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

If the treasury issues a t-bill to Pimco, it would in exchange for cash. Now the treasury would hold cash. Nothing would change (no money creation , just an asset swap) until they spent the cash you can also see it empirically. In 2020, the US Treasury spent $3 trillion more than it took in via taxes, fees (think CARES Act, etc). What was the increase in all US commercial banking deposits in 2020? Answer: $2.94 trillion. Its a match (well almost - I can never get it exactly to match which makes me think there's leakage into currency in circulation as some people take money out of their ATMs, etc). This happens every year if you flip through the Fed H.4.1 and H.8 reports. wabuffo

nope, unless Treasury is borrowing from Fed...which it doesn't. that bond its held by the Treasury buyer/extender of credit...which is not Fed Repeat after me - US Treasury "borrowing" is a reserve maintenance function. It really isn't borrowing despite its appearances. US Treasury sends you a $600 stimulus cheque. The Fed moves $600 from the US Treasury general account to your bank's reserve account thus performing the Fed's main job (payment clearing). This is a new financial asset for the private sector (your bank gets both an asset and a liability. A $600 deposit in its reserve account at the Fed and a $600 deposit liability to you). You then decide that you don't want to hold $600 in cash at the bank cuz it doesnt pay any interest. So you buy T-bills with the $600. Your bank now exchanges its $600 reserve balance on your behalf (and your $600 deposit) for $600 of T-bills. The private sector (you) still has an asset ($600 of T-bills). Your bank has neither $600 of reserves nor deposits. The issuance of T-bills has removed $600 of bank reserves that the initial stimulus cheque created. Thus reserve maintenance activity. Let's review: US Treasury spend -- new financial asset US Treasury borrow -- asset swap, financial asset still exists but in different form. wabuffo

Whats the point of QE if reserves are simply for clearing payments? I agree QE is a pointless exercise. Its stupid in too many ways to count. We don't need it and it makes things worse. And here I am refering to the exercise of the Fed forcing the banks to hold excess reserves and then adding to those already unproductive reserves by buying Treasuries and swapping them for even more reserves. Reserves stayed flat or even dropped for much of the rapid NGDP growth period from 1970s and 1980s...but MB grew much more so One has nothing to do with the other. Reserves have nothing to do with lending. To the extent the monetary base grows, it is growing from increasing deposits in the US commercial banking sector. You didn't answer my question - where do incremental bank deposits come from? I'll answer it - from net US Treasury deficit spending. So I can rephrase your comment this way: Reserves dropped because banks never needed them to lend. Growth in MB didn't come from reserves but instead from the larger deficits of the 1980s, which created a surge of new deposits. See? The Fed and its reserves had nothing to do with it. 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 How does the Fed "inject" reserves? It swaps them for Treasuries - ie an asset swap with the private sector. Reserves can't go anywhere. They're stuck. So even if Fed doesn't pay an interest rate (or charges an interest expense) - what can the banks do? Nothing. They are stuck with those reserves. They can't lend them, they can't reduce them. The only way they can in theory reduce them is to exchange them for currency. I'd like to see that. Have JPM, WFC, BAC etc ask for $3.2 trillion in tens, twenties and hundred dollar bills. wabuffo

Fed issues money with a keystroke (as opposed to Treasury, which just borrows money) nope not how it works. The US Treasury spends first, which creates a new bank deposit somewhere in the private sector (and a matching reserve deposit at the Fed for the bank receiving the deposit). US Treasury then borrows to remove the reserve it creates in the banking system with its spending by replacing it with an interest-earning time deposit (ie, US Treasury bond) held at the Fed in a custodial account. The Fed is an asset swapper - its only asset is a reserve balance which can't go anywhere except inside the Fed's payment clearing account system. So despite the hoopla, the Fed is basically inert and can't do diddly when it comes to creating new financial assets in the private sector. I think you have it backwards, I'm afraid. Money creation comes from the US Treasury. That's why everyone wants them $600 cheques. wabuffo

Let's review this all-important Fed interest rate (and the role of the Fed): 1) it's an interest rate that is paid on reserves. 2) reserves are stuck at the Fed and can't go anywhere else. You and I can't get a "reserve" account at the Fed. No one actually wants the Fed's reserves - they are illiquid. Banks don't create reserves - the Fed does. Nothing that banks do increases the size and quantity of reserves. Only the Fed can increase or shrink the size of reserves. 3) reserves don't affect bank lending. Banks lending is affected by bank capital and regulatory ratios. It has never been affected by reserves - nor do banks need reserves to lend. In fact, "required reserves" are now temporarily set at zero. The Fed is like the Wizard of Oz - so long as you ignore that little man behind the curtain. The real reason the Fed exists is to do one job - run the payments system and make sure no inter-bank payment in the United States ever fails to clear and settle. It does this by using reserve accounts to clear payments between banks and between banks and the US Treasury. The Fed also buys and sells assets with the banks and uses reserves to do this. The banks have no choice in the matter. wabuffo

In practice, the Fed controls the monetary base by setting expectations and adjusting short term rates to meet that expectation. Jim - you keep saying this but I don't think its correct. Let me ask you - where do incremental bank deposits come from? How do they originate? I'm talking in aggregate for the US commercial banking sector in its entirety -- and not for an individual bank like JPM or WFC? The US commercial banking sector saw an almost $3t increase in total bank deposits in 2020. What caused that increase? Where did it come from? Hint: ...not the Fed. Further hint: ..... the US Treasury 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 Again - agree to disagree. In that scenario, I believe new issuance of long bonds would go off at a zero coupon rate as well (regardless of inflation or not). There are three forms of risk-free money from the US government that the private sector can choose from: 1) currency in circulation, 2) bank reserves, and 3) US Treasury debt. The first form has no interest rate. The second form, if set, permanently to zero by the Fed - would cause no 3 to yield zero as well (in fact, some of the long-term debt would go negative YTM due to the mechanics of yield to maturity and bond prices). Think of it like you/me/we (the private sector) are customers of a bank called the US Treasury Federal Reserve Bank. We have excess funds so we can hold it in cash (currency in circulation) or in a demand deposit (bank reserves) which pays zero or in a time deposit (US Treasury debt) which can be locked up for 1 month/3 months/10 years/30 years etc. Since we have excess funds and want the safety of holding them in a bank, we will take any time deposit which gives us even a tiny/teeny interest rate no matter what. What other choice do we have? Put our large excess funds under a mattress in cash and banknotes? So the yield curve asymptotically approaches zero too if the policy of the bank is to never pay an interest rate on demand deposits. 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) Again - I do not believe this is how it works. Reserves have nothing to do with lending. US commercial banks have $3.2t of reserves and $15.1t of bank credit ($22t of total assets). As you note banks can't "lend out reserves" since these are inert deposits that are immovable from the Federal Reserve account, so how do you want banks to proceed? If I understand what you are saying correctly, you are proposing that banks would lend more and balloon their balance sheet size in order to overcome the drag of their zero-interesting earning reserves that in aggregate they are stuck with. But the ratio required would mean an immense growth in loans to reduce the ratio of reserves to total loans/assets. Is there enough good credit out there in the private sector for that. Do banks have enough capital? Nope and nope. As an example, let's go back to how it was before the GFC. Just picking a date in mid-July 2007. Banks had $5.9b in reserves against $8.9t in bank credit (and $12.1t of total assets). So if your goal is to force banks to lend so that they maintain the same ratio as then, the US commercial banking sector would have to expand their loan book 531x! They would have to lend $4.7 quadrillion dollars! The US economy is only $22t in size. Banks don't lend based on what's happening to their reserves. They lend based on their capital and their credit evaluation. Reserves (and what they're paid on them) never enters the equation at all. But that's just my 2-cents.

A big thumbs up for Gangs of London. Just finished it. British crime family TV show encompassing 10 1-hour episodes (warning - it has quite a bit of graphic violence). The directing and writing is very good. The acting is excellent. The plot is a bit cheesy sometimes and always over-the-top. Some of the fight scenes are right out of John Wick as in the one in the opening episode that takes place inside a London pub. The show grabs you right from the opening shot (won't spoil it) and never lets go. If you are into this kind of action/crime show, its extremely entertaining from beginning to end. Unfortunately - it might be hard to access since its on AMC+ in the US. But worth it, IMHO. One of my top five favorite TV shows of 2020. wabuffo

I calculate that as of today DJCO has total investments of about $280 million compared to a market cap of roughly $366 million. Did I get this right? Yep - based on current prices and ignoring taxes, margin loan. Here's my real-time tracker. I could be wrong, of course. wabuffo

When was DJCO's purchase? He's purchased BYD in a few lots over the years. - Mar-Jun Qs of 2011 - Jun-Sep Qs of 2012 - Dec Q of 2016 wabuffo

it occurs to me you likely meant to ask Wabuffo. DJCO's 13F-HRs disclose US-listed stocks. However Charlie has also purchased two foreign-listed stocks for DJCO (that do not need to be disclosed). The two are 1211.HK (BYD - Hong Kong Stock Exchange) and 005389.KS (Hyundai Pfd 3 - South Korean Stock Exchange). wabuffo

Probably more relevant to the value of DJCO in terms of percent of market cap. For every 1 share of DJCO one also "owns" 4.3 shares of 1211.HK. wabuffo

You can see the topics containing all of the unread posts since you last came to the site or just the topics you've participated in with new posts. Then you can click on only the topics that you are interested in. Thanks for the tip - that is better. I get less of a headache after signing in. 8) wabuffo

Its just not working..... I sign in to read informative investment posts and over half the new message thread on the opening screen is stuff that has nothing to do with investing. And I even put the Politics section on ignore. I'm sure I will get push-back = "but this stuff affects your investments". I really don't agree but its not up to me. Its up to the moderator to moderate here. I've seen a number of once great investing boards descend into chaos this year to the point that I don't even visit them anymore - much less post. Perhaps this is what everyone here enjoys and wants to discuss. That's ok. Reasonable people can disagree about what is relevant and what is not. But its getting to the point that its not worth the effort to wade through an entire screen of what I consider (but other may disagree) are political posts that add only noise. Fwiw, wabuffo

This is becoming a discussion that belongs in the Politics section..... can the moderator please move it there? Thanks.

1) capital gains inclusion go way up. 75 to 100% I don't think it will happen unless the US raises capital gains taxes significantly. Capital is fungible and flows easily across borders. That's different from labor which can't easily cross borders. Canada already has a problem with low investment levels and its main competition for capital is south of the border. When President Clinton cut the US capital gains tax rate to 20% in 1998, it's no coincidence that Canada had to reluctantly follow a few years later (cutting the inclusion rate from 75% to 67% to 50% in 2000). Prior to that, the combined Federal/Ontario cap gains tax rate at the top marginal tax rate was almost 40%. That was a plainly unsustainable 20% delta versus the US rate and thus was cut to a mid-to-low 20% top rate in Canada for much of the aughts. Canada can't afford to create a sizeable gap (current top cap gains tax rate in Ontario = 26.76%) vs the US capital gains tax rate (23.8% including Obamacare net investment income tax). Moving the inclusion to 75% - 100% would raise the cap gain tax rates in Canada to 40-53%. With potentially a divided US government and gridlock for the next four years, its unlikely that the US will be raising tax rates much, if any. There's no way that Canada could afford to open up a 20%+ gap again in how capital is taxed in Canada vs the United States. Much of the chatter about Canada raising inclusion rates was maybe predicated on large tax increases in the US when it looked like a Democrat control of Congress and the Executive Branch. That's unlikely now with Senate control likely in Republican hands. I wouldn't lose any sleep over it. It's not happening. And if a Federal government tried to do it, it would be quickly reversed after a few years. They might tinker a bit, but there won't be any big moves. wabuffo

http://investor.pdl.com/news-releases/news-release-details/pdl-biopharma-reports-2020-third-quarter-financial-results-and For my fellow PDLI baghodlers. PDLI releases its Q3 balance sheet in liquidating accounting form. wabuffo

I think owning and watching AAPL may have helped enlighten the old man as to the true force of buybacks. C'mon man - Buffett talked about the importance of buybacks when he owned General Foods in the early 80s and they were buying back stock aggressively. He was around to watch Henry Singleton make his tender offers to repurchase Teledyne stock in the 1970s. Give the Old Fool some credit. I think he understands it full well as he encouraged many of his investees to massively repurchase shares. I think he just wanted to keep painting his canvas and thus never wanted to give back any paint until he absolutely had to. Perhaps he feels he's reached that point. My 2-cents is that he's stretched a lot to keep painting lately with sometimes poor results (Kraft, Oxy, the airlines, PCP) where his shareholders would've been better if he had returned those billions back via buybacks (not dividends). wabuffo

My line of work has involved repairing fractures. So a financial orthopedic surgeon! Interesting. 8) wabuffo