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Australia interest rates to go lower, for longer
Topic Started: 5 Aug 2013, 07:13 PM (9,983 Views)
Catweasel
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b_b
7 Aug 2013, 11:14 AM
Firstly, QE1 (TARP) served a real economic benefit IMO. During 2008, the banks were not dealing with each other, which mean some banks were hoarding reserves, while others suffered a shortgage. A bank with no reserves can not settle their client's transactions which means deposits get frozen and the monetary system grinds to a halt. The banks were not dealing with each other because they did not trust each other's credit worthyness / asset quality. SO the Fed bought the crap and printed cash. This gave the banks the reserves they wanted/needed without a full blown banking crisis.

QE2/3 is different to QE 1 as I explained to Newjez. The addition of reserves it not really neded for the payment system. So why are they doing it? I guess you would have to ask the Fed, but i have a couple of thoughts
- What else are they going to do at 0% interest rates and US congress unwilling to spend or reduce taxes yet asking the Fed to do more?
- Benanke is a monetarist, so he probably beleives in the money multiplier
- I have read a few a Benanke's academic papars, and it is clear he is a big beliver in the wealth effect. So the Palacebo may have "knock-on" effects as people borrow against rising equity values and this restarts the whole economy.
- He has mentioned he is trying to lower the long end bond rate, but QE has generally done the reverse (because the punters see QE as a stimulus). I think this frustrates the Fed. He could set the ten year bond rate to 0.5% or lower if he wanted, by simply standing in the market at the appropriate price (which is what all CB's do at the short end anyway).
If it scratch a surface of the chin a little further,

it will extend mind back to a pre-2008,

and it will understand a weakness of think of master, expert and a mouse.

Who believe it infallible and invent money trees system.

Even a Greenspan the admit.

So it scratch a chin-chin about brilliant of Bernanke brain and tinker.

but it cannot remove the behavior of mouse.

Of where an unknown exist,

outside of its Meccano set of economic the theory.
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b_b
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Catweasel
7 Aug 2013, 11:21 AM
b_b
7 Aug 2013, 11:14 AM
Firstly, QE1 (TARP) served a real economic benefit IMO. During 2008, the banks were not dealing with each other, which mean some banks were hoarding reserves, while others suffered a shortgage. A bank with no reserves can not settle their client's transactions which means deposits get frozen and the monetary system grinds to a halt. The banks were not dealing with each other because they did not trust each other's credit worthyness / asset quality. SO the Fed bought the crap and printed cash. This gave the banks the reserves they wanted/needed without a full blown banking crisis.

QE2/3 is different to QE 1 as I explained to Newjez. The addition of reserves it not really neded for the payment system. So why are they doing it? I guess you would have to ask the Fed, but i have a couple of thoughts
- What else are they going to do at 0% interest rates and US congress unwilling to spend or reduce taxes yet asking the Fed to do more?
- Benanke is a monetarist, so he probably beleives in the money multiplier
- I have read a few a Benanke's academic papars, and it is clear he is a big beliver in the wealth effect. So the Palacebo may have "knock-on" effects as people borrow against rising equity values and this restarts the whole economy.
- He has mentioned he is trying to lower the long end bond rate, but QE has generally done the reverse (because the punters see QE as a stimulus). I think this frustrates the Fed. He could set the ten year bond rate to 0.5% or lower if he wanted, by simply standing in the market at the appropriate price (which is what all CB's do at the short end anyway).
If it scratch a surface of the chin a little further,

it will extend mind back to a pre-2008,

and it will understand a weakness of think of master, expert and a mouse.

Who believe it infallible and invent money trees system.

Even a Greenspan the admit.

So it scratch a chin-chin about brilliant of Bernanke brain and tinker.

but it cannot remove the behavior of mouse.

Of where an unknown exist,

outside of its Meccano set of economic the theory.
What?
(S – I) + (T - G) + (M - X) = 0
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herbie
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QE? I surely won't pretend to understand it, but here's Stevens on it:

"... there have been programs of ‘unconventional monetary policy’ in several major countries over recent years. These have been varyingly thought of as operating by one or more of:
•reducing longer-term interest rates on sovereign or quasi-sovereign debt by ‘taking duration out of the market’ once the overnight rate was effectively zero
•reducing credit spreads applying to private sector securities (‘credit easing’, operating via the ‘risk-taking’ channel)
•adding to the stock of monetary assets held by the private sector (the ‘money’ channel, appealing to quantity theory notions of the transmission of monetary policy)
•in the euro area in particular, commitments to lower the spreads applying to certain sovereign borrowers in the currency union (described as reducing ‘re-denomination risk’)."

http://www.rba.gov.au/speeches/2012/sp-gov-121212.html
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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zaph
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b_b
7 Aug 2013, 11:25 AM
What?
Money grows on trees?

I'm cultivating a few grevillea US dollara. I gave golden leafed Japanese Maple a go - grew big but never produced flowers or fruit.
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Trojan
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zaph
7 Aug 2013, 12:20 PM
Money grows on trees?

I'm cultivating a few grevillea US dollara. I gave golden leafed Japanese Maple a go - grew big but never produced flowers or fruit.
I think I over-watered mine ... they died
Never had a green thumb :(
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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Elastic
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b_b I don't quite follow your thought process on why QE is deflationary.
I understand that the interest paid on the bonds is now paid to the Fed rather than the banks which previously held the bonds.

Under normal circumstances, the banks would use existing money to purchase bonds.
The bank gets the bond, the government gets the money and spends it through the economy.
No net creation of money.

Under QE, the bank buys the bond, then the Fed buys the bond from the bank.
Under this scenario, the bank still has its money, the government gets its money to spend through the economy and the Fed holds the bond and a debt on it's balance sheet.
There has been newly created money moving through the economy.

I should also add that under QE the newly created money ends up as excess reserves in the banks and is free to be invested in the sharemarket, high yielding currencies ($Aus) or in cheap real estate. So it's no surprise that the ending of QE would shock the sharemarket.
Edited by Elastic, 7 Aug 2013, 01:21 PM.
Only a rat can win a rat race.

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b_b
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Elastic
7 Aug 2013, 12:53 PM
b_b I don't quite follow your thought process on why QE is deflationary.
I understand that the interest paid on the bonds is now paid to the Fed rather than the banks which previously held the bonds.

Under normal circumstances, the banks would use existing money to purchase bonds.
The bank gets the bond, the government gets the money and spends it through the economy.
No net creation of money.

Under QE, the bank buys the bond, then the Fed buys the bond from the bank.
Under this scenario, the bank still has its money, the government gets its money to spend through the economy and the Fed holds the bond and a debt on it's balance sheet.
There has been newly created money moving through the economy.
No - Under normal cirmstances, this is what happens.

1. Treasury spends into the real economy - the recipiants of the spending put the money in the banks and private deposits grow.
2. To settle with the private banks accounts, treasury trasnfers its cash balance at the CB to the Banks
3. Banks now have too many reserves earning a lower penatly rate of interest. Ie: too much liquidity
4. Treasury issue bonds to the banks to remove the liquidity so the CB can mantain its target interest rate
5. To settle the Bond trade with treasury, the Banks transfer its cash balances with the CB back to Treasury
6. Treasury now has a positive cash balance again,a ndthe process can start over...

Result
Private sector deposits increase (and bank liabilities increase)
Banks own more bonds exactly equal to the increase in deposits.

So, government spending adds to private sector deposits (households and/or business - depending on who get the government cheques).

In Australia deposits have increased in line with the increase in government deficits. Co-incidence? No. The spending creates the dollars to buy the bonds. That is why Japan has yet to default despite debt/gdp of 200%. Same monetary system.


Under QE
The CB buys the exisitng bond from the banks and gives the banks more cash
Normally this would create excess reserves in the banking system and push the interbank rate to near zero
But the US is near zero anyway - so no real impact.

The Lesson
Banks will always have the liquidity to buy the bonds. the question is never funding since the CB always provides enough reserves to the banking system to maintain a target interest rate. As the RBA say on its own website
Quote:
 
As part of its responsibility for monetary policy, the Reserve Bank Board sets a target for the cash rate. This is the rate at which banks borrow from and lend to each other on an overnight, unsecured basis. The rate is determined by the demand and supply of exchange settlement balances that commercial banks hold at the Reserve Bank. Through its open market operations, the Reserve Bank alters the volume of these balances so as to keep the cash rate as close as possible to its targethttp://www.rba.gov.au/mkt-operations/index.html
(S – I) + (T - G) + (M - X) = 0
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Elastic
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The deflationary effect of the payment of interest to the bond holding Fed is minimised by the fact that the Fed pays most of its profits back to the government anyway.
Only a rat can win a rat race.

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b_b
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Elastic
7 Aug 2013, 01:25 PM
The deflationary effect of the payment of interest to the bond holding Fed is minimised by the fact that the Fed pays most of its profits back to the government anyway.
No different to the IRS. So are you saying increased taxes via the IRS / ATO have no real impact since it all goes back to the government?

A tax removes net financial assets (money) from the private sector. Whether it is done by the IRS or the Fed, the impact is still the same. It reduces money, which has a (mild) deflationary impact and acts as a headwind for the economy.
(S – I) + (T - G) + (M - X) = 0
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Catweasel
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Catweasel say it a fascinating.

At end of day, it all about a mouse confidence.

Forget about a yesterday.

As if it the never the happened.

Maintain a system for a system the sake.

But wear different the costume.

And convince mouse it all a hunky dory.

And if it blow up in a face,

it cannot be the helped.
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