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WTF is QE?; Does Stimulus Stimulate?
Topic Started: 4 Sep 2015, 07:28 AM (7,639 Views)
Andrew Judd
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Count du Monet
6 Sep 2015, 08:24 PM
Fair enough. Bonds are certainly used in exchange. But they are ultimately deferred payment and are highly vulnerable to interest rates. Typically in the olden days to borrow cash, or make a deferred payment a man would write a note at a value greater than the cash payment. At one stage the main character in the Poldark series in financial difficulties writes a 12 month note for 1400 pounds, but only gets 1000 pounds for it. Effectively paying 40% annual interest.
I am not suggesting a bond can be spent like cash otherwise there would be no interest rate difference. For a bank however the difference between reserves earning overnight interest and a bond earning interest that can be instantly sold is minimal. Treasuries are electronic these days.
Edited by Andrew Judd, 6 Sep 2015, 09:06 PM.
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peter fraser
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Andrew Judd
6 Sep 2015, 08:58 PM
I am not suggesting a bond can be spent like cash otherwise there would be no interest rate difference. For a bank however the difference between reserves earning overnight interest and a bond earning interest that can be instantly sold is minimal. Treasuries are electronic these days.
For a bank cash is something they are obliged to carry to attend to their business clients cash float needs, but it's a security problem for them which is a large cost, and it bears no return.
Banks would rather carry bonds which don't have a cost to carry and they have a return. We used to refer to them as "liquid government securities" which indicates how fluid they are for a big player. It's a pity that they aren't available for small players anymore.
Any expressed market opinion is my own and is not to be taken as financial advice
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Loki
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peter fraser
7 Sep 2015, 07:51 AM
For a bank cash is something they are obliged to carry to attend to their business clients cash float needs, but it's a security problem for them which is a large cost, and it bears no return.
Banks would rather carry bonds which don't have a cost to carry and they have a return. We used to refer to them as "liquid government securities" which indicates how fluid they are for a big player. It's a pity that they aren't available for small players anymore.
When a single entity buys up half the bonds and holds them to maturity, market depth and breadth drop by about 50%. US Treasury Bonds are traded in secondary markets after primary dealers bid for them in auctions. The Fed buys UST in the secondary market and the primary dealers earn a spread on every bond they buy from treasury and subsequently sell to the Fed.

Other than the primary dealers, everyone else buys in the same market as the Fed. If that market becomes illiquid due to the Fed buying 50% of the bonds and holding them to maturity, strange things can and do happen. One is that buyers desperate for good quality paper can bid bond prices over par, taking yields negative. Another is that lack of liquidity can cause bond prices to fall, as Sweden's central bank discovered in June.
http://www.bloomberg.com/news/articles/2015-06-23/qe-shows-signs-of-backfiring-in-sweden-as-liquidity-evaporates

So yes, sovereign bonds are highly liquid, until someone buys most of them and holds them to maturity. Then they can become illiquid as market depth and breadth shrinks.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Andrew Judd
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Loki
7 Sep 2015, 09:55 PM
When a single entity buys up half the bonds and holds them to maturity, market depth and breadth drop by about 50%. US Treasury Bonds are traded in secondary markets after primary dealers bid for them in auctions. The Fed buys UST in the secondary market and the primary dealers earn a spread on every bond they buy from treasury and subsequently sell to the Fed.

Other than the primary dealers, everyone else buys in the same market as the Fed. If that market becomes illiquid due to the Fed buying 50% of the bonds and holding them to maturity, strange things can and do happen. One is that buyers desperate for good quality paper can bid bond prices over par, taking yields negative. Another is that lack of liquidity can cause bond prices to fall, as Sweden's central bank discovered in June.
http://www.bloomberg.com/news/articles/2015-06-23/qe-shows-signs-of-backfiring-in-sweden-as-liquidity-evaporates

So yes, sovereign bonds are highly liquid, until someone buys most of them and holds them to maturity. Then they can become illiquid as market depth and breadth shrinks.
Since QE started US debt has doubled so the Feds relatively small purchases cannot be creating supply problems surely??

Earlier you said that QE increased purchasing power. If you can explain why you think that we can continue discussing this and see if we can get to a common understanding.

In my view QE makes almost no difference to the amount of purchasing power in the economy from the perspective of a money point of view. There are however fewer assets in the economy to buy where there must be a very very large total number of assets that can be bought across all risk types.
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Loki
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Andrew Judd
7 Sep 2015, 10:24 PM
Since QE started US debt has doubled so the Feds relatively small purchases cannot be creating supply problems surely??

Yes, they are. The Fed has purchased almost 4T. The average tenor of the Fed's balance sheet is now 6 years, but a lot of the bonds that have been issued since QE have a much longer maturity. The Fed targets 6-7 years maturity, which has a depressing effect on short rates. You can make one tenor illiquid by targeting it, and it doesn't matter how big the market is on the longer maturities.
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Earlier you said that QE increased purchasing power.
No, I didn't. I said it was believed that rising asset prices created a "wealth effect", which in turn would encourage consumption rather than saving (or deleveraging, which is the same thing).
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If you can explain why you think that we can continue discussing this and see if we can get to a common understanding.
I can't explain something I didn't say.
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In my view QE makes almost no difference to the amount of purchasing power in the economy from the perspective of a money point of view.
Not from a monetary point of view, but as I stated in another thread, if interest costs are a materially large input cost of production, lower interest rates will have a deflationary effect on produced goods and services. US corporations and their executives have tax incentives to take on debt rather than dilute equity, so interest costs as an input can be substantial.

Do you agree that QE lowers interest rates?
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There are however fewer assets in the economy to buy where there must be a very very large total number of assets that can be bought across all risk types.
I'm not sure what you mean by that.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Andrew Judd
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Loki
5 Sep 2015, 03:42 PM
Also wrong.

But it's OK that your beliefs are wrong, because otherwise you would need to think about it logically.
That reply was in response to this comment of mine

>> QE introduces almost zero new buying power into the economy.


I have later said

>>In my view QE makes almost no difference to the amount of purchasing power in the economy from the perspective of a money point of view.

And you have just replied

>>Not from a monetary point of view


So.......I say

>>>> QE introduces almost zero new buying power into the economy.

And you have some disagreement and evidently whatever you are saying about that have I have no idea what you are thinking from your answers so far.
Edited by Andrew Judd, 7 Sep 2015, 11:32 PM.
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Loki
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Andrew Judd
7 Sep 2015, 11:27 PM
That reply was in response to this comment of mine

>> QE introduces almost zero new buying power into the economy.


I have later said

>>In my view QE makes almost no difference to the amount of purchasing power in the economy from the perspective of a money point of view.

And you have just replied

>>Not from a monetary point of view


So.......I say

>>>> QE introduces almost zero new buying power into the economy.

And you have some disagreement and evidently whatever you are saying about that have I have no idea what you are thinking from your answers so far.

1. Do you agree that QE lowers interest rates?
2. Do you agree that the primary dealers earn a spread on every bond they sell to the Fed?

Edited by Loki, 7 Sep 2015, 11:34 PM.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Andrew Judd
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Loki
7 Sep 2015, 11:33 PM

1. Do you agree that QE lowers interest rates?
2. Do you agree that the primary dealers earn a spread on every bond they sell to the Fed?
I do not disagree but if you refuse to interact with me we cannot have a useful conversation.

We have a fundamental disagreement about the nature of QE.

I believe QE does not introduce new buying power into the economy. If you do not want to discuss that with me we can end here. Your call
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Loki
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Andrew Judd
7 Sep 2015, 11:39 PM
I do not disagree but if you refuse to interact with me we cannot have a useful conversation.

We have a fundamental disagreement about the nature of QE.

I believe QE does not introduce new buying power into the economy.
Define buying power.
Quote:
 
If you do not want to discuss that with me we can end here. Your call
Define "discuss".

Edited by Loki, 7 Sep 2015, 11:50 PM.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Andrew Judd
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Loki
7 Sep 2015, 11:49 PM
Define buying power.

Define "discuss".
Define discuss?
Edited by Andrew Judd, 8 Sep 2015, 12:25 AM.
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