I sell $100 worth of bonds to the Federal Reserve.
Now I have $100 cash and $102 worth of bonds.
Where did the extra $2 come from?
Somewhat confusingly perhaps I was only referring to the entire amount of the new reserves created rather than the much smaller amount that is the difference between the feds price and the markets.
As far as I can see this small amount that has meaning is a tiny fraction of the total reserves created.
Anyway you already agreed earlier that you were objecting to the entire amount because you said the bond was not money like.
And it should have been clear earlier what i was getting at because of this
>>Most of us here believe QE is a swap where a form of money is replaced by another form of money.
>>QE introduces almost zero new buying power into the economy.
Funny that you understood that sufficiently to tell me i was wrong and I was thinking about the problem in an illogical manner, while later you made out for a few pages you had no idea what i meant by that and I am supposing you will produce more of the same sillyness where whatever it is that is causing you to have such strong feelings about QE will remain a total mystery.
>>Most of us here believe QE is a swap where a form of money is replaced by another form of money.
5 pages in and this is still wrong.
Quote:
>>QE introduces almost zero new buying power into the economy.
0.0000001 is almost zero. If you mean something else by "almost zero" you should be specific.
Tell me where the $2 comes from OR:
Quote:
Funny that you understood that sufficiently to tell me i was wrong and I was thinking about the problem in an illogical manner, while later you made out for a few pages you had no idea what i meant by that
Fuck you.
Quote:
and I am supposing you will produce more of the same sillyness where whatever it is that is causing you to have such strong feelings about QE will remain a total mystery.
It seems you have nothing of substance to offer to this discussion.
As I suspected, you don't know where the extra $2 comes from, or you DO know, and you are simply obfuscating because it doesn't fit your ideology.
There are ~$18T in government bonds on issue, the Fed owns ~$4T of them, so that leaves ~$14T on the balance sheets of the private sector.
Bonds are marked to market, so if QE pushes up the market price of bonds by 10%, that is $1.4T improvement in private balance sheet assets. Assets that can be used as collateral in short term money markets, interbank lending and repurchase agreements. The collateral effect on borrowing has a money multiplier effect as other asset prices rise, but no one knows exactly what the multiplier is, but it is certainly more than 1.0
If you think $1.4T is "almost zero" then you obviously earn a lot more than I do, and it begs the question as to why you spend any time here when you could be flying your fleet of private jets to Monaco and enjoying your wealth.
“Talk sense to a fool and he calls you foolish.” - Euripides
As I suspected, you don't know where the extra $2 comes from, or you DO know, and you are simply obfuscating because it doesn't fit your ideology.
There are ~$18T in government bonds on issue, the Fed owns ~$4T of them, so that leaves ~$14T on the balance sheets of the private sector.
Bonds are marked to market, so if QE pushes up the market price of bonds by 10%, that is $1.4T improvement in private balance sheet assets. Assets that can be used as collateral in short term money markets, interbank lending and repurchase agreements. The collateral effect on borrowing has a money multiplier effect as other asset prices rise, but no one knows exactly what the multiplier is, but it is certainly more than 1.0
If you think $1.4T is "almost zero" then you obviously earn a lot more than I do, and it begs the question as to why you spend any time here when you could be flying your fleet of private jets to Monaco and enjoying your wealth.
I was thinking your 2% example was very unrealistic. 10% seems over the top. The first thing that happened in this crisis was bond prices began to strengthen. I dont think there has ever been a time when bond prices fell in a way that suggested interest rates were going to be forced up other than the odd blip here and there. I admit that seemed counter intuitive to me but that is what has happened.
Fundamentally the Feds cannot alter the market by money printing, otherwise any nation could do this and quite clearly they cannot. The feds need the perception by the market that what they are doing is credible. Of course many have talked about the feds money printing and lack of credibility and the lack of liquidity of the bonds without the fed and so forth. I would have thought that it should be obvious that by now that argument amounts to wishful thinking only.
But of course further out if the US government does not change course and or growth does not materialise then the Feds will lose credibility and they will go the way of so many other failed nations. Seems to me you are arguing they are already closer to that point than the market believes.
One of the things that interests me about the perception of QE is what exactly is holding the price of Gold up? Is the market that fearful of a catastrophe or do so many people still think the Feds have been printing money to the full QE amount of 4T or some other amount that is going to make a big difference, so that from somewhere we are going to see ordinary prices exploding higher???
I was thinking your 2% example was very unrealistic. 10% seems over the top.
If a 10 year bond yield goes from 4.5% to 2.3% it's price moves (roughly) from 80 to 65. (Very roughly, I can't be bothered working out 20 semi-annual discount rates).
Quote:
The first thing that happened in this crisis was bond prices began to strengthen.
Yes, flight to safety. If a crisis gets very bad, nobody wants to sell their bonds, and the bond market becomes completely illiquid, which usually causes interbank lending and short term money markets to freeze also. When the government announced TARP and the Fed QE, markets resumed trading. However, as the Fed has targeted the middle of the yield curve,bond prices have strengthened considerably. Probably more than 10% on average, but I was being conservative.
Quote:
I dont think there has ever been a time when bond prices fell in a way that suggested interest rates were going to be forced up other than the odd blip here and there.
No, that is not true. At the end of QE 1 and QE 2, bond prices fell, then the Fed started another round of QE and up they went. QE3 didn't really end, because the Fed continues to roll over existing stock.
Quote:
Fundamentally the Feds cannot alter the market by money printing, otherwise any nation could do this and quite clearly they cannot.
Still not true, even when you use your most authoritative voice. The Federal Reserve can change the liquidity and balance sheets of the nation's banks. Not forever I agree, but they can and have done for 7 years now. The nation's banks have the power to move capital markets.
Quote:
But of course further out if the US government does not change course and or growth does not materialise then the Feds will lose credibility and they will go the way of so many other failed nations. Seems to me you are arguing they are already closer to that point than the market believes.
It's not a matter of losing credibility. If the market knows what you are going to do, they can front run you for "free" money. The Fed has to maintain the illusion that it can and will raise rates/stop QE at some point in time, or the market will take what amounts to an essentially infinite amount of risk, because there is no consequences for doing so. At the same time, the Fed cannot raise rates without bursting credit driven asset bubbles both in the US and all over the globe. Basically, unless economic growth resumes, with strength, the Fed is trapped.
Quote:
One of the things that interests me about the perception of QE is what exactly is holding the price of Gold up?
Gold is just a special type of bond not issued by any government, so it has no credit risk, and it is 100% convertible anywhere in the world.
Quote:
Is the market that fearful of a catastrophe or do so many people still think the Feds have been printing money to the full QE amount of 4T or some other amount that is going to make a big difference, so that from somewhere we are going to see ordinary prices exploding higher???
I don't think so. The modern monetary system only works if you have economic growth to expand into the growing money supply. If growth stalls, then eventually governments will not be able to collect enough taxes to pay the entitlements they have promised and the interest on their debts. Historically what happens next is that the debts are inflated away along with the value of the currency.
“Talk sense to a fool and he calls you foolish.” - Euripides
If a 10 year bond yield goes from 4.5% to 2.3% it's price moves (roughly) from 80 to 65. (Very roughly, I can't be bothered working out 20 semi-annual discount rates).
Yes, flight to safety. If a crisis gets very bad, nobody wants to sell their bonds, and the bond market becomes completely illiquid, which usually causes interbank lending and short term money markets to freeze also. When the government announced TARP and the Fed QE, markets resumed trading. However, as the Fed has targeted the middle of the yield curve,bond prices have strengthened considerably. Probably more than 10% on average, but I was being conservative.
No, that is not true. At the end of QE 1 and QE 2, bond prices fell, then the Fed started another round of QE and up they went. QE3 didn't really end, because the Fed continues to roll over existing stock.
Still not true, even when you use your most authoritative voice. The Federal Reserve can change the liquidity and balance sheets of the nation's banks. Not forever I agree, but they can and have done for 7 years now. The nation's banks have the power to move capital markets.
It's not a matter of losing credibility. If the market knows what you are going to do, they can front run you for "free" money. The Fed has to maintain the illusion that it can and will raise rates/stop QE at some point in time, or the market will take what amounts to an essentially infinite amount of risk, because there is no consequences for doing so. At the same time, the Fed cannot raise rates without bursting credit driven asset bubbles both in the US and all over the globe. Basically, unless economic growth resumes, with strength, the Fed is trapped.
Gold is just a special type of bond not issued by any government, so it has no credit risk, and it is 100% convertible anywhere in the world.
I don't think so. The modern monetary system only works if you have economic growth to expand into the growing money supply. If growth stalls, then eventually governments will not be able to collect enough taxes to pay the entitlements they have promised and the interest on their debts. Historically what happens next is that the debts are inflated away along with the value of the currency.
I do not believe at this point in time that the Fed can hold down longer term rates against what the market requires. I believe those bond vigilantes can still come back if the Fed does not behave in a credible manner.
I do not believe at this point in time that the Fed can hold down longer term rates against what the market requires.
In this I agree with you. I think we will see the Fed lose control of rates if they don't hike the funds rate this year. If they DO hike the funds rate this year,I am fairly confident we will see a collapse of asset bubbles everywhere, but particularly the US stock markets.
If you look at the junk bond market, particular energy (shale oil and gas mostly), I would say that the Fed has already lost control of rates, as the market realises that the Fed cannot control the price of oil, so the funds rate and QE are now irrelevant to HY credit.
Quote:
I believe those bond vigilantes can still come back if the Fed does not behave in a credible manner.
What do you mean by "credible manner"?
“Talk sense to a fool and he calls you foolish.” - Euripides
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy