tag:blogger.com,1999:blog-6704573462403312459.post3518870571696868098..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: The convenience yield as epicentre of monetary policy implementationJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger75125tag:blogger.com,1999:blog-6704573462403312459.post-18485336281865857692019-08-23T11:02:59.315-04:002019-08-23T11:02:59.315-04:00This comment has been removed by the author.fortnitehttps://www.blogger.com/profile/01045597712306377453noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-4419400524705357722013-09-13T19:26:25.230-04:002013-09-13T19:26:25.230-04:00Tom:
Counting both the mortgage and the house is ...Tom:<br /><br />Counting both the mortgage and the house is double-counting. Someone who needs $100 will bring his $100 IOU to the bank, and the IOU is backed by a $100 lien against his house.<br />Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-31361578709723424012013-09-13T17:06:18.342-04:002013-09-13T17:06:18.342-04:00"Banks will naturally issue the right amount ..."Banks will naturally issue the right amount of money, just like farmers naturally grow the right amounts of apples and oranges."<br /><br />Mike, so the scenario you describe sounds a lot like people coming into the bank bringing their signed loan documents in exchange for money. Does that count? A swap of IOUs. But of course there's the collateral too... the house for example, that the new borrower is purchasing. How does that fit into your description? Both the mortgage and the attached collateral (house) have value. Do they count together as "stuff" people bring into the bank in exchange for an issuance of $?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-34910093201152777122013-09-13T16:56:45.402-04:002013-09-13T16:56:45.402-04:00Tom:
The real bills doctrine has been around long...Tom:<br /><br />The real bills doctrine has been around long enough, and has been stated and mis-stated in enough ways, that it's hopeless to try to define a "true real bills purchase". But if we ask the question differently, and just ask "What's the right thing to do?", then it's easy to see that as long as any bank, central or otherwise, gets assets worth $100 for every $100 that it issues, then that bank will not cause inflation or recession. Since QE seems to be doing just that, I have no complaints about it.<br /><br />Will such purchases be stimulative? If the economy is suffering from a tight money condition, then yes. The new money will relieve the tight money condition, and people who previously couldn't trade, or were reduced to inefficient things like barter, will be able to trade, and business will pick up. Note that if the economy is short of cash to the tune of $100, then people will eagerly bring $100 worth of their stuff down to the bank, asking the bank to issue $100 in exchange. A well-functioning bank does not need to actively try to inject more money. It only needs to accommodate its customers' requests for money. That's the argument in favor of free banking: Banks will naturally issue the right amount of money, just like farmers naturally grow the right amounts of apples and oranges.<br /><br />The other side of the question is, what if the economy does not currently have a money shortage? In that case, new money will do no good, but of course in that case, customers would not be bringing in their stuff to the bank and asking it to issue money.<br /><br />I think of 'stimulus' like taking a drink of water. If you're thirsty, a drink can have miraculous effects. If not, the drink does nothing.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-3727076784833485162013-09-12T16:28:49.822-04:002013-09-12T16:28:49.822-04:00Ah, thanks for the clarification. So is QE a "...Ah, thanks for the clarification. So is QE a "true real bills purchase" even though it's with a central bank? Or is non-central banking (Free Banking) required?<br /><br />If QE is a true real bills purchase, and true real bills purchases are stimulative, do you regard QE as stimulative? Why or why not? Is it too much or not enough stimulation?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-72051232198279025772013-09-12T16:19:00.233-04:002013-09-12T16:19:00.233-04:00Tom:
Here's a classic statement of the real b...Tom:<br /><br />Here's a classic statement of the real bills doctrine:<br /><br />"“The notes of the Bank of England, “the committee observes, “are principally issued in advances to government for ”the public service”…and in advances to the merchants upon the discount of their bills.” (Charles Bosanquet, Practical Observations, p. 53.)"<br /><br />so it would be a mix of government bonds plus "real bills". Personally, I'd say anything of value is potentially ok, from real bills to government bonds to lottery tickets. But historically, bankers preferred real bills, since they found that newly issued notes issued that way were less likely to reflux on them the next day.<br /><br />I suppose it's strange to say, but I'd never advocate Sproulian purchases. The only kind of purchases I advocate are purchases at the prevailing market price. That would work for our current situation, but since I'm a free banker at heart, I should point out that private banks, left to themselves, would naturally follow the real bills rule of only issuing new money in exchange for stuff of adequate value. No central bank is needed.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-44525764887444472522013-09-12T00:09:59.449-04:002013-09-12T00:09:59.449-04:00What kind of stuff (for a true real bills purchase...What kind of stuff (for a true real bills purchase)? Tsy bonds? I'm guessing "no" but I don't know... because that's what we've got now with QE, but with apparently limited stimulation.<br /><br />Are you advocating Spouling purchases (mix of inflation & stimulation) for our current situation?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-10905046429184170792013-09-11T17:12:56.688-04:002013-09-11T17:12:56.688-04:00Tom:
JP invented the term 'Sproulian purchase...Tom:<br /><br />JP invented the term 'Sproulian purchase', and I think he meant it as "the central bank drastically overpays for stuff it buys". So it's a less extreme version of a Roche purchase. On backing theory principles, a Roche purchase would cause inflation and would not affect real cash balances and so would have no stimulative effect, while a Sproulian purchase would increase real balances while also causing inflation, so it would have some stimulative effect. But a true real bills purchase would have the bank issuing a new dollar for a dollar's worth of stuff, so there would be no inflation, but the expansion of real balances would be stimulative.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-50719728310661180992013-09-10T23:55:41.801-04:002013-09-10T23:55:41.801-04:00Mike, so how do Sproulian Purchases differ from Ro...Mike, so how do Sproulian Purchases differ from Roche's-bags-o-dirt? It's not clear to me if you gave an example of a Sproulian purchase here.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-71606022834760921702013-09-10T23:47:15.067-04:002013-09-10T23:47:15.067-04:00Tom:
I've discussed that nominal/real equity ...Tom:<br /><br />I've discussed that nominal/real equity idea under the heading of "inflationary feedback" in a couple of papers: "The Law of Reflux" and "There's No Such Thing as Fiat Money". You've pretty much got the right idea.<br /><br />There are no sticky prices or wages in my world. That's an illusion created when a bank does an ordinary open market purchase and issues 10% more money while its assets also rise by 10%. A quantity theorist (Like Nick or Scott) sees the money supply rise 10% and expects prices to rise by 10%. But prices don't rise, because the bank's assets have risen in step with its issuance of money. Quantity theorists don't see this. They explain the stable prices by claiming prices are sticky, while the backing theory says that there was no reason for prices to change, since bank assets rose in step with money issuance.<br /><br />About stimulus: Here again, I live in a different world. A recession happens because there is a shortage of money. For example, the economy has $100 (=100 oz) of money in circulation, but people need 110 oz worth of money in order to conduct business efficiently, without being forced into less efficient systems like barter. Solution: The people most in need of money will offer the bank 10 oz worth of stuff in exchange for the banker issuing $10 of new money. Real cash balances rise from 100 oz to 110 oz, people now have enough money, and the recession ends. There's no inflation, since $1=1 oz throughout. But quantity theorists see that the 10% increase in the money supply did not cause a rise in prices, so they start talking about sticky prices.<br /><br />If the bank had instead printed $10 and bought bags of dirt, then there are 10% more dollars, each worth 10% less than before, so real balances are unchanged at 100 oz. Since there is no new money in real terms, there is no relief for the money shortage, and there is no stimulus.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-17039955949868650832013-09-10T20:58:57.132-04:002013-09-10T20:58:57.132-04:00Sorry, the GOAL is to get out of a recession while...Sorry, the GOAL is to get out of a recession while at zero rates.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-10974956865439832732013-09-10T20:57:30.576-04:002013-09-10T20:57:30.576-04:00Re: your wife: Lol
re: you bank example: Ah... so...Re: your wife: Lol<br /><br />re: you bank example: Ah... so the bank causes inflation (dollar lost 0.7% of value), but the bank "hit itself in the head" while doing this (loss of $2 of (nominal?) assets for the bank). Basically the bank lost $2 of nominial equity, but those dollars all lost 0.7% of their value. Both things happened. Correct? So the bank lost $2*0.993 "real" equity (as measured from the time prior to the loan).<br /><br />re: "the other way around" Haha! :D<br /><br />you write:<br /><br />"there would be (say) 10% more federal reserve notes laying claim to the same assets as before, so each FRN will lose 10% of its value. There will be no stimulative effect from this, since real money balances held by the public are unaffected."<br /><br />I'm confused... I'm understanding that the goal is to cause the price level to rise over a period of time, and that happens due to sticky prices/wages and an instantaneous change in the stock of the base (MOA). Isn't the argument that sticky prices and sticky wages don't adjust instantaneously?... but if the Fed buys bags of dirt, isn't that the same as if we'd dropped 10% more gold into an economy on the gold standard? I.e. that in the long run, prices should rise 10% in both cases, but it'll take a while to get there? If we didn't have sticky prices & wages, then wages & prices would adjust instantaneously and we'd have just changed measuring sticks? I.e. nothing else would have changed? (I was going to write "we'd still be at the ZLB and in a recession" but if wages and prices were NOT sticky, I'm getting the idea that this would help to prevent recessions, so we wouldn't be there in the first place most likely.)<br /><br />Here's Sumner on the effects of a change in the long run value of the MOA (his Case 4) by an immediate increase in the stock of MOA w/ "sticky prices":<br /><br />"if prices are sticky then other things will change to bring about a short run equilibrium in the gold market, before the price level has had time to fully adjust. And obviously one of those “other things” might be a change in interest rates. Other “other things” include changes in asset prices and real output."<br /><br />http://www.themoneyillusion.com/?p=23314<br /><br />So what's the key difference between Roche's-bags-o-dirt & Sproulian Lev.... uh, "Purchases" (with all due deference to your wife)?<br /><br />Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-79795918237856854492013-09-10T18:13:59.594-04:002013-09-10T18:13:59.594-04:00Tom:
I haven't really wrapped my head around ...Tom: <br />I haven't really wrapped my head around JP's concept of the convenience yield, and I get even more confused when folks start talking about the zero lower bound, etc. So I'm going to have to keep quiet on the subject for now. <br /><br />As for central bankers buying bags of dirt [or was it the other way around?], there would be (say) 10% more federal reserve notes laying claim to the same assets as before, so each FRN will lose 10% of its value. There will be no stimulative effect from this, since real money balances held by the public are unaffected.<br /><br />My wife is already teasing me about the "Sproulian lever", so I'll just try to steer the discussion back to the term "Sproulian purchase". Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-50412426065151748992013-09-10T17:49:31.737-04:002013-09-10T17:49:31.737-04:00Tom:
"If the going rate is R=5%, and my bank ...Tom:<br />"If the going rate is R=5%, and my bank above starts lending at 4%, then the bank would lose assets with every loan and inflation would result." <br /><br />For example, the bank starts with 100 oz of assets backing $100, so $1=1 oz. The bank then lends another $200 for 1 year at 4%, even though the market rate is 5%. The banker then has an IOU promising 208 oz in 1 year. But if he had lent at 5% like he was supposed to, he'd have an IOU promising 210 oz in 1 year. The present value of the 208 oz IOU is 198 oz (and the PV of a 210 oz IOU is 200 oz.). So the bank has issued a total of $300 (=100+200), backed by assets worth 298 oz (=100+198), so each dollar is now worth about .993 oz. (=298/300). The loss of 2 oz worth of assets has caused the dollar to lose about 0.7% of its value.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-82979903416388288302013-09-10T12:27:32.249-04:002013-09-10T12:27:32.249-04:00BTW, my example above w/ CPI and gold is backwards...BTW, my example above w/ CPI and gold is backwards for what to do to get us out of a liquidity trap... what I described is how to get us INTO a recession: both with MOA = gold and MOA = CPI basket.<br /><br />The other way of course is double the gold stock or halve the CPI slice target. The other distinction between these two methods (time it takes, etc.) still remains.<br /><br />Thanks JP for the feedback!Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-44924010615241596102013-09-10T10:14:34.082-04:002013-09-10T10:14:34.082-04:00Tom,
Yes, even if you hit a point at which the co...Tom,<br /><br />Yes, even if you hit a point at which the convenience yield is at 0 across all maturities, or Scott Sumner's 5b, the Sproulian lever (buying assets at very wrong prices) will still work. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-78397331084908388352013-09-10T09:05:39.019-04:002013-09-10T09:05:39.019-04:00Mike, do you have a blog? If you do it should be c...Mike, do you have a blog? If you do it should be called "The Sproulian Lever."Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-81220816834401747652013-09-10T08:58:05.699-04:002013-09-10T08:58:05.699-04:00Mike, I think I'm starting to put some things ...Mike, I think I'm starting to put some things together here.<br /><br />1. JP says at the ZLB the CB needs to commit to lowering the convenience yield of future reserves.<br /><br />2. In Sumner's recent post "HPE Explained" he proposes two cases, 5b, and 5c: both at the ZLB, but in 5b there's no expectation of future rates that are not zero, so you're stuck: bonds are money: no difference. In case 5c however, you're still at the ZLB but there are expectations of non-zero rates, so you're good: price levels will rise.<br /><br />3. Commentator "Jared" there, and JP here (in responding to me in his latest HPE post) says we're really between 5b and 5c. The more indeterminate that future non-zero rate is, the closer to 5b. Or perhaps the further out those expectations are of non zero rates, the close to 5b.<br /><br />4. In JP's post that he mentions the "Sproulian level" (I think that was #2 on his list of 4 levers), we again get into this idea of committing to keep rates zero (#3: the new Keynesian/Krugman version) or to keeping the marginal convenience yield zero (MM version: #4). But again, this seems to put us closer to Sumner's case 5b above: bonds are money: nothing happens. It's a bit of a paradox isn't it? The more you commit to keeping future marginal convenience yields zero... the *stronger?* the effect to raise prices now... but also in some sense the close we are to Sumner's case 5b where nothing happens.<br /><br />5. Nick Rowe makes a great comment right here (trying to shoot down the Sproulian lever and show that it's nothing but Chuck Norris still... just like the two "expectations" based levers: Krugman and MM). Well here's his comment:<br /><br />http://jpkoning.blogspot.com/2013/08/give-bernanke-lever-long-enough-and.html?showComment=1376687426295#c6535328868119468929<br /><br />Now look at JP's response. That was my thought too! Almost exactly... but with regards a Nick Rowe article... explaining a concept to DOB (who's link is below) on his blog... only JP put it much better.<br /><br />See I was trying to say something like this: If our MOA = CPI basket, and UOA = slice of that basket, then what's the equivalent (under gold standard) of just halving the stock of gold? I say it's doubling the size of the TARGETED CPI slice. But they aren't really equivalent... since one happens right now (the gold) and the other is really a target that we have to get to.<br /><br />I think JP's argument there (in my link) in response to Rowe is kind of saying the same thing: he's refuting Nick's attempt to say that Sproulian level is the same as an expectations lever... it's immediate. It doesn't suffer from having to invoke Chuck Norris. <br /><br />Do you agree?<br /><br />Also, would you claim this is the Sproulian level: Have the Fed buy bags of dirt (and overpay) instead of market priced assets. What do you think? Cullen Roche has said this, but he says that's equivalent to having the CB do fiscal policy.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-53658418663373508912013-09-09T23:09:19.598-04:002013-09-09T23:09:19.598-04:00If the central bank guarantees that it won't w...If the central bank guarantees that it won't withdraw base money five years from now, then base money at t+5 years will be plentiful. Therefore the marginal convenience yield on reserves will fall to zero at t + 5 years.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-37465425252952670062013-09-09T23:04:42.724-04:002013-09-09T23:04:42.724-04:00Neat. I think granting a central bank the ability ...Neat. I think granting a central bank the ability to set negative interest rates make a lot of sense too.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-87949585939515246942013-09-09T21:56:44.593-04:002013-09-09T21:56:44.593-04:00Mike, that makes sense. I don't follow this th...Mike, that makes sense. I don't follow this though: "If the going rate is R=5%, and my bank above starts lending at 4%, then the bank would lose assets with every loan and inflation would result." Could you elaborate? Are you saying that people would borrow at 4% from the bank, withdraw oz, and then loan them out to someone else at 5%?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-70456695285222919832013-09-09T18:46:45.546-04:002013-09-09T18:46:45.546-04:00Mike, thanks again! Very interesting.Mike, thanks again! Very interesting.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-25741104335961864202013-09-09T17:33:26.237-04:002013-09-09T17:33:26.237-04:00Tom:
You've found a great example of why my di...Tom:<br />You've found a great example of why my discussions with Nick so often go off the rails. In just about every sentence, he mis-characterizes the law of reflux.<br /><br />Now for the hard part, actual refutation:<br /><br />"an excess supply of money could not cause inflation [update: because any excess supply of money would immediately flow back to the issuer]."<br /><br />Start with a bank holding 100 oz as backing for $100 that it has issued. Customers need another $20 to conduct their business, so they offer the bank 20 oz worth of IOU's in exchange for the bank issuing another $20. There's no excess supply of money here. The $20 wouldn't have been issued unless the customers wanted it badly enough to pay the bank 20 oz. for it. If business slows down, so that people don't need that extra $20 anymore, then the $20 will reflux to the bank as people pay off their IOU's, but this has nothing to do with the value of the dollar, which is always $1=1 oz. (determined by backing)<br /><br /> "Banks could only cause inflation by lowering the price of money in terms of gold."<br /><br />You mean the bank, in spite of having 100 oz backing $100, suddenly declares that $1=0.6 oz? I suppose the bank could do that if it wanted, just like I could hit myself with a hammer if I wanted.<br /><br />"Modern proponents of the Law of Reflux argue that banks can only cause inflation by lowering the rate of interest."<br /><br />Well, sort of. If the going rate is R=5%, and my bank above starts lending at 4%, then the bank would lose assets with every loan and inflation would result. But we're back to the question of why would the bank do something tantamount to hitting itself with a hammer?<br /><br />"He seems to imply that if you don't accept his HPE for MOE (law of reflux doesn't hold for MOE), that you can't accept that QE could work."... "Do you accept that QE can work [to raise inflation]?"<br /><br />QE can work to increase the quantity of money, and as long as new money is issued for assets of adequate value, then QE won't cause inflation, but it can relieve any money shortage and end the resultant recession. In my world, the solution to recession is to issue more money for assets of adequate value. Inflation per se is not a solution for anything.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-25229902059961164792013-09-09T15:13:01.371-04:002013-09-09T15:13:01.371-04:00Mike, I find this comment by Nick Rowe to be inter...Mike, I find this comment by Nick Rowe to be interesting:<br /><br />"This very old debate over the Law of Reflux is what is at the root of the very modern debate about whether Quantitative Easing can work. Those who argued for the Law of Reflux argued that an excess supply of money could not cause inflation [update: because any excess supply of money would immediately flow back to the issuer]. Banks could only cause inflation by lowering the price of money in terms of gold. Modern proponents of the Law of Reflux argue that banks can only cause inflation by lowering the rate of interest."<br /><br />http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/09/all-money-is-helicopter-money.html<br /><br />He seems to imply that if you don't accept his HPE for MOE (law of reflux doesn't hold for MOE), that you can't accept that QE could work.<br /><br />Do you agree that's his logic? What do you think of that logic? Do you accept that QE can work [to raise inflation]?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-58989741967350096342013-09-09T14:05:10.167-04:002013-09-09T14:05:10.167-04:00JP, I'm not sure I understand this sentence:
...JP, I'm not sure I understand this sentence:<br /><br />"One way to reduce convenience yields five years hence would be to promise that the then-supply of base money will be sufficiently broad so as to ensure that the marginal deposit yields no convenience flows."<br /><br />Could you elaborate?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.com