wabuffo

Where can I see this information, that he is using margin? I think folks are referring to the borrowings used by Munger to buy the two software companies in 2012 and 2013. https://www.sec.gov/Archives/edgar/data/783412/000143774914011800/djco20130930_10k.htm This is the description here in the 10-K: [click on the image for full-size viewing] And you see the amount on the balance sheet here: wabuffo

Tax rates probably won't go up until next year. And I think most wealthy individuals and corporations will be able to avoid most of the impact. The point is that tax rates matter and the market won't wait until the legislation goes in effect to react to them. The market will handicap their passage and begin to react before they are enacted (say this summer or fall). So then, what is $1 of pre-tax constant annuity-like earnings worth at a 21% federal corporate tax rate and a 3% long-term risk-free discount rate? Answer = ($1 x (1 - .21))/.03 = 26x What is $1 of pre-tax constant annuity-like earnings worth at a 29% tax rate and same discount rate? Answer = ($1 x (1 - .29))/.03 = 23x so 12% lower. Add in a slight backing up of long-term rates (discount rate goes to 4%) and it could be 30% lower (17x). For large domestic payers of US federal taxes like BRK or banks or railroads, this could be bad news (all other things being equal). wabuffo

The thing that worries me is the S&P 500 does not actually look that expensive at around 25x pre-COVID earnings. ... And with interest rates a lot lower ....So you could imagine the S&P 500 going 50% higher perhaps over the next year or two unless the Fed starts tapering or the economic weakness starts to affect the results ... or marginal tax rates on capital gains go up + the corporate Federal tax rate increases..... but I haven't heard any plans for something like that happening,... 8) wabuffo

The dude is using margin. I mean, he can't be too concerned then, right? mmm - he sold enough stock in the Sept Q to basically raise cash to cover 90%+ of the margin loan. Prior to this Q, Munger didn't hold a lot of cash on the b/s. So is he really still on margin? Technically yes, but... wabuffo

strong dollar relative to what? ...other currencies, commodities, gold,...? What is the benchmark for your question? wabuffo

The biggest difference between the late 90s and today is the monetary environment in terms of what ends the 'bubble'. And by monetary environment, I mean the supply of federal government liabilities to the private sector that provide "moneyness" (i.e., currency in circulation + bank reserves + US Treasury debt held by the public - US Treasury debt held by the Fed). from late 1997 til 2001, the US ran a surplus that peaked in early-mid 2001. The effect of this was to put deflationary pressures on the US private sector. You can see this in a FRED chart I built for that period. [click on image for full-screen viewing] You can see that the effect was to reduce the private sector's total Federal govt money liabilities by 15.5%. This effect is mirrored by pulling up charts of the USD vs commodities and currencies during this same time period. Dollars were getting scarce. Here's gold vs the USD: Here's the Euro vs the USD Here's the Canadian Dollar vs the USD (this graph goes the other way, as USD gets stronger, CAD weaker means rising trend line): This was like a blanket descending on equities slowly smothering them. Add in US Treasury yields over 6% (which is an inverse P/E comparison for a DCF calculation) and equities collapsed in Q1, 2000 and didn't hit bottom until Q4, 2002. Today the monetary environment couldn't be more favorable. Here is the chart of Federal government liabilities since 2018 (currency + reserves + Tsy debt held by the public ex amounts held by the Fed). One can see the taking-it-to-11 growth (+22%) in 2021 since the pandemic. And the incoming administration wants more based on their recent pronouncements. And of course, unlike 1999, the yield on the 30-year US Treasury bond is 1.8% today vs 6%-ish back then in terms of the anchor for DCFs. I wonder if most people are going to get caught underestimating the length and strength of this bubble/rally/pick-your-descriptor. At the very least, there aren't the obvious headwinds of 1999 forming against equities today. The only things that I think could emerge as headwinds would be if long-term 30-year yields break out above 4% AND if tax rates on investments/business enterprise go up (both personal capital gains tax rates as well as Federal corporate tax rates). In 1997, personal cap gains tax rates were cut (and later cut again in the early aughts). Just some things to think about in terms of structural issues that affect stock prices. wabuffo

There has also been a structural change on how we should perceive BRK cash pile as well: I would like to point out that Buffett's avoidance of long-term US Treasury bonds starting in 2010 or so in favor of extremely short-term T-Bills has cost BRK a lot of money. As an example, her is the bond table from the 2019 BRK annual report: Look at the fair value gains on the tiny amount of bonds in the five-to-ten year duration bucket (+84%). Imagine what the fair value gains in the ten-to-thirty year bucket would've been. It's been taken as gospel that Buffett has been shrewd in avoiding the long-end of the yield curve and staying in cash and cash equivalents for the better part of a decade. But in fact, its been a huge error that has cost BRK shareholders plenty. Is ten years long enough to call out Buffett's mistake or is that still heresy here at COB&F? wabuffo

Bought more GTXMQ this morning even though I already had a full position. At this point - its kind of an arb. The Ch.11 plan is providing a put option at $6.25 that will be good until plan is confirmed (likely in Q2, 2021). Haven't decided if I will take the cash or invest in the rights @ $3.50 and get the Series A 11% preferreds plus common shares. wabuffo

SD trading or Wabuffo talking about monetary policy....both are kind of like grad level university course poetry. You can see its beauty. You are captivated by its effortless luster, and ultimately leave appreciating it, but not really understanding it anyway. Hey Greg - what if I explain monetary policy with memes? wabuffo

Thanks about that sub-stack. I've heard of him, haven't read his stuff (its behind a paywall, I think) - but have seen some of his interviews and think he is brilliant. Also, just to be sure I'm correctly synthesizing the Hunt/Hoisington position with your explanation above, is it fair to say scenario 2 cannot legally happen independent of a corresponding tax receipt or treasury issuance? In other words, the government cannot legally create new private sector assets without taxing the private sector or increasing public sector debt to pay for those assets? Yes - but its because of a political constraint - ie the US Treasury cannot run its general account at the Fed with an overdraft (ie - negative balance). wabuffo

Do I understand you correctly? I think so. Just remember you must always think in terms of debits and credits. If there is a flow, you must think in terms of both assets and liabilities. If there is a flow of deposits into a bank (a liability), there must also be a corresponding asset. You have to ask yourself what is that asset (or it could be the addition of a liability and the reduction of another liability). The reason why this is all confusing is because most people don't think this way. So even economists make ridiculous statements sometimes on CNBC and elsewhere. wabuffo

Russell 3000 Value +3.1% Russell 3000 Growth +0.25% Long end of the yield curve going up. I think people sometimes forget that stocks have duration as well. A growth stock has much of its discounted cash flows out in the future - thus much of its NPV is past the, say, 10-year mark. But a value stock has shorter duration. Its value is driven by liquidation value and near-term earnings so much of its NPV is within the 10-year mark of a DCF. If this is more than a head-fake in terms of rising long-end yields, then "value" might do better than "growth", much like a shorter-term bond than a long-term bond when rates rise. wabuffo

Are you saying that each bank has two types of accounts with the Federal Reserve: (1) that they cannot withdraw from because it is funded by asset sales to the Fed, and (2) that they can withdraw because they funded it voluntarily with customers' cash? No there is only one account at the Fed - a reserve account. Banks also hold a tiny amount of cash outside the Federal Reserve. They also have vault cash (actual hard currency). Let's look at the data as at Weds Dec. 23, 2020 as an example. We'll look at this from both sides of the mirror: - first from the Federal Reserve's balance sheet (Federal Reserve H.4.1 report), and then - from the collective balance sheet of all US commercial banks (Federal Reserve H.8 report) [as always - click on the image to expand it for full-screen viewing] First - let's go to the Federal Reserve's balance sheet (the liability side): Bank reserves are a liability of the Fed. From this snapshot taken on Weds. Dec. 23, 2020 - total bank reserves for the entire US commercial banking sector on deposit at the Fed were $3.177 trillion. Now let's go to the mirror image of this liability and look at the collective balance sheet of the US commercial banking sector's asset side that matches this Fed liability. We can find this in the Federal Reserve's H.8 report We can see here that total cash assets across the entire banking sector were $3.240 trillion. Why the difference? Because on the bank balance sheet all cash is consolidated from an accounting perspective and doesn't distinguish between what is at the Fed and what is held by banks themselves or in their vaults. Thus $3.240 - $3.177 trillion = $63 billion held by banks outside of the Fed reserve accounts. As expected banks on their own want to hold very little cash. Thus 98% of what banks classify as cash on their GAAP balance sheets actually is frozen at the Fed. The $3.177 trillion is there simply because of actions by the Fed (and US Treasury). Here is an excerpt from a Bank of America earnings call, where they are saying that they have a choice on what to do with incoming cash from customer deposits to either (a) park incoming cash from customer deposits at 10 bps with the Fed Reserve or (b) buy securities. Are you saying that if they pick (a), they cannot take that cash out to start funding riskier loans later? Ok - I can see where this gets confusing and BofA is not helping with their description of what's happening here. First of all customer deposits are not an asset of BofA - they are a liability (unlike reserve balances which are an asset for BofA). So you can't mix the two, right? Second - ask yourself where does the growth in total US commercial banking deposits come from? You might say "saving" or people or businesses "depositing their money" - but actually these transactions move deposits around from bank to bank but don't actually increase total deposits for the entire banking sector. If you get paid by your employer - your deposits at the bank go up but deposits at your employer go down by an equal amount (and total deposits for the entire banking sector don't change). Its only when you pay taxes to the IRS or get a stimulus check from the US Treasury do total deposit balances for the entire banking sector change. Go back to this payment flow (US Treasury deficit spending) and think about what was happening in 2020. The lion share of net, new bank deposits are created out of the blue from US Treasury spending. And as we can see from the flowchart (substitute BofA for JPM visually here), this spending creates BOTH A RESERVE ASSET for BofA and a BANK DEPOSIT. So when BofA is saying they've added billions in new deposits since year-end, most of those are via US Treasury spending (though some could be a net increase from transfers of deposits from other banks). But most of that deposit increase was accompanied by a reserve account increase too. BofA didn't "deposit cash at the Fed, the US Treasury did" and it stays locked there. In addition, to the extent that BofA saw a net increase in transfers of deposits from other banks, those deposits, too, were accompanied on the asset side of BofA's balance sheet with a reserve transfer from those other banks. Again those reserves can't leave the Fed's payment and reserve account systems, they can only circulate between reserve accounts as payments/transfers get cleared. If you are interested you can pull BofA's regulatory Call reports at the FFIEC and there you will see a breakdown of BofA's cash assets between what's actually held at the Fed in reserve accounts. Hope this helps. wabuffo

<bizaro86> I'd like to invert this with a question (selfishly to aid my own understanding). What would cause inflation? We know inflation is possible because it has happened in the past. <mattee2264> Yeah I think large budget deficits accompanied by a recovery of private sector spending could do the trick with higher commodity prices and supply constraints adding some fuel to the fire. I'm glad these accounting ledger views are helping folks visualize what's really happening with these different government payment flows. So with that I want to show the three basic payment flows that we've been talking about: 1) The Federal Reserve buying a US Treasury bond in its open market purchases. (it is not technically allowed to buy it directly from the US Treasury) 2) The US Treasury spends. (because the US Treasury runs a perpetual deficit - it must spend more than it takes in via taxes. But I could also focus on a tax payment too - flows would just reverse) 3) The US Treasury issuing a bond to the private sector. Here's the key takeaway: Only deficit spending (scenario #2) from the US Treasury actually creates new money (i.e., new net financial assets) for the private sector. The other two flows leave the private sector with exactly the same net financial assets as it had before, it just changes the form of that financial asset composition. Ok - so if you've read this far. Let's go through all the payment flows. I'm going to expand the accounting ledger beyond the Fed and a bank (JP Morgan Chase) to add the US Treasury and an Individual/Business Account (which is a proxy for the private sector). I'm consolidating the govt sector by combining the US Treasury and the Fed on one side (in blue) and the private sector (bank + individual/business) on the other side in green. The key to focus on is the effect on the net financial assets of the Individual/Business sector. Focus on which of these three flows increases the net financial assets - highlighted in yellow. First up - the one payment flow we've already covered. The Fed buys a Treasury Bond. In this case, I've made a change. I've had the US Treasury Bond originate from an Individual/Business through a Bank to the Fed. Before we just had the Bank dealing with the Fed directly. [click on drawing for full screen viewing] I'm not going to go over this one because we've been over it. Notice though that this payment flow does not increase individual/business net assets. Next up - the US Treasury deficit spends. Here the US Treasury issues $10m in CARES Act checks (for example). The Treasury tells the Fed to issue a payment order and the Fed moves electronic deposits from the Treasury's reserve account to JPM's reserve account. This creates both a reserve asset and a bank deposit liability for JPM. But for the private sector - this is a new net financial asset. Therefore US Treasury deficit spending creates "new money" for the private sector and increases the private sector's net asset values (in terms of the "government's money". Finally - the US Treasury issues a bond. Here the private sector buys a bond from the US Treasury. Notice again - that this is an asset swap. The private sector does not see an increase in its net financial assets. It's balance sheet stays the same as before buying the bond - it just changes the asset mix. A long-winded way to answer the question is that the only thing that increases money, banking deposits, net financial assets in the hands of the private sector is US Treasury deficit spending. Everyone worries about the Fed, the banks, lending - but all of the real action is here. This is what one needs to pay attention to. The Fed and the banks are just intermediaries that manage the payment flows through the payment systems. I'll just add another comment. File this under = advanced topics. Compare Payment Flows 2 and 3. Notice how the act of US Treasury Spending creates an equal in size reserve balance for JP Morgan? Notice how after issuing a Treasury bond, the bond relieves JP Morgan of that large reserve balance even as it maintains the increase in net financial assets for the private sector? (ie, the bank deposit asset is changed into a Treasury bond asset for the Individual/Business sector). This is why we say that Federal Government Debt issuance isn't really borrowing - its a reserve maintenance function. This means that if not for the borrowing, US Treasury spending would create unwanted and large reserve balances in the US commercial banking sector. This is why one can't think of a sovereign borrowing in its own currency as simply borrowing the way we think of it for individuals, businesses, local and state governments that don't create fiat currency. Federal borrowing serves a different function than funding the government. I know this last point can be confusing. It is made confusing by the rules that the Congress puts in place to make it look like the government must tax or borrow to fund spending: - the US Treasury cannot run an overdraft at its general account at the Federal Reserve (i.e., no negative balance), - the US Treasury cannot borrow beyond an absolute level (ie "the debt ceiling") - the US Treasury must issue its bonds to the public (and not the Fed). - the Fed must buy its Treasury bonds in the open market. Its important to note that these are all political constraints, and not economic ones. The only economic constraint is that the private sector must want and need the Federal government's money. This need is not created by legal tender laws or contracts. It is created by the tax obligations that the Federal government imposes on the private sector and then mandating that these tax obligations can only be extinguished by using the Federal government's money. Hope this helps and I just haven't confused everyone with my ramblings. I'm still learning this stuff myself. wabuffo

Are you saying that #1 effectively forces #2 to happen because banks don't have anywhere else safe to put their customer deposits? No - I am saying the two are linked in a payment flow. The Fed's main job is to manage US large-scale payments clearing. They do this by using reserve accounts. All nationally-chartered banks have a "chequing account" at the Fed. So when the Fed decides it wants to expand its balance sheet by buying a Treasury bond from JP Morgan Chase, this is the payment flow that happens. This is very simplified and very high-level. The tables show what happens to the assets and liabilities of the Fed and the assets and liabilities of JP Morgan Chase when the Fed buys a bond from JPM. In the first table, JPM owns only $10m of US Treasury Bonds so its total assets are also $10m. (This is obviously not what the entire balance sheet of JPM looks like). The Fed at this point has no assets and no liabilities. (again - not what the Fed balance sheet looks like). Then the Fed buys $10m of US Treasury bonds from JPM. The Fed makes an electronic accounting entry in JPM's reserve account at the Fed for $10m and takes possession of the bond. Now the balance sheets have changed. The Fed expanded its balance sheet and now owns $10m of Treasury Bonds but also has a liability of $10m via JPM's reserve account at the Fed. JPM's balance sheet hasn't changed in total assets. It still has the same $10m of total assets. The difference is that instead of US Treasury bonds, its assets are on deposit at the Fed with an account balance of $10m. The issue is that these reserve accounts at the Fed can only be used to clear payments between JPM and other federally-chartered banks or between JPM and the US Treasury (ie, tax payments going to the US Treasury, spending from the US Treasury going to JPM). See! its a closed-loop system. In aggregate the reserve balances can shift between banks but for the entire banking sector the total reserves at the Fed can't change unless/until the Fed changes them by selling assets back to the banks. LearningMachine - I hope that makes sense. You can't think of reserves as something banks can "withdraw" from the Fed, in aggregate they can't. It is Fed decisions to buy assets (and expand its balance sheet) or sell assets (and reduce its balance sheet) that determine how much reserves that banks have stuck in these accounts. If you want a slightly more complicated flow involving the US Treasury and MetaBank (CASH) and the CARES Act EIP debit card program for stimulus payments to the "unbanked" - I went over that payment flow last summer (a real world example). Its shows how MetaBank's reserve account exploded when the US Treasury issued the order to the Fed to transfer money from the US Treasury's reserve account at the Fed to Metabank's. https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-can-the-fed-unlimited-qe-be-deflationary/msg425263/#msg425263 wabuffo

This action eliminated reserve requirements for all depository institutions. This is related to REQUIRED RESERVES and was already essentially obsolete as a concept. TOTAL RESERVES today are made up of REQUIRED RESERVES + EXCESS RESERVES. Required reserves stopped being important after the GFC and the expansion of the Fed's balance sheet. Look at this table - nothing's really changed just because for accounting purposes required reserves are marked at zero -- the numbers just shift over to the excess reserves column now. https://www.federalreserve.gov/releases/h3/current/default.htm It sounds counter-intuitive, but reserves are a function of the Fed deciding how big a balance sheet it wants to carry. Banks are just along for the ride as passengers collectively. They have no choice. Don't believe me. Let's hear from a former Fed governor (ex-NY Fed President Bill Dudley): https://www.bloomberg.com/opinion/articles/2020-01-29/fed-s-repo-response-isn-t-fueling-the-stock-market Dudley was talking to the issue that many market participants were blaming the Fed restarting its repo program in late Sept. 2019 as causing "liquidity to flood into the stock market" - but focus on the mechanics he's describing. 1) The Fed increases reserves by buying stuff (strictly a swap of assets with a bank) 2) Those reserves go nowhere and stay in the Fed’s clearing accounts for the banks. So why did the Fed cut the required reserves to zero if banks can't actually change the total reserve levels held by the commercial banking system? I believe there are calculations embedded within that reserve requirement that are affected by the types of assets banks hold on their balance sheet. By setting it to zero, it was a very quick-and-dirty deregulation act for banks to free them up to change their asset mix. Perhaps, the Fed hoped banks could more easily alter their asset mix towards riskier assets and help them better respond to the economic hardships businesses were facing because of the pandemic-related shutdowns. I don't think it did much. wabuffo

I wonder if it is a question of "when" people might stop hoarding money not a question of "if". The problem is that one of the largest components in the calculation of "velocity" in the monetary base is reserves. I can't seem to access my reserve account at the Fed so I guess I'm one of the hoarders. 8) "Velocity" started to fall when the Fed expanded its balance sheet in 2008 by forcing the US commercial banking sector to hold over $3 trillion of reserves when they used to hold less than $5 billion pre-2008. The quantity of bank reserves is a policy decision controlled by the Fed (banks as a total sector don't have any choice in the quantity of reserves the industry must hold on deposit at the Fed). Reserves are "frozen" assets that do nothing but sit there to help clear payments. If one is actually trying to measure velocity - I think you could look to the Federal payments systems (Fedwire, CHiPs) and measure the number of turns vs something like GDP. I haven't updated this in awhile, but this is a chart I drew up comparing these two things ($ value of payment transfers & GDP) Currently, the Federal Reserve payment systems settle over $1.1 quadrillion in payments per year. Annual US GDP is $21 trillion - give or take. So every $1 of GDP requires over $60 of payments to circulate on average through the US economy. This doesn't include payments in cash - but they are small relative to non-cash so I ignore them. Here's the historical chart. The ratio bobs around a bit but is up in 2020, FWIW - if my little home-grown "velocity" ratio actually tells us anything useful. wabuffo

I think what is different this time is the money supply growth is enabling enormous budget deficits. Is it really different this time, though? The numbers look big, but as always I think its important to put them in context. During the response to the GFC, the US hit a peak deficit-to-GDP ratio on a trailing-twelve month basis during Sep Q 2009 of 12.58%. During this crisis, the peak deficit-to-GDP ratio on a trailing-twelve month basis was during the June Q 2020 of 14.8%. The deficit continued to go up on a TTM basis for the Sep Q 2020 but so did GDP such that the ratio for Sep Q 2020 actually fell slightly to 13.31% of GDP. So yes - the budget deficits are a bit bigger, but not enormously so, when place in the context of the size of the US economy. Did we have inflation after 2009? I didn't see much of it. Did we have currency debasement? That we sure did - gold took off and hit a peak in 2012 but declined after that as deficit-to-gdp ratios came back down to the single-digit range percentages. wabuffo

how about public sector assets? how much is the Grand Canyon (etc) worth? i was talking about the US monetary system - you know, more mundane stuff. Accounting ledger debits and credits.... I don't do the big picture stuff like you do. My cognitive capacity is quite limited. 8) wabuffo

I think of of money supply this way: Private sector assets = Public sector (i.e., Federal govt) liabilities. So money is basically a liability of the Federal government and an asset of the private sector. As I've indicated in other posts, the Federal government offers the private sector three forms of "money": a) currency in circulation b) reserve balances with the Federal Reserve banks c) US Treasury securities In my view, the traditional measures of money supply - M1, M2, MZM are simply imperfect measures of private sector assets that can be more easily measured by looking at their mirror image of Federal government liabilities of "moneyness". Here's a FRED chart that puts it together. The formula is: (currency in circulation + reserve balances at the Fed + US Treasury debt held by the public - US Treasury debt held by the Fed). As of this Dec. 30th, 2020 - the total money liabilities of the Federal government stood at $22t. That liability has grown 18.9% since March 4, 2020. While that sounds impressive - this measure has been growing at +10.8% per year since mid-2008. [click on chart for full-screen viewing] Ok - so what is the effect of all this? My own theory is that it is already having an effect - just not in CPI measures, but in debasement of the currency which manifests itself in asset inflation. The canary in the coal mine for me is gold which has been very sensitive to this "money" growth. Here's two examples from this dataset - one when money "supply" fell significantly and one when money "supply" increased significantly. The first is from 1997-2001 when the US actually ran a Federal surplus (taxes exceeded spending). This caused "money supply" to fall for one of the few times in our recent history (-4% per year over this period). Look what happened to gold - it fell too. In addition, the stock market had a three-year funk (2000-2002) as it finally started to feel the cumulative deflationary effect at the beginning of 2000. The next chart is after the GFC, when spending ramped up in response to the crisis, "money supply" increased 17% per year from mid-2008 to the end of 2012. Gold responded to this as well. Now the relationship between money supply growth and asset inflation (or gold) isn't linear or perfect so its not a perfect "hard and fast" rule. But I think the general relationship makes sense to me as the supply of new gold mined every year is around 1.8% of the above-ground gold inventory. Gold's monetary attribute is stability since it grows very slowly. This is also what Bitcoin is trying to do - grow supply at 2% per year (like gold). My guess is that the reason gold is jumping again since early December is because it is starting to "feel" the effect of this second round of stimulus that has begun this week and will start to appear in the US Treasury spending numbers in January. FWIW, wabuffo

Wabuffo, if monetary policy is not important and no amount of QE is stimulative, why in the world do we collect taxes? 1) Jim, I don't think I ever said that monetary policy isn't important. I believe you and I just disagree on the mechanics of it and the optimal strategy to be pursued. You have a central bank viewpoint that I think overstates the limits on what a central bank can actually do given its unattractive "currency". I view monetary policy on a consolidated federal govt basis (which combines the US Treasury and the Fed and removes the arbitrary barriers in how we think of them as being independent of each other - in my view the Fed is just the US Treasury's bank - a role that I wish it would just stick to instead of the self-important things it thinks it must do). 2) Why do we collect taxes? My view is that we collect taxes because they give value to the sovereign state's fiat currency. Fiat currency is the only thing the private sector can use to extinguish their tax obligation to the sovereign state. Thus in order to pay one's taxes, then one needs a supply of the sovereign state's money. Its like riding a bus - you need bus tokens for a ride. Therefore the transit authority must run a deficit of bus tokens with the transit users (ie the transit users hold a perpetual surplus of bus tokens). If the transit authority didn't require bus tokens for a ride, then no one needs bus tokens. Taxes/money = bus tokens/rides. 3) I never said inflation is impossible. In your example, again you are fixated on the Fed buying treasuries. Let's make your example simpler - you are advocating running a US Federal govt annual deficit of 20% (regardless of the mix of tax and spend levels). I never said that wouldn't cause inflation. It might, it might not. We've come close this year - probably running a deficit in the high teens (~18-19%) percent of GDP. During the GFC we also hit the low teens deficit-to-gdp ratios. Did you see inflation anywhere? Jim - I truly enjoy these technical discussions. Not many people care about this stuff (which makes them saner than you and I probably...) wabuffo

Imagine the law were changed such that the Fed reserves you describe -- liquidity-sucking assets useful only for clearing, and thus essentially useless at their current volume -- were permitted to freely circulate, and the only reserve requirements were the relatively small amounts necessary to ensure clearing. In other words, make all Fed liabilities "Federal Reserve notes" (or their electronic equivalent) rather than the illiquid Federal Reserve deposits you have described. I believe some central banks do exactly this -- issue their own short-term central bank debt, separate and apart from sovereign debt issued by the government's treasury department. But let's not give our Fed/politicians any ideas. BTW - I really like your description of reserves ("liquidity-sucking assets useful only for clearing, and thus essentially useless at their current volume"). I'm going to steal that term! wabuffo

..relevant thread on George Selgin discussing weimar republic etc.... Jim - i think what you miss with your model is that you take a view that the Fed (or a central bank) is the centre of the monetary system. From that you jump to all kinds of conclusions that the Fed is orchestrating behavior when it is not. The true center of the monetary system as I've explained many times is the US Treasury (or any sovereign currency issuer that spends in its own its own fiat scrip and doesn't link its fiat scrip to (or borrow in) a non-sovereign currency). The central bank is just the US Treasury's banker - nothing more, nothing less. Remember US Treasury net spending = new bank deposits/private sector financial assets. I have never studied Weimar or any other hyperinflation scenario but I would guess excessive spending plus the need to borrow in non-sovereign currencies to make transfer payments to England/France had a lot to do with the resulting inflation (and not "hot potato" reserves). I think inflation comes from linking excessive spending with a sovereign borrowing in a foreign currency (and here I would add gold as a "foreign currency") When that link snaps, inflation results. The US does not peg its currency to anything else and has no need to borrow in foreign currencies - so inflation is very hard to create (though not impossible). I'm repeating myself but growing the Fed balance sheet by forcing excess reserves on banks that don't want them and then not paying any interest on those excess reserves has the opposite effect to what you think it does. I've mentioned its effect on the withdrawal from the private sector of risk-free lendable collateral (US Treasuries) which would directly reduce lending. But its even more insidious than that. Low rates punish savers more than they help borrowers. That is a fact. If you look at the Fed's household balance sheet survey and look at both the asset side and liability side and then factor in which assets/debts have fixed interest rates and which are variable rate - you'll see this fact. The effect of low rates is demand destruction as savers get less income from their savings and so they have to save EVEN MORE thus reducing their consumption. Finally, I think about interest expense paid by the Federal government as just another source of income to the private sector. If we think $600 or $2000 cheques are good for stimulating the economy, then we would want the Federal government to pay higher interest on its debt (and not lower) because that is just another transfer of financial assets to the private sector. What difference does it make to a sovereign issuer if it pays 1% on its debt as it is raining $600 cheques over the country and instead pays 8% interest with no cheques. Sure the distribution of that US Treasury largesse is perhaps skewed differently, but in the long run, does it matter? I don't think so. You know... we've been trying low rates and QE for a long time and not getting the desired result. What's the definition of insanity - I know it's like that old expression "if you find yourself in a hole, perhaps its time to stop digging".... or something like that. If you really want to stimulate the economy - I would tell the Fed to stand down and have the US Treasury run high deficits (preferably via low taxes than high spending) and pay high interest rates on Treasury debt (7-10% would be good). This is basically what we did in the 1980s and it was pretty good. The US GDP added an amount equal to the entire GDP of West Germany at the time. Oh and we also tamed inflation. How about that? Let's do that. wabuffo

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? Reserves are unproductive and illiquid. The private sector does not want them. They serve one purpose and one purpose only - clearing payments at the Fed between banks, and between banks and the US Treasury. Prior to the GFC, the payment systems (Fedwire and CHiPS) could handle $4.6 trillion in payments per day while needing only $5 billion in total banking reserves to do it. And no payment fails to clear - which is the Fed's job #1. The system worked like this because banks could run a daylight overdraft while waiting for payments to settle and clear. So they didn't need much in reserves - much the same as you wouldn't need a large balance in your bank account if the bank provided you with an overdraft protection. All your checks would clear too so long as eventually you got your account to a positive or zero balance. That's how reserves at the Fed work too - they are a deposit at the Fed in an account for each federally-chartered bank. Today, the Fed has changed many of these rules. No more daylight overdrafts. An expansion of the Fed balance sheet which has caused the expansion of bank reserves. As I said in an earlier post - the only way for banks to get rid of reserves is to convert them to currency. As for lending, banks don't need or use reserves for lending. The act of extending a loan creates a deposit. Think of a line of credit. If the consumer (or business) borrows from the line, the bank now has a loan and a deposit with that consumer (business). No deposit was required first before the loan could be extended - instead the loan gets extended and a deposit gets simultaneously created. That's true for all bank lending. The deposit may move to another bank after the loan is made but if the bank needs reserves to clear that transfer (payment) to another bank it will borrow them. The real constraint is capital, collateral and bank regulations - not reserves (or even deposits). You keep making this connection of reserves and lending that just does not exist in today's economy. You also seem to imply that the Fed buying assets and creating more reserves is somehow creating "liquidity" and I'm arguing its just the opposite. It is reducing liquidity because the Fed is removing from the private sector a more liquid safe asset (Treasury) and replacing it with an illiquid one (bank reserve). It even hurts lending, since it removes collateral from the system (US Treasuries are the most used source of collateral for the private sector to lend against). Anyway - this is a probably a boring technical point for others here who either don't care or don't understand the monetary system - so I guess I will end it here unless you have some more appetite to discuss it further. wabuffo

fed has become a big buyer of treasury and agency mbs, and so is definitely providing cash demand (which the fed key stokes on its magic computer) Actually The Fed swaps the US Treasury debt it is buying in exchange for reserves at the banks (even as the bank is just a middleman in the transaction). In fact, reserves have grown so much (and banks are complaining about that to the Fed), that the US Treasury had to purposely increase its general account from around $400b at the start of the year to $1.6 trillion by mid-year by issuing Treasury debt in excess of its needs/spending so as to remove the excess reserves being created by the Fed. Thus negating the effect of the Fed trying to corner the Tsy market and turning the Fed's actions into one big circle jerk. Sucking and blowing is the expression that comes to mind. But it gets worse than that for the pinheads at the Fed. By buying long-dated 30-year bonds and exchanging them for bank reserves, the Fed is torpedoing the govt's attempt to secure long-term borrowing at ultra-low fixed rates (which I don't believe is a US Treasury objective, but what the hey let's go with it for this explanation). Think about what the Fed is actually doing to the Federal government's consolidated account. It is swapping long-term 30-year fixed rate borrowing at ultra-low rates for extremely short-term borrowing at variable rates which are low now but may not be low next year. So much for the government locking in low rates. Its bonkers as a liability management strategy. wabuffo