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%...

He says rates are going to zero but says we are also going to do a bunch of money printing? Classic mistake of assuming money printing and "easy" money means low rates. It means the exact opposite: "After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die." Of course central banks are making the same mistake which means low rates are likely here to stay. No escape from tepid growth, despite the solution staring us right in the face --> What are nominal yields in Argentina and Turkey?

Wrote out some thoughts on housing in the link below. Obviously my extreme examples are just that...examples. They won't ever come close to being implemented, but was helpful for me to show myself just how wasteful many of the current zoning rules are I find YIMBY twitter is almost as good as fintwit another good follow which if you look at his retweets lead you to other good follows:

Wabuffo, Agreed, and good convo! This stuff is endlessly confusing (at least for me) and I always enjoy these type of discussions and to hear other points of views.

I'd certainly argue the Fed was too tight (easpecialy in earlier parts of 2010s). I judge the easiness or tightness of monetary policy solely on NGDP growth (which went negative in 2009) and was tepid until recently. Fed was certainly way too tight. As an extreme, if you run 10% budget deficits for 10 years, you'd increase debt from 0% to 100% or there abouts. That won't necessarily cause inflation if Fed makes it clear it won't monetize the debt faster than would be implied with 2% inflation. It would just spread the monetization out over many years to get the 2% inflation. Thats what i mean by the term "monetary offset". You can't look at even short run deltas of reserves. Its the long term path that matters, and with reserves increasing 1000% in QE1 to QE3 we've just front loaded money printing, but the long run path of MB is remains unchanged or even below trend (hence the low NGDP growth and inflation since 2008). I don't have any insights on the gold price and its way to variable to try to equate to inflation. Helicopter drops don't necessarily cause inflation. I could trop $8.3 Trillion to everyone tomorrow. That won't necessarily cause inflation because i could promise to tax it out of existance in 1 years time. Its the long term path of MB that matters. thats why QE didn't cause inflation. It didn't permanently change the path, it was just front loading money printing More extreme, what if Fed said it wouldn't monetize any debt? then deficits wouldn't matter and maybe govt would default, but if Fed remained firm, no inflation would result. The treasury can't affect aggregrate demand. they don't control the supply of the medium of account. Treasuries are not a medium of account. Only the dollar is, and the Fed is the sole controller of the dollar. The treasury can't print more dollars, only bonds. Sometimes the Fed plays ball and buys those bonds and monetizes part of the debt. But thats entirely the Feds call. They could refuse to buy any more treasuries, in which case no new dollars get out into the economy, and any deficit will either be accompanied by a future surplus or otherwise the bonds will default. Unlikely this will occur, but just list the extremes to illustrate a point

Fiscal deficits only matter to the extent that the central bank allows them to matter. See "monetary offset" https://mru.org/dictionary-economics/monetary-offset-definition https://www.econlib.org/archives/2016/08/monetary_offset_1.html The example of Europe is a perfect illustration. You can have 0% budget deficits and still get 10% inflation. You can have -10% budget deficits and get 0% inflation. This is why, while I don't favor the fiscal rules in the EU, the primary reason nominal GDP has been sluggish in Europe is the ECB...not individual fiscal situations in the member countries. Only the ECB controls the supply of the medium of account. Treasuries and government bonds are not mediums of account and illustrate why fiscal policy always takes a back seat to monetary policy when talking about aggregate demand. By the the way, that 8.3 deficit works out to something like 5% of GDP since 2010. Its a non issue

"inflation is always and everywhere a monetary (not fiscal) phenomenon" happy to continue the conversation but the problem (or solution) in Europe is not on the fiscal side https://www.themoneyillusion.com/fiscal-and-monetary-policy-are-not-alternatives/ (net federal spending, budget deficits, private bank lending, etc....none of these have any long term effect on aggregate demand...only the Fed can create new reserves which is the only thing that effects NGDP in the long run. The only 800 pound gorilla in the room is the Fed, not the Treasury) Indirectly, you could argue that congress is the 1000 pound gorilla - as they dictate the Fed's mandate

Agree with most comments here in that other political factors come into play, making higher inflation in the ECB unlikely. The failure, when looking at the political situation isn't all the ECBs fault. That said, no one at the ECB should be confused about the technical reasons why inflation is low. Its seems like i've heard some of this confusion from the ECB and that worries me a bit - because it implies that even if they did have the political support, they wouldn't know how to raise inflation. Another political factor going against higher inflation is the unhelpful bullying comments coming from the U.S. of "currency manipulation" - its a false term to begin with (a central bank must always and everywhere "manipulate" its currency as a central bank completely and totally controls the path of the monetary base). Even so, sub 2% inflation is in no sense "currency manipulation". That said, its real, and the ECB won't piss off the U.S. so they are stuck with low inflation Finally, would agree with ruleNumberone about the different conditions across the board and yet the forced single monetary policy. If the EU was an optimal currency area - that is if residents could more easily move across borders (much like residents easily move to different states in the U.S.) then a single monetary regime for the entire EU would be less problematic. That said, given the current political reality, I think the EU should move to a 3% inflation target. This might result in a bit higher than desired inflation in some countries but would likely help eliminate the 0.7% inflation you're seeing in Italy etc. Budget rule probably doesn't help but inflation is a monetary phenomenon (not fiscal phenomenon) and keeping the 3% budget rule, but increasing inflation target to 3-4% would be massively helpful imo (finally, prev. post was not arguing for hyperinflation, only showing how easy it is for central banks to raise inflation and nominal interest rates and that central banks are "never out of ammo" or "pushing on a string", etc. How come Argentina is never out of ammo or pushing on a string? Since nominal shocks have real effects, I'm arguing that raising NGDP (especially in the EU) would have benefits in the short run. In the long run, money is neutral, but that doesn't me we shouldn't be arguing for a stable 5% NGDP now - It would greatly improve the lives of EU citizens)

"Nominal shocks have *real* effects" (because of sticky wages) Hard to believe that at this point anyone is arguing that the the EU should have *less* robust nominal GDP growth. What in the world is the risk with unemployment so high? The main advantage of breaking up the EU would be to allow individual countries to inflate. Why in the world cant the ECB just inflate across the board...? If Spain or Italy leaves the EU tomorrow, the only way they recover is by devaluing their (new) currency...ECB just needs to print more money...its so easy and yet we are all making it out to be rocket science

Dalio produces a lot of good stuff but imo is dead wrong when he says we are "pushing on a string" or suggests that monetary policy is out of bullets. Monetary policy is never out of bullets. If we all think monetary policy is out of bullets we, then only need to go ask for advice from Argentine central bankers...they have no problem getting nominal rates to 25% or higher. Are they using some magic voodoo to get growth this high...or is it possible that monetary policy never runs out of ammo and the current batch of central bankers are just too timid to get the (nominal) growth they say they want

So...so far we've seen asset price inflation which will eventually spill over into CPI but we haven't seen that spill over yet? But its coming? Any eta on when you think it's coming? What do you mean exactly by "elsewhere"? Billions prices project? CPI? Are we all having skin in the game and holding massive short treasury positions for this "second coming" of inflation that is always just around the corner? 10 years and counting..... (if its only stocks and other assets that ever go up, and the price of milk and bread don't ever go up....then haven't we found nirvana and a perpetual motion machine?) In a society where a central bank does unlimited printing w/ only stocks going up and the price of milk and bread remaining flat - everyone would pay a 0% tax rate and see their net worth go sky high Its either that or we need to all start admitting (after 10 years) that "asset price inflation"/"shadow stats inflation" /"pushing on a string", etc. etc. theories are exactly wrong