JimBowerman

Wabuffo, if monetary policy is not important and no amount of QE is stimulative, why in the world do we collect taxes? Federal tax receipts are something like 20% of GDP. Why don't we issue new treasuries in the amt of 20% of GDP every year, and then immediately have the Fed buy up all those new treasuries and store them on the Fed's balance sheet forever? If no inflation will result, and instead we get deflation, why am I sacrificing so much and paying taxes to the IRS every year? Let's take our free lunch and never collect another dime in taxes! (of course i'm be facetious, and inflation would rapidly rise if we came close to that, but according to your logic, no inflation would result and its a free lunch?) Been a good convo, but we tend to go in circles on this, so will let you have the last word

Don't fully agree, but lets follow this train of of thought. The Fed does 100 quadrillion of QE...basically all commercial banks balance sheets are now 100% reserves. You're saying the commercial banks do nothing because of illuqidity? They don't make any loans? Does the economy deflate? inflate? I'm just very confused as to why we can't agree even at a high level that massive amounts of QE increase inflation (assuming 0% or negative IOR). Again, Selgin comment about the weimar republic banks being able to make massive amount of loans to the point where they had no excess reserves (despite. QE being many times higher than now) is relevant, but we don't seem to agree on this basic reading of history? Relevant thread on George Selgin discussing weimar republic etc. A few other replies to this tweet are also relevant --> (I'll also reference a thread we've had before on this same topic :) -->

This is our fundamental disagreement right here. If the Fed does QE to the tune of injecting $1,000,000,000,000,000,000,000,000 worth of new reserves and buys literally every asset on the planet, you're saying it will have no effect on bank lending?

Cameron, Yes Scott Sumner and market monetarists are far from mainstream. At least by my rough twitter count, It doesn't seem like there are more than a few dozen people in the world who are outspoken supporters of market monetarism. Hopefully that changes over time. Market monetarists are some of the few (only?) folks who correctly see that the goal of QE should be to *raise* long term bond yields (via higher NGDP growth). I wish folks on the FOMC would read more from: Scott Sumner, George Selgin, Lars Christensen, Marcus Nunes, David Beckworth, etc. This talk of yield curve control, etc will only bake in lower growth expectations (which comes from from incorrectly thinking that the goal of QE should be to lower bond yields - its the exact opposite!)

Cameron, I'm largely parroting here the market monetarist school of thought (Scott Sumner and George Selgin both have blogs that I largely agree with). I'm oversimplying a bit, but the old school "Monetarist" school of thought was close to accurate, but critically assumed the money velocity was constant. Market monetarists update this to focus on the "Velocity adjusted, monetary base"...Basically they target NGDP (and wish to automate most of the Fed's actions by setting up an NGDP futures market and making open market operations largely automatic whenever these NGDP futures deviate from a 4 or 5% growth path - ie making dollars convertible (in unlimited amounts) into NGDP futures. WaBuffo, always enjoy out discussion here and on twitter...Don't have a ton of time, and sorry if I'm repetitive with some comments...understandable if we want to agree to disagree, but with that said... Whats the point of QE if reserves are simply for clearing payments? If QE is not stimulative, then why don't we do more QE and collect less taxes? Is it not a free lunch? Again, sorry if i'm repetitive...i think we've had this conversation before but I do enjoy them! ;D (I'd also note that its MB [ie reserves + cash] that should correlate to NGDP over the long term. Reserves stayed flat or even dropped for much of the rapid NGDP growth period from 1970s and 1980s...but MB grew much more so. looking at just reserves can lead to wrong conclusions) Regarding "They would have to lend $4.7 quadrillion dollars!" - You can't do a simple ratio like this because of IOR. Comparing reserve amounts pre 2008 vs post 2008 isn't possible because IOR changes everything. That said, if the Fed did inject the amount of reserves that they've done, and did NOT pay IOR, then we'd certainly have hyperinflation and well on our way to that $4.7 quadrillion. And yes, while the current IOR rate is only 0.1%, the market correctly expects the Fed to raise IOR at the first sign of overheating...which in turn keeps inflation moderate.

This is probably one of the more complicated subjects but will give it a short explanation and we can go from there. Interest rates in my mind correlate (over the long term) with nominal GDP growth. And NGDP is determined, in the long run, by the velocity adjusted monetary base. Increase MB by 100x and you should increase NGDP by a similar amount over the long term (i'm ignoring interest on reserves for now to keep it simple) In practice, the Fed controls the monetary base by setting expectations and adjusting short term rates to meet that expectation. They have a 2% target now, and will adjust the overnight rate to a level where they feel MB will increase enough to match that 2% inflation target. If expectations are below 2% they can lower the rate, which should increase MB and increase inflation. However monetary policy is 90% expectations and 10% actual actions, so this can be confusing. Many times, the expectations can change without a change in actual Fed action. Dropping short rates to 0% can be stimulative if the market expects the Fed to keep rates at 0% for a long while. However if Fed signals they'll raise short term rates in the near future, then the initial drop to 0% will have much less stimulative effect. This happened in 2009, when the market saw that the Fed would raise rates too early (which they did in 2015). Many folks saw the 0% rates in 2009-2014 as easy monetary policy, when in fact monetary policy was tight during that time period. Again, expectations are the key. As a simple thought experiment: If the Fed pegged short rates at 0% forever, what would happen to longterm nominal bond yields? Answer: They'd go sky high and you'd have hyperinflation almost immediately We should judge monetary policy based on an NGDP level target, and we can clearly see that NGDP was well below the pre 2008 trend ever since the GFC. Monetary policy was entirely too tight for nearly a decade. I fear we have a similar problem now. Despite 0% short term rates, long term rates have remained stubbornly low, implying tight monetary policy and low NGDP growth going forward. The Market correctly sees that monetary policy is currently too tight. Truly successful QE and easy monetary policy should *raise* long term interest rates, not lower them. And of course, ever since 2008, the Fed has paid interest on reserves. This means that an injection of QE is much less stimulative because the commercial banks have less incentive to lend. Pre 2008, during open market operations (OMOs), commercial banks received 0% yielding reserves in exchange for say 2% yielding short term treasuries. Since these reserves can't be disposed of, the commercial banking sector had to lever up its balance sheet by making loans etc, which increased NGDP and draws the link between OMOs and higher NGDP. Now however, the Fed is paying interest on reserves (IOR). Commercial banks are receiving 2% yielding reserves in place of 2% yielding treasuries. Comm. Banks incentive to lend more is reduced drastically, showing how paying too high a IOR rate leads to a neutering of OMOs or QE and keeps NGDP too low (as we saw after 2008 and now) Anyways, that at least an (unorganized) start to the conversation :)

Yes Floored! is a great book. My youtube post by Selgin earlier in this thread goes into how the Fed can flood the commercial banking system with reserves to get NGDP growth if they want. Sumner has a great blog that I highly recommend. Here's one relevant post https://www.themoneyillusion.com/the-real-problem-with-the-money-multiplier/

Yes good discussion! I thinks it very hard to discern cause and effect from the data, especially since Central banks usually don't give clear forward guidance. For example, if a bank is unclear about how much of the currently printed money is permanent, then looking at money multipliers won't be usuful at all. A prime example of this is 2008. The Fed printed a bunch of money, but signaled at the same time that they would unwind relatively soon (and paid IOER). But that doesn't mean money printing is ineffective. It just means they shot themselves in the foot by signaling contractionary forward guidance (which turned out to be true - market called Feds bluff and won). Would also point out that I should say its reserves PLUS currency that matters (ie MB). In theory you could have a system with 0 reserves...Or another system with 0 currency. But you can't have a system with zero MB. You need a nominal anchor. in the last few decades, reserves have gone down. But if you look at MB, you can see a large increase (4-5x i believe) which largely coincides with NGDP growth (if you remove IOER factor of late) I think that you're right as far the current system...as it stands, reserves largely for settlement balance, etc. But I'm saying if the Fed acted appropriately, they could use reserves more as a money creation function to increase NGDP. Fiscal policy is a whole other discussion. I'd actually don't think fiscal can drive much growth on its own. The monetary authorities must cooperate, and the monetary authorities can snuff out any fiscal stimulus if they want (see monetary offset -> https://www.econlib.org/archives/2016/08/monetary_offset_1.html) Macro musings has a lot of good stuff. Have you read much from Scott Sumner or George Selgin? Pretty much 95% of my views here are just parroting original stuff from those two that I read over the years. btw, if you're on twitter, a few of us tend to have some good discussions on there if you're interested in joining in (example: )

Not sure if would be very difficult at all if there were a Nominal GDP futures market. Make dollars convertible into NGDP futures, in unlimited amounts (by anyone). Anyone who disagrees with future inflation marktes can make money. Fed promises to print velocity adjusted dollars when futures imply below 5% NGDP growth and remove dollars when NGDP growth is above 5% NGDP was WAY above trend for 30 years (1960-1992, see below). It was perfectly obvious, in real time, that monetary policy was entirely too easy for 3 decades. It is beyond easy to see when monetary policy is too tight/too easy if you have an NGDP futures market. Fed could set this market up very quickly and very low cost. Though I do agree that targeting inflation can be problematic. Take the current crisis. Real GDP understandably will be way below trend for a while. Proper monetary response is to raise inflation to 3-4% to make up for this downfall in real GDP. Keeping NGDP growth constant does exactly this and is one of the many benefits of NGDP targeting over inflation targeting

Would also note while private debt is an important factor in the 2008 crisis, I'd argue the drop in NGDP growth was much much more important. Private Debt to GDP went from 310% in 2005 to 370% in 2009. This likely isn't ideal, but much of this increase also occured as a result of NGDP (ie income) dropping yet nominal debts remaining fixed. If NGDP had maintained on a steady 5% growth path, I think private debt % would have been lower. We've also reached a steady state in the decade since 2008 with no major problems (see graph below). I argue that this is because NGDP was relatively stable until recently. I can imagine a world where we keep private debt to GDP in the 330% range forever with no problems, but only if NGDP is also kept stable on a 5% growth path. We can't let NGDP drop to even a 3% path, much less *negative* as we saw in 2008. The 2008 crisis was primarily a monetary policy failure, not a private debt problem https://fred.stlouisfed.org/graph/?graph_id=316529

This is what makes monetary policy so confusing. It works so counterintuitively. For me its helpful to think of the 10 year interest rate as having a fixed spread between nominal GDP growth. Its of course not always true, but over the long term is accurate and will help with our cause and effect understanding. For most of the 20th century, lets say NGDP averaged say 6.5% while bond yields averaged say 5% (spread of 1.5%). This was approximately the scenario in the 2005/2006 time frame. Now imagine, that with our 4.5% 10 year bond yield, the Fed suddenly announces yield curve control. In this case the Fed promises to keep the 10 year yield at 0%. Many people (including many at the FOMC >:( ) would think this signifies easy monetary policy. Unfortunately this is exactly wrong. When the Fed promises to keep 10 year bond yields at 0%, the market will instantly recognize that this also means NGDP growth will have to drop from 6.5% to say 1.5% or so (to keep our original 1.5% spread in tact). In order to keep NGDP this low, and keep bond yields this low, the Fed will actually start to decrease the future path of the monetary base. They'll signal that they are going to make less money in the future (remember, NGDP is simply the velocity adjusted monetary base). We saw this in Japan and we will see this in the US if they implement yield curve control. Yield curve control simply bakes in low growth expectations going forward and will not stoke inflation or higher nominal GDP growth If a central bank really wants high inflation they need to set their 10 year bond yield target above the current 10 year yield, not below it. If the Fed said "We promise to do unlimited Open Market Operations until the 10 year bond yield reaches 4%"...well then i'd really start to worry about inflation. The Fed usually only considers how their purcheses of bonds lowers the yeilds. They ignore how these bond purchases by the Fed also signal to the market that higher growth is coming. QE, If done correctly, will lead to the market *raising* its demand for interest rates which more than counteracts any depressing effect on yields from direct Fed purchases of bonds. FOMC and pundits also assume the market won't adjust to Fed signals...But the market most certainly will. its why we had huge inflation in the 1980s with a Fed balance sheet at only 5% of GDP...Its also why we can't get any inflation now, despite a Fed balance sheet of 30% of GDP. The market sniffs all this out and knows what the Fed is going to do better than the Fed itself Until the Fed makes the above quote, i'm not worried about inflation much at all (and of course, in my ideal world they wouldn't target the 10 year yield, but would target nominal GDP growth instead)

Wabuffo, Regarding your points: 1) QE should *raise* rates, not lower them. Lower rates signify tight monetary policy as Scott Sumner mentions here: Indeed, if QE always led to lower rates, then we could stop collecting taxes and just have the Fed Fund all gov't expenses with QE. Unfortunately this wouldn't happen, and if you do enough QE, then inflation and interest rates will eventually go *up* 2) There may be some minor interest income that is lost, but the overwhelming factor is the increase in lending that can result. There are problems with the money multiplier, but if done right, it gives an approximate order of magnitude..that is something like X increase in MB leads to 10X increase in M2 and NGDP (over the long run)

In my opinion, the private sector is helped if the Fed is clear about its intention to swap lower interest bearing reserves with higher interest bearing treasuries etc. If they do this consistently enough, the only option for the commercial banks to "rerisk" their balance sheets and make more loans (which increase Nominal GDP) George Selgin talks about how even in the weimar republic, the banks were able to get rid of excess reserves. Of course our post 2008 world is different because central banks are paying interest on reserves. But this isn't any technical failing of monetary policy. The failure is paying interest on reserves, which is self inflicted and has kept NGDP below trend since 2008 and led to a subpar recovery "“This is another argument I’ve had with Fed economists. I wrote to the Fed and said: ‘look, you’ve got it wrong. There is a distinction between the determance of excess reserves and the determance of reserves. It’s not the same. Banks can, in principal, always have low excess reserves by creating enough deposits.’ His (a Fed economist) response was: ‘well, when the magnitude of deposit creation is such, as it was under all three rounds of Q.E., then it’s no longer possible for banks to make that many loans. There’s not enough loan possibilities out there.’ And I wrote him back and said: ‘well excuse me, but in the German hyperinflation, the order of magnitude of increase of bank reserves was many times greater than in Q.E., as fantastic as Q.E. was. Yet, not only did the German banks expand deposits as rapidly as reserves and keep the same low ratio of reserves...the German banks actually lowered their reserve ratios. They created more deposits. They’re always able to get rid of non-interest earning reserves as long as there are other assets that earn more interest’…He didn’t have an answer to that” (Source w/ time stamp: )

QE can be deflationary if a central bank insists on paying interest on reserves. I know it's in fashion to say that private banks create most of the money, but this isn't true in a practical sense. The nominal anchor is still the monetary base and that is controlled by the Fed Under normal open market operations (OMOs), the Fed injects 0% yielding reserves in place of say 2% yielding treasuries. This makes a commercial banks balance sheet a bit less risky. Since reserves are "stuck" in the commercial banking system, the only thing these commercial banks can do (as a whole) is make more loans, etc to bring their balance sheet metrics back in line However, when the Fed insists on paying interest on these reserves, now the open market operations are swapping say 2% treasuries for 2% yielding reserves. There is no incentive for banks to "rerisk" their balance sheet and hence the banks have very little reason to make more loans. Of course this will look like "hoarding" of money, etc and result is lower economic (nominal GDP) growth. If the Fed clearly signaled their intention to move to negative interest on reserves, etc, then I think we'd see more inflation/nominal GDP growth. I'm simplifying a bit, but do think this is the general idea. Monetary policy is not (and is never) "out of ammo" I don't think ideas like "asset price inflation" or "market distortions" (from fairly basic OMOs) are all that valid at all.

So I'm probably misreading this, but he mentions that the mean annual return was 76%....but the geometric return is likely very different? Anyone have any estimates on what geometric mean return since inception has been? I'd guess its much lower than 76%...