exactly what you mean with your SNB analogy. 1933 seems more like the SNB case to me than 1937, since in 1933 the dollar was redefined as a smaller amount of gold, just as the franc was devalued vis a vis the euro. In 1937 the dollar remained fixed at 13.71 grains of gold.<br /><br />"There is no tightening of the base it is just not growing..."<br /><br />If an announcement is made that the base will stop growing whereas everyone expected it to grow prior to that, then that sounds an awful lot like tightening to me.<br /><br />"Sterilized gold purchases is fiscal tightening."<br /><br />I thought Stone's point was that sterilization would only have amounted to a fiscal tightening if taxes and not bonds are used to sterilize. <br /><br />You guys really want to talk about the fiscal side. Must admit, that's not my expertise but I'm open to being taught.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-41288140309655344682013-11-14T18:30:47.377-05:002013-11-14T18:30:47.377-05:00I had a similar question as stone @5:45 AM.
Steril...I had a similar question as stone @5:45 AM.<br />Sterilized gold purchases is fiscal tightening. There is no tightening of the base it is just not growing, and Irwin's article says reserves were plentiful. So is this really a story of the base? The situation (not sterilizing) seems to be like the SNB actions to put a floor on EURCHF; sure the base is expanding but the real story is exchange rates. As the BoC says: monetary policy is affected through interest rates and the exchange rate. The 1930s example may just be a story of fiscal policy rather than base?jt26noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-1617782098277049412013-11-14T13:25:25.262-05:002013-11-14T13:25:25.262-05:00That same thought crossed my mind when I posted th...That same thought crossed my mind when I posted the charts. Let's hope it doesn't come to that!JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-18471289991630971992013-11-14T13:18:13.051-05:002013-11-14T13:18:13.051-05:00"About convenience yield- I can see that when..."About convenience yield- I can see that when the availability of base money is a binding constraint, then that pushes up interest rates by way of the convenience yield and when it becomes an extreme binding constraint then it can cause a full on deflationary crisis... However, when there is plenty of base money then I fail to comprehend how adding more can increase prices.... exchanging treasuries for base money seems to me entirely neutral when things are at the zero bound as they are now and were in the 1930s."<br /><br />I was hoping you'd make that point. You're right that we currently have oodles of base money and are effectively at at the zero lower bound. The <i>current</i> convenience yield is 0, nada. <br /><br />However, the market also has expectations about <i>future</i> convenience yields going out 1-week to 1-year to 10-years etc. Although the current, or 24-hour yield is at 0, it doesn't necessarily follow that convenience yields further out along the curve are at 0. As long as distant convenience yields can be reduced by more QE now, then a central banker can still increase prices by a bit more. This process of pushing future convenience yields to 0 will at some point lose its effectiveness, as I pointed out in my post, since the discounted value of hitting a 0 convenience yield twenty years from now is piddling. Anyways, <a href="http://jpkoning.blogspot.ca/2013/09/woodfords-forward-guidance-vs-forward.html" rel="nofollow">this post</a> describes the convenience yield curve.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6466409568933492652013-11-14T10:53:31.185-05:002013-11-14T10:53:31.185-05:00Perhaps this is a good test of your "memory-o...Perhaps this is a good test of your "memory-of-crashes" effect you've discussed previously (http://jpkoning.blogspot.com/2013/10/fama-vs-shiller-on-1987-stock-market.html)? Basilnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-36172560450101257892013-11-14T10:19:32.937-05:002013-11-14T10:19:32.937-05:00JP Koning, your meaning is very clearly put -thank...JP Koning, your meaning is very clearly put -thanks. Sorry if the question marks gave a bad impression. I was only trying to convey that although I followed what your were clearly saying I was struggling to tally that with my own comprehension of plausible causes and effects.<br />Although you say that this is about base money, non-banks will be left holding bank deposits rather than bank reserves won't they? Only banks can hold bank reserves so if say a car exporter sold cars to France in 1936, and the gold from that sale was then sold to the US treasury, then the consequence would be that the car exporter would be holding bank deposits that mirrored the bank reserves that his bank had got from the gold sale. It seems much the same as how JKH points out that today QE vastly increases bank deposits because the vast bulk of the treasuries that get bought by the Fed are owned by non-banks who then get primary dealers to sell them on to the Fed. Although the Fed pays with bank reserves, what the (non-bank) person/institution who was owning the treasury actually gets is bank deposits.<br /><br />About convenience yield- I can see that when the availability of base money is a binding constraint, then that pushes up interest rates by way of the convenience yield and when it becomes an extreme binding constraint then it can cause a full on deflationary crisis (that is never allowed to occur nowadays and is what central banks were set up to prevent). However, when there is plenty of base money then I fail to comprehend how adding more can increase prices. Obviously if you were to spread wealth around then that would increase demand but exchanging treasuries for base money seems to me entirely neutral when things are at the zero bound as they are now and were in the 1930s. The fact that the gold sterilization etc failed to raise interest rates much seem consistent with the idea that monetary base had minimal convenience yield at that time. If say a factory needed to be bought and lots of base money was needed for that transaction then it could be readily obtained in exchange for treasuries -which is just another way of saying treasury interest rates were low? stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-9852298529463274612013-11-14T09:06:17.769-05:002013-11-14T09:06:17.769-05:00"If someone was directed by distant expectati..."If someone was directed by distant expectations about rarity then why would holding treasuries, that were going to mature in say a year, act any differently than someone holding bank deposits????"<br /><br />Not bank deposits -- my whole conversation has been couched in terms of base money. <br /><br />Why do base and treasuries differ? Base money is typically more liquid than treasuries. A central bank will keep the supply of base rare in order to create a very large <a href="http://jpkoning.blogspot.ca/2013/08/the-fed-funds-rate-was-never-feds.html" rel="nofollow">marginal convenience yield</a> (or <a href="http://jpkoning.blogspot.ca/2013/11/rates-or-quantitites-or-both.html?showComment=1384008532381#c5784743288295907243" rel="nofollow">opportunity cost</a> as JKH calls it). The convenience yield on treasuries will almost always be smaller than that of the base. Second, shopkeepers keep prices in terms of base money, not treasuries. Put differently, the $ unit-of-account is defined by Federal Reserve-issued liabilities, not treasury-issued liabilities. So while a change in the base's convenience yield will directly cause prices to change, a change in Treasury's convenience yield will not. Does that make sense? You're using four question marks, so I can only assume that I'm not properly explaining myself to you.<br /><br />I'm sure there were fiscal reasons for 1937, I chose not to get into those.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-52386996945498500932013-11-14T05:45:09.437-05:002013-11-14T05:45:09.437-05:00I'm still puzzled. If someone was directed by ...I'm still puzzled. If someone was directed by distant expectations about rarity then why would holding treasuries, that were going to mature in say a year, act any differently than someone holding bank deposits????<br /><br />Might the clue about the apparent affect of gold sterilization be where they say that sterilization entailed the treasury purchasing the gold with funds obtained by bond sales OR TAXATION. Perhaps it all boils down to that "or taxation" way of sterilizing. Perhaps it was nothing to do with monetary policy effects (substitution of treasuries for reserves) and all to do with a fiscal change with more taxation/ less government spending so as to get the funds to pay for the gold purchases without selling more debt. Perhaps the recovery before gold sterilization was driven by government deficits and it would have been immaterial whether those deficits were in the form of accumulating stocks of reserves or accumulating stocks of treasuries (given that interest rates were effectively at the zero bound anyway). Before sterilization, the government deficits due to treasury gold purchase passed through to be collected as profits and when sterilization was funded by increased taxation/reduced spending profits collapsed????stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-59768614284654007512013-11-13T13:48:06.286-05:002013-11-13T13:48:06.286-05:00"Back in the 1930s, did the people selling go..."Back in the 1930s, did the people selling gold to the Treasury view the bank deposits they got in return as being very insecure?" <br /><br />I'm not sure. Could be. I recall reading that there were worries about devaluation in 1937.<br /><br />The hot potato effect I'm talking about in this post doesn't have much to do with things like deposit insurance. Base money is special -- it is both limited in supply and used to settle payments in the government's monopoly clearinghouse. By manipulating expected rarity of the base, a central bank creates a hot potato effect. Even if the base is not rare in the present, QE may be able to affect distant expectations about rarity, thus setting off a hot potato in the present.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-12355756875593932762013-11-13T13:31:26.399-05:002013-11-13T13:31:26.399-05:00"how can we have any confidence in their abil..."how can we have any confidence in their ability to time it just right?"<br /><br />Good point. We can't, I suppose. All the more reason to trust less in bureaucratic judgment and adopt a well-defined target?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-25979240740114175072013-11-13T13:19:46.898-05:002013-11-13T13:19:46.898-05:00I'm still trying to get my head around this. B...I'm still trying to get my head around this. Back in the 1930s, did the people selling gold to the Treasury view the bank deposits they got in return as being very insecure? Am I right in thinking that bank collapses with loss of customer deposits had happened in the 1930s? So perhaps before sterilization, there was a shortage of treasuries and so the lack of a safe refuge helped to create a hot potato effect just like QE is hoped to do now. Perhaps the whole effect rested on bank deposits not being fully insured? Perhaps if government protection of bank deposits was as extensive and credible as that of treasuries, then no "hot potato" effect would come from unsterilized gold purchase (in 1930s) or QE today????stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-45213251763538158262013-11-13T11:06:57.054-05:002013-11-13T11:06:57.054-05:00Yellen's comment is frightening... given Berna...Yellen's comment is frightening... given Bernanke and the rest of the FED had no clue they were in the 'great recession' a full 6 months into it, how will they know when the right time to reduce excess reserves will be?.... they cant spot bubbles either... so how will they know they are not blowing one? ... given their total lack of historical ability to know exactly where they were in the cycle, how can we have any confidence in their ability to time it just right? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-79331026091234918202013-11-13T11:01:43.074-05:002013-11-13T11:01:43.074-05:00"Let's imagine that in the 1930s, there h..."Let's imagine that in the 1930s, there had been no gold sterilization- would stocks have been able to rise forever? "<br /><br />Well, if you believe in some sort of "plucking model", then yes. I'm not entirely sure what to think about the plucking model. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-5981581645733722432013-11-13T09:12:55.209-05:002013-11-13T09:12:55.209-05:00Let's imagine that in the 1930s, there had bee...Let's imagine that in the 1930s, there had been no gold sterilization- would stocks have been able to rise forever? Presumably at some point consumers have to get enough money coming around to them to sustain a recovery. Things can get started by firms investing and building up inventory but if nothing gets sold at the end of it, a crash is unavoidable. I wonder whether "expectations" merely set the precise timing of the crash not the inevitability of the crash. What finally fixed the economy was the massive redistribution of financial power that came from WWII -its tragic that it took such an terrible event with all of the associated waste and suffering to put things back on track.<br /><br />Marriner Eccles perhaps got it right when in the 1930s he quoted:<br /> <br />“It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches, they can save empty office buildings and closed banks, they can save paper evidences of foreign loans, but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.<br />It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”, it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.” stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.com