tag:blogger.com,1999:blog-6704573462403312459.post2451190634836241189..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: Toying with the monetary transmission mechanismJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger33125tag:blogger.com,1999:blog-6704573462403312459.post-19768455981946028292014-04-25T09:37:29.359-04:002014-04-25T09:37:29.359-04:00Late in the party...
FED buying bitcoins cannot b...Late in the party...<br /><br />FED buying bitcoins cannot bid them over the fundamental value but HPE between banks will do the trick with the assets in general and push the prices higher, why?<br /><br />I would say banks has pretty good information on the quantity and one gets the almost perfect collusion scenario; the only effect is then that the yield of the reserves will go down?Jussinoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-56993269890919776682013-10-16T05:05:56.766-04:002013-10-16T05:05:56.766-04:00You make a lot of interesting and thought provokin...You make a lot of interesting and thought provoking posts, JP. I need to think about this one.<br /><br />One thing is puzzling me though. If the FED wants to inflate the dollar, this makes it more likely that people switch to Bitcoin as both a medium of exchange and store of value. And companies like E-Gov Link allow you to pay your taxes with Bitcoin. Who would there be left to hold the dollars if this continues? In the end, the only one would be banks (due to reserve requirements, the ability for the payment processors to pay taxes with dollars, and things like that) and the government. But banks would have no customers because the dollars would only be bought at the time when the tax is due, and only to be immediately transferred to the government. There would also be no reason to hold any of the bonds or other instruments issued by the treasury denominated in dollars, because the interest on them might not be sufficient to outweigh the appreciation of bitcoins.<br /><br />Also, the mechanism you describe requires an accessible trade mechanism between bitcoins and dollars. But this prevents the government from executing capital controls when people do not want to hold dollars anymore. And what if it turns out the other way around, that the government regulates bitcoin exchanges out of the legal field? Will the FED execute monetary policy in back alleys, meeting with bitcoin dealers?<br /><br />What I'm trying to point out that various governmental institutions might have goals that run counter to the goals of the FED. That would be paradoxical if the government itself were the greatest obstacle for achieving goals of monetary policy.Peter Šurdahttps://www.blogger.com/profile/17346161576941109337noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6909126397437031192013-10-13T22:53:12.675-04:002013-10-13T22:53:12.675-04:00MP didnt work perfectly in normal times. Weve had ...MP didnt work perfectly in normal times. Weve had many crises influenced or directly caused by MP. I do agree that it did have a degree of success though. It's a medicore or less effective MP mechanism than what we could have, which alot of the time gets a pass grade but it doesnt excel and certainly is not perfect. But MP could be much more efficient.<br /><br />" If lxdr/Mike is right that purchases through primary dealers can't cause prices or aggregate demand to rise"<br /><br />I didn't say prices cant rise. I said the effect of the current mechanism is limited or weak on aggregate demand or prices. The effectiveness of the mechanism varies mainly according to how widely held the assets that move are and the credit channel.<br /><br />I think the fed doesnt control inflation. I think it influences it. It doesnt dictate to price setters where they should price things. The degree of influence may vary.lxdr1f7http://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-23557333431467112842013-10-13T16:37:37.631-04:002013-10-13T16:37:37.631-04:00John, by conventional monetary policy I mean pre-2...John, by conventional monetary policy I mean pre-2008 Fed policy and/or current policy at many central banks like the BoC, RBNZ, RBA etc. In a conventional environment, the zero-lower bound is not viewed as a problem and supply of settlement balances has been kept artificially tight. My post is written in this context. We know that monetary policy worked perfectly in a conventional environment. If lxdr/Mike is right that purchases through primary dealers can't cause prices or aggregate demand to rise (ie. "therefore prices of goods and services wont increase much" or read his comments <a href="http://www.themoneyillusion.com/?p=24108#comments" rel="nofollow">at Sumner's blog</a> claiming that the Fed doesn't control inflation) he needs to explain the success of conventional policy (which is also Sumner's criticism <a href="http://www.themoneyillusion.com/?p=24108#comment-283840" rel="nofollow">here</a>). <br /><br />The hot-potato effect doesn't apply to financial assets... as long as those assets don't provide a marginal consumption return, or convenience yield. You're right that the marginal overnight convenience yield on reserves is currently at zero, however the distant convenience yield (1-5 year) is probably still positive. So the Fed can still create a hot potato effect by attacking the distant convenience yield. Once that yield has hit 0 across the entire curve, we really have hit the end of the hot potato road.<br /><br />As for helicopter drops, this post is more about the theory behind purchases at market rates, not giveaways or overpayments. Yes, you could view drops as buying rotten carrots, or "Sproulian purchases". I agree that they would be useful in a liquidity trap type situation. All 4 of the options on that list have their weaknesses and strengths -- I'm still feeling my way towards which one I prefer.<br /><br />I would add one other simple "hack" to that list. Don't ban cash, just issue $1s, $5s, and maybe $10s. Call in all $20s, $50s, and $100s. Low denomination notes are bulky and expensive to store. That way come the next crisis, the Fed can safely drop rates to -2% or -3% without fearing mass cash withdrawal. Regular people will still be able to use low-denomination cash and enjoy the benefits of privacy. Criminals, probably the main users of high-denomination notes, will be out of luck. Such a small modification would be unlikely to face legal hassles. [<a href="http://jpkoning.blogspot.ca/2012/10/no-need-to-ban-cash-to-avoid-zero-lower.html" rel="nofollow">link</a>]<br /><br />"I'm confused about exactly how the scramble to get rid of excess reserves and bidding up of financial assets leads to increased prices for goods and labor (in normal, non-ZLB times)."<br /><br />I'll try and write a post on this at some point. <br /><br />Good comments, by the way.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-48423627168643450122013-10-13T12:35:57.729-04:002013-10-13T12:35:57.729-04:00IMO the common definition of monetary policy is sl...IMO the common definition of monetary policy is slightly incorrect. If the monetary authority is altering the money supply in order to achieve its policy goals I would regard that as MP. Just becuase the CB is dealing with the public (when the mechanism is put in place without depending on the gov) I dont think stops it from being MP. <br /><br />I would say the current MP approach isn't really pure MP as it involves asset purchasing. "Pure" IMO would be just affecting the money supply on its own without buying assets. <br /><br />I see four main initial effects in bitcoin traders and dealers example :<br /><br />1) the bitcoin OTC traders or dealers rebalancing out of deposits (fed checks)<br />2) the banks receiving these checks will result in an equal amount of new liabs in form of deposits from OTC traders and an equal amount of new reserves<br />3) the banks rebalancing out of excess reserves above their RR<br />4) Bitcoin supply taken off market and held on fed balance sheet will drive up its price.<br /><br />The effects seem to be quite similar in both examples if we assume the rebalancing of OTC traders and banks will be the same. But I dont think everyone has the same investment and consumption habits or needs. For example small OTC traders will reallocate portfolios different to bigger dealers IMO. But I'm getting a bit too deep on this.<br /><br />In reality I rekon the fed would prefer to invest in a 51% attack on the bitcoin network rather than buying bitcoin. But your example is a good mental exercise.<br /><br />The transmision mechanism does matter. It matters who you interact with becuase everyone invests or consumes differently. It also matter if the CB is buying assets which I dont see as necesary if they monitor prices and bring money into effect in a balanced and measured manner. lxdr1f7http://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-45495012229870735392013-10-13T11:11:27.590-04:002013-10-13T11:11:27.590-04:00Re: helicopter drops--couldn't these be constr...Re: helicopter drops--couldn't these be construed somewhat like the Fed overpaying for assets, Sproulian-fashion? ("Buying" nothing from households, or essentially trucks of rotten carrots). Legality aside, wouldn't it have the same effect?<br /><br />In your Archimedes post, you listed four ways to push up NGDP at 0% int rates:<br /><br />1. Miles Kimball's floating conversion rate and negative returns<br />2. Sproulian purchases at wrong prices****<br />3. Krugman's New Keynesian credible commitment to keep future interest rates too low<br />4. Market monetarist's credible commitment to keep future non pecuniary returns too low<br /><br />#1 would be confusing (floating conversion), and Kimball's proposal to eliminate cash would also be a very hard sell to the US public (though I believe it has been nearly achieved in Sweden[?}). #3-4 require commitment by the future Fed, which the market can't be certain of. So aren't helicopter drops (#2, buying nothing) the best way forward?<br /><br />The public already has experience getting checks from the government (the Bush "stimulus" checks, although these were tax rebates). They surely wouldn't object to another round, if the Fed could legalize helidrops. (Re: the mechanics--wouldn't Fed helichecks be processed just like checks to BTC owners?)<br /><br />Helidrops would relax the "survival/liquidity constraint" on households, allowing them to make nominally fixed payments on things like rent and mortgages. It would also increase their real cash balances, since prices for goods and services will take time to adjust, thus leading them to spend unwanted excess cash. Good result, right?<br /><br />Beckworth also endorsed helidrops, as I'm sure you've read.John Snoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-49064957161072486252013-10-13T10:55:15.279-04:002013-10-13T10:55:15.279-04:00JP, in your reply to lxdr you wrote:
So conventio...JP, in your reply to lxdr you wrote:<br /><br /><i>So conventional monetary policy can't drive up CPI? That's a controversial statement to make.</i><br /><br />But as you also noted in your hot potato post, <br /><br /><i>As a central bank issues ever larger amounts of reserves... their marginal convenience yield, falls towards zero. As this happens, the hot potato effect becomes almost negligible—each subsequent issue of reserves increases the supply of what has already become a free good.</i><br /><br />So doesn't lxdr have a point? Isn't that more or less where the Fed finds itself right now? <br /><br />I'm confused about exactly how the scramble to get rid of excess reserves and bidding up of financial assets leads to increased prices for goods and labor (in normal, non-ZLB times). Is it the wealth effect (holders of flex-price assets feel richer and spend more, starting a HPE)? Or is it that banks increase lending on the margin to projects that are now attractive due to the decreased convenience yield on reserves? (Or both?) <br /><br />I thought the HPE doesn't apply to financial assets, so in times like now, when banks are flush with reserves (and new reserves provide negligible con. yield), how do increased financial asset prices lead to higher prices for tangibles like goods and labor?John Snoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-32210411103920365822013-10-13T10:30:04.886-04:002013-10-13T10:30:04.886-04:00Rereading your comments, I see now that you're...Rereading your comments, I see now that you're talking about helicopter drops. This is basically fiscal policy, or a tax cut. My post is about pure monetary policy. As my first line says... does it matter what the Fed buys? from whom? Helicopter drops don't involve the purchasing of anything, they are giveaways. I tried to reconfigure your scheme as a purchase of an IOU but that's probably not what you're interested in.<br /><br />However, when we're talking about purchases, not helicopter drops, do you agree that it makes no difference if the Fed buys bitcoin from public OTC markets or primary dealers?<br /><br />In any case, I do appreciated your comments as they make me think more carefully about my positions.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-75885583859724930162013-10-12T23:10:36.665-04:002013-10-12T23:10:36.665-04:00"My bitcoin spraying example is the same as d..."My bitcoin spraying example is the same as directly increasing people's accounts."<br /><br />You made the above comment. I directly referred to both structures in my comments. The structure of directly increasing in peoples accounts and also the primary dealers and also detailed the different effect on the economy. You haven't rebutted my observation of the differences between both approaches.lxdr1f7http://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-50865859900003867542013-10-12T22:07:26.428-04:002013-10-12T22:07:26.428-04:00I've been thinking about that monopoly/moneyne...I've been thinking about that monopoly/moneyness premium a lot lately. It seems like if the monopolist central bank is restricting money issuance enough for a premium to develop, it would also be restricting it enough for a recession to develop.<br />Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91775447355249893732013-10-12T22:01:57.109-04:002013-10-12T22:01:57.109-04:00"That assumes that those reserves have no way..."That assumes that those reserves have no way to reflux to the issuer, but that is tantamount to a removal of backing."<br /><br />Mike, good points as always. If reflux/efflux occurs via free conversion into x oz gold, then no premium will ever develop since there are no limits to supply. If reflux/efflux is conditional or limited in some way, then an issuer can restrict the amount of circulating media to ensure that a premium develops. It's ability to do so derives from its monopoly power. So we can get some inflation without losing backing. (However, you might say that the central bank's monopoly franchise is the backing that creates the premium -- the more it issues more its monopoly shrinks, as does its backing, as does the premium.)<br /><br />In your second comment, that's an interesting point. I agree that there doesn't seem to me much latitude for monetary policy if all it does is shrink or increase what is a very small premium. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-53779816618368946662013-10-12T14:08:00.117-04:002013-10-12T14:08:00.117-04:00There's also the problem that if you think tha...There's also the problem that if you think that the moneyness premium is 4%, then reserve-creation can drive the value of money down by 4% at most.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-77958688731202887602013-10-12T12:54:01.397-04:002013-10-12T12:54:01.397-04:00That assumes that those reserves have no way to re...That assumes that those reserves have no way to reflux to the issuer, but that is tantamount to a removal of backing. So either way, it is only by a loss of backing that we get inflation.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-4252328400564457122013-10-12T10:54:04.127-04:002013-10-12T10:54:04.127-04:00I provide not just a premise, but a structure in w...I provide not just a premise, but a structure in which too work things out. That's why I've created the bitcoin transmission mechanism with Joe Public and primary dealers. You've simply read my premise and skipped the structure. If you want to continue the conversation, please do so using the structure I've created -- there are reasons I spend so much time setting up these examples. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-7009698284138466502013-10-12T10:38:26.926-04:002013-10-12T10:38:26.926-04:00Mike, I agree that giving away reserves would also...Mike, I agree that giving away reserves would also do the trick. And that normally, an exchange of asset x for asset y at market prices would not cause the price of asset x to fall.<br /><br />I'm assuming in this post that reserves also provide a marginal non-pecuniary return and this causes them to trade at a price above their backing value. Any increase in reserves reduces their marginal non-pecuniary return, driving their value down towards their backing value. So that's how an increase in reserves allows the Fed to hit its inflation target. <br /><br />However, when too many reserves have been created their non-pecuniary return will be worth nothing on the margin. At this point, if the Fed issues 5% more reserves while getting 5% more assets, the price level will not change. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-3742795918914744952013-10-11T23:25:45.569-04:002013-10-11T23:25:45.569-04:00"if the Fed falls short of hitting its 5% gro..."if the Fed falls short of hitting its 5% growth target, it need only send out more officials to write more checks for more bitcoin until it hits its mark."<br /><br />If you had said that the Fed issues 5% more reserves, (or currency) and gives them away, then I'd agree that the price level would rise 5%. But if the fed issues 5% more reserves (or currency) while getting 5% more assets, the price level would not change. You said the same thing about Google stock a few posts back.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-89869208245673822472013-10-11T19:07:56.422-04:002013-10-11T19:07:56.422-04:00""Once asset prices increase it doesnt t...""Once asset prices increase it doesnt transmit significantly into greater demand"<br /><br />Where in my post did I say that rising asset prices cause greater demand for goods and services? You may want to double-check that you've properly digested my post."<br /><br />This premise of your article is that the route of the transmision mechanism is not important. In my comment I am detailing how altering the route affects the economy differently.<br /><br />"Big as these changes may seem, altering the route won't impede the transmission of monetary policy. Whether it quietly buys bitcoin from the public or pre-announces government bond purchases with primary dealers, the Fed will still continue to keep a firm grip on the economy's price level."<br /><br />"So conventional monetary policy can't drive up CPI? That's a controversial statement to make. "<br /><br />I didnt say that. I said if aggregate demand doesnt pick up significantly neither will prices. lxdr1f7http://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-65669076499007112992013-10-11T11:25:54.317-04:002013-10-11T11:25:54.317-04:00"Once asset prices increase it doesnt transmi..."Once asset prices increase it doesnt transmit significantly into greater demand"<br /><br />Where in my post did I say that rising asset prices cause greater demand for goods and services? You may want to double-check that you've properly digested my post.<br /><br />"Therefore prices of goods and services wont increase much." <br /><br />So conventional monetary policy can't drive up CPI? That's a controversial statement to make. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-46887329687056482372013-10-11T10:15:34.519-04:002013-10-11T10:15:34.519-04:00We can get a rough idea of the liquidity premium b...We can get a rough idea of the liquidity premium by looking at the fed funds curve. As long as there is some point along the curve that is positive, then a liquidity premium exists. A positive rate, after all, indicates that the market is requiring compensation to part with reserves over that time frame --- if reserves weren't valued for their liquidity, the market would require no compensation.<br /><br />I don't think there is a mechanical relationship between amount of reserves and their liquidity premium. Here is one attempt to compute it:<br /><br />http://www.bankofcanada.ca/wp-content/uploads/2012/05/wp2012-15.pdfJP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63124603947228704462013-10-11T05:44:04.109-04:002013-10-11T05:44:04.109-04:00Is there any way to calculate the effect of additi...Is there any way to calculate the effect of additional QE assuming that it is only done in exchange of assets at fair value? Lets say total amount of reserves is 100 x, the Fed does QE with 10 x, what would this do to the value of reserves? It would lower the liquidity premium by 10% perhaps? How do we know how much the liquidity premium on reserves is? Dan https://www.blogger.com/profile/14228383423254118263noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-55524181546281919392013-10-10T22:17:26.783-04:002013-10-10T22:17:26.783-04:00It isnt the same for the reason I explained in my ...It isnt the same for the reason I explained in my previous post. The fed is taking bonds off the market and reducing the return on money which is pushing up the attractiveness of risk assets. So far the transmision is fine. Here is where the problem starts though. Once asset prices increase it doesnt transmit significantly into greater demand or address the credit channel. <br /><br />Asset price increases wont increase demand from the many people that have little or no assets (unemployed, students, youth, etc...) and the people that have alot of assets dont increase demand much either. Therefore prices of goods and services wont increase much. The credit channel wont start up again becuase balance sheets of all the people without assets or little assets dont improve so they dont become eligible for credit. <br /><br />On the other hand if people broadly directly get money they have a much higher propensity to consume than asset holders. This picks up AD and goods prices, employment and accesibility to credit becuase they become employed after AD picks up. You dont see banks rebalance their portfolios into 10000 haircuts or movie visits do you? People that are barely getting by dont rebalance their portfolios out of cash into risk assets they are barely getting by they might just spend it on food or gas.<br /><br />lxdr1f7http://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-88453139981754909202013-10-10T18:11:11.138-04:002013-10-10T18:11:11.138-04:00My bitcoin spraying example is the same as directl...My bitcoin spraying example is the same as directly increasing people's accounts. The only difference is that the Fed is buying personal IOUs with checks, not bitcoin. <br /><br />Whether the Fed writes cheques to primary dealers for bonds, writes cheques to households for bitcoin, or writes cheques to households for personal IOUs, asset prices will universally be the first to adjust because they aren't sticky. The process by which sticky priced goods & services catch up is the same for each route.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-44684102252649100462013-10-10T11:42:50.002-04:002013-10-10T11:42:50.002-04:00Ok, let's talk about a malfunctioning transmis...Ok, let's talk about a malfunctioning transmission mechanism. When times are bad and expected to stay that way for a long time, Fed injections of reserves will simply be held by banks since they can perpetually earn 0% on reserves rather than investing at, say, -1%. However, this applies just as equally to your deployment example. Even if Fed employees fan out across the US and directly buy assets from households, why would people spend the cash they receive if they can hold it and enjoy a 0% return rather than investing it at -1%? In each cases, the Fed has troubles pushing prices higher.<br /><br />In short, if the transmission mechanism is blocked, changing the route doesn't unblock it. If the transmission mechanism is unblocked, changing the route doesn't block it.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-50712870560663369982013-10-10T11:34:37.463-04:002013-10-10T11:34:37.463-04:00Of course everyone will rebalance, the effect will...Of course everyone will rebalance, the effect will be different though if peoples accounts are increased with newly created money. The fed doesnt need to buy anything it can just monitor inflation or NGDP and if it is too low then it just expands money to reach its target.<br /><br />If people broadly expect to or do receive an increase in money an increase of goods and services will be realized more than an increase in demand for financial assets when compared to banks. People use money differently to banks, banks don't spend as much proportionally on goods and services. Spending on goods and services directly affects demand more than movements in financial assets becuase large swaths of the populace dont hold financial assets and many rich peoples spending habits wont even be affected if their financial wealth increases anyway. Therefore wages and employment will increase more if goods and services demand increases when compared to an increase in demand for financial assets.<br /><br />The effect on the credit channel is different also. People will pay off debt more and their balance sheets will improve making them more credit worthy. People become more credit worthy if they have more employment. Many people are unemployed and their credit worthiness will improve if they gain employment but wont improve if asset prices increase because they don't have assets.<br /><br /><br />lxdr1f7http://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-65287626915683190402013-10-10T11:14:23.698-04:002013-10-10T11:14:23.698-04:00If the Fed writes $-denominated cheques to buy bit...If the Fed writes $-denominated cheques to buy bitcoin, or if in an alternate monetary universe Google writes G-denominated cheques to buy bitcoin, it's the same thing. <br /><br />As long as Fed $'s and Google G's are useful in transactions and in scarce supply, then a hot potato effect will occur should $ or G be added or removed (via bond purchases/sales, or bitcoin purchases/sales, or X purchases/sales). However, at the zero-lower bound, neither $ easing nor G easing will be particularly effective.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.com