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scepticus

Now Witness The Firepower

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Some of you may remember some while ago I was blathering on about how all government debt (base money and bonds) are equivalent and how bonds can be switched for base money and vice versa...

here's confirmation of that, via FT alphaville.

"And here’s the big difference. Instead of buying US Treasuries on an unsterilised basis — which was the method of the Fed’s last bout of QEasing — this time around, the central bank would sterilise.

And the benefits, Konstam says, would be myriad:"

Typically the Fed manages short rates with an eye on long-term risk premia, primarily reflecting inflation risk. The Greek problem is an example where markets can quickly lead the process and plunge the economy into an enforced deflation. The danger is that US fiscal dynamics are not particularly good either, absent a strong recovery so that risk premia could rise once the dust settles on the initial flight to quality. This would be exacerbated if for example the Administration considered more fiscal stimulus.

QE in these circumstances could be sterilized via reverse repos, term deposits or effectively neutralized by raising interest on reserves. The result would be a substantial twist of the yield curve. Mid-2011 2s might be around 1 ½ percent with a policy rate of, say, 1 percent, but 10s could be 2 ½ to 3 percent. Sterilization would be a way to placate the hawks. Net there is no new monetary stimulus via the Fed’s balance sheet. Yet there is a removal of unwarranted risk premia in return for a delay in fiscal consolidation. Some might welcome higher short rates if it helped reduced precautionary money balances (velocity rises). This is of course more likely if growth is stronger – but with an outlook that is still highly uncertain.

Foreign investors hold around half of the Treasuries outstanding. Ultimately they are the marginal pricers of risk premia. Given their concern for euro periphery financing, it is reasonable to assume they will be among the first to expect appropriate fiscal consolidation if and when downside economic risks abate. The beauty of sterilized QE is that they would be pushed to purchase shorter-term Treasuries as the Fed purchased longer-term Treasuries. To the extent that they are comfortable with low inflation in the short term, but fear long-term inflation risk, this is appropriate and a stable outcome. It allows them to revalue their currencies on that horizon too. The alternative would be to revalue more rapidly and obviate the need to invest in dollars altogether . . .

It is too early to say whether Fed policy will embrace the possibility of sterilized QE to contain long-end risk premia. And perhaps it may not need to if markets are “well behaved”. However, the powerful logic is that unless there is a very strong recovery that allows more rapid fiscal consolidation, either markets need to behave and maintain low long rates or the Fed will need to threaten sterilized QE. It suggests that over the medium term as well as the short term, yield curves are prone to be sustainably flatter.

Finally there is also a certain neat logic to policymakers standing up to free markets. First with regulatory reform and maybe, second, with a greater use of central bank balance sheets to dictate interest rates.

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You know, if the above had been written in ancient Greek I would have understood it better.

Can someone paraphrase the above into numpty language please?

:lol: Seconded.

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You know, if the above had been written in ancient Greek I would have understood it better.

Can someone paraphrase the above into numpty language please?

at your service.

the coming round of QE will be different to the last one. In this round, the new bank reserves created by QE will be prevented from circulating in the economy. The fed will do this by offering the banks the opportunity to lock up the newly created reserves in term deposit accounts a t the fed, which pay a rate ever so slightly higher than the base rate.

the net effect of this is to swap X billion bonds paying long term interest rates, for x billion bank reserves paying a short term rate.

so the net liquidity effect is zero, but it lowers long term rates, flattens the yield curve and keeps government and mortgage funding rates down.

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You know, if the above had been written in ancient Greek I would have understood it better.

Can someone paraphrase the above into numpty language please?

PRINTY PRINTY (effectively).

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PRINTY PRINTY (effectively).

nope, as I have explained above.

to really placate the hawks, it needs to be in conjunction with some gesture of fiscal deficit tightening.

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nope, as I have explained above.

to really placate the hawks, it needs to be in conjunction with some gesture of fiscal deficit tightening.

Sorry, it doesn't matter what you or they say.

I will see what they do.

Edit - and in order for me to have any belief in what you claim I would need to see full balance sheet accounting of all actions, full mark to market of all assets etc etc. No more of this hidden fun and games.

Edited by Errol

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at your service.

the coming round of QE will be different to the last one. In this round, the new bank reserves created by QE will be prevented from circulating in the economy. The fed will do this by offering the banks the opportunity to lock up the newly created reserves in term deposit accounts a t the fed, which pay a rate ever so slightly higher than the base rate.

the net effect of this is to swap X billion bonds paying long term interest rates, for x billion bank reserves paying a short term rate.

so the net liquidity effect is zero, but it lowers long term rates, flattens the yield curve and keeps government and mortgage funding rates down.

Does that leave you with a feeling of confidence in the currency?

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Does that leave you with a feeling of confidence in the currency?

there isn't any currency.

its all debt.

I feel a post from injin coming on...

Edited by scepticus

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at your service.

the coming round of QE will be different to the last one. In this round, the new bank reserves created by QE will be prevented from circulating in the economy. The fed will do this by offering the banks the opportunity to lock up the newly created reserves in term deposit accounts a t the fed, which pay a rate ever so slightly higher than the base rate.

the net effect of this is to swap X billion bonds paying long term interest rates, for x billion bank reserves paying a short term rate.

so the net liquidity effect is zero, but it lowers long term rates, flattens the yield curve and keeps government and mortgage funding rates down.

Which is of course the eltists massive achilles heel and why it's going so badly wrong for them.

They are not apart from the economy they are only a part of the economy.

Cave of wealth and death stuff right here.

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(snip)

"And here’s the big difference. Instead of buying US Treasuries on an unsterilised basis — which was the method of the Fed’s last bout of QEasing — this time around, the central bank would sterilise.

And the benefits, Konstam says, would be myriad:"

Typically the Fed manages short rates with an eye on long-term risk premia, primarily reflecting inflation risk. The Greek problem is an example where markets can quickly lead the process and plunge the economy into an enforced deflation. The danger is that US fiscal dynamics are not particularly good either, absent a strong recovery so that risk premia could rise once the dust settles on the initial flight to quality. This would be exacerbated if for example the Administration considered more fiscal stimulus...

blah blah ad infinitum.

Premier league obfuscation.

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Cave of wealth and death stuff right here.

oh hello.

I agree about the cave of wealth thing, BTW.

tbh though, this round of QE doesn't do much to increase of decrease the cave of wealth effect. That needs to be addressed by re-distribution.

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there isn't any currency.

its all debt.

I feel a post from injin coming on...

There is...

There is of course currency, operationally. That "money is debt" doesn't change anything as to how the important people in the economy (i.e. everyone who does real stuff with real things in the real world) use that debt - as money.

Commodity trading is the only course and source of exchange. That some of that commodity is coloured paper or PC numbers is all that has been achieved. The basics cannot be changed.

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oh hello.

I agree about the cave of wealth thing, BTW.

tbh though, this round of QE doesn't do much to increase of decrease the cave of wealth effect. That needs to be addressed by re-distribution.

Again, you are falling for the eltists trick of trying to be seperate from an economy.

Hyperinflate and hand it to one banker and you've still hyperinflated. The banker is just another guy, not special in any fundamental way and he is part of the economy and cannot ever leave it.

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The trouble with keeping long (or short) term rates low, by means of printing, but not letting it get out on the streets, is that eventually the savers run out of money.

Then what happens? The shortage of capital available from savings, restricts lending even more, lessening capital investment, reducing growth and job creation.

They're trying to have their cake and eat it too. Inflate away the debt, but don't create any inflation. Not possible.

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Is this then a method to avoid the US suffering a soveriegn debt attack thus avoiding the chance of default.

If so why would" bond vigilantes" buy if another "solid" country like Germany[say]

offer better return on their debt?

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link

The Societal Bottom Line

Let's review. In their shortsighted greed and hubris, in their pursuit of extraordinary personal wealth, a small group of exceptionally wealthy and politically well-connected bankers took enormous and obvious risks that nearly destroyed the global financial system. In response, two separate bailouts took place. One was the congressional sideshow that gathered all the media attention, and the other was the real deal, with over $12,000 per household in money created and another $150,000 per household committed to be created if necessary.

The $12,000 per household was paid in cash, freely spendable cash. Cash that could take a big chunk out of the value of the US dollar if it got out into general circulation, both directly and via the "multiplier effect". So the Fed began paying off the bankers not to spend the massive amount of cash that had been created and given to them under highly favorable terms.

One could liken this situation to that of a loaded revolver (a six-shooter to continue the horse and corral theme). In essence, the Federal Reserve dealt with those mischievous risk-takers at the banks who had nearly destroyed the financial world by handing to them a loaded revolver that was pressed against the heads of all the nation's savers, investors and retirees. A revolver that could destroy most of the value of your personal savings. Then the Fed said "Please don't pull the trigger! We will create however much money is needed and pay it into your personal bonus pools, just so you won't pull the trigger on that revolver we just handed to you."

This is essential to understand, because what does paying higher rates than the banks could otherwise get on excess balances and reverse repos really mean? It means higher profits and bonuses. Ultimately, the Fed's official inflation containment strategy is to always be able to offer banks a better deal than any private investment alternative. A better deal means the bank taking in more income, which means the banking executives involved get bigger bonuses. The source of funding for this ability to always pay more than the private markets is the ability to directly create a limitless amount of money. At this point it is a very low interest rate, but the rate can go as high as needed, when inflationary pressures build.

This may sound outrageous, but all it really does is demonstrate the true nature of the Federal Reserve. It is owned by the banks. It is run by the banks. As we are seeing demonstrated right now, its job in times of crisis is to manage the money supply for the benefit of the banks, regardless of the harm inflicted on the rest of the nation.

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Doesn't sterilizing it sort of defeat the purpose. If there is no additional money but additional money is being used to bring down the long term bonds.. doesn't money have to be subtracted from somewhere else in the economy?

I'm a fan of the plan to expand the fed's balance sheet to 5 trillion. Buying long term government bonds is a good way to bring the new money in. And then see what happens with a 5 trillion base money supply.

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in other words QE part II Nuclear Option

which would eventually lead to Hyperinflation if $ is not destroyed in between that.

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Clear as mud.

They are still going to buy government debt (to fund public sector spending and lower long-term yields/borrowing costs).

But this time it will be sterilised instead of unsterilised.

WTF is sterile QE?!

It appears to be a type of QE that has no net effect on the money supply thus requires no reverse repo. OK. How does that work?

You print money and buy long term debt. Do they then just destroy the debt so as to have no net effect on the quantity of money in circulation.

If this s the case, then surely printing money to wipe out government debt is the text book definition of monetising debt?

Doesn't that lead almost directly to uncontrollable inflation?!

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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