Isabella Kaminsky Gets Sceptical

[scepticus]

Popular belief has it that the Fed is intervening in the market to keep rates suppressed at the zero bound.

But in reality cutting Fed Funds rates is actually all about driving short-term rates in risk-free assets below where they would otherwise trade via market forces, so as to incentivise risk-taking. This process hence stimulates the economy.

However, once market forces push ‘real’ rates below a level where a central bank can easily incentivise risk-taking, a liquidity trap situation may come into the making.

That is to say, no matter how much zero-rated money you push into the system, no incentive exists to draw that money into riskier assets.

So how does that apply to where we are now?

As ever, one place to look for clues is in the yield curve. Below you find the current state of the US Treasury curve, the US swap curve and the US Treasury-inflation protected curve:

For one, there seems to be an obvious convergence point around the 11-month mark, where Tips get propped back into positive territory, Treasuries yields begin to bounce higher, and the swap rate comes off rapidly.

In which case, is that the point where the Fed’s interventions are possibly supporting rates from falling through the zero bound, rather than suppressing them lower?

And would market forces otherwise force them into negative or special status?

Well well well. First Bill Gross, now isabella K is starting go Sceptical. Who next, I wonder? Answers on a forum thread please.

[Bloo Loo]

they have no clue.

[Injin]

they have no clue.

I think they are in deep, deep denial about the nature of the system they run.

[Bloo Loo]

I think they are in deep, deep denial about the nature of the system they run.

they are there to protect banks...thats why they were set up.

As for the system..I think you are correct.

[scepticus]

I think they are in deep, deep denial about the nature of the system they run.

Isabella isn't running the system. She is speculating about what its behaviour would be if it wasn't supported by QE.

I have held out before that were it not for QE and credit easing, major government bond markets would already be subjected to negative nominal rates at the short end irrespective of the official base rate.

The denial does not exist where you think it does. Its the hyperventilators who are guilty of sticking their head in the sand.

[scepticus]

link to the original:

http://ftalphaville.ft.com/blog/2010/08/10/311146/zero-support/

[Injin]

Isabella isn't running the system. She is speculating about what its behaviour would be if it wasn't supported by QE.

I have held out before that were it not for QE and credit easing, major government bond markets would already be subjected to negative nominal rates at the short end irrespective of the official base rate.

The denial does not exist where you think it does. Its the hyperventilators who are guilty of sticking their head in the sand.

I think you are also in deep, deep denial about the nature of the system.

[scepticus]

I think you are also in deep, deep denial about the nature of the system.

however deeply I may be in denial it pales beside your denial of the existence of zero. The above is really a case of the pot calling the kettle black, so try and come up with more constructive input once you have climbed out of the wreckage of your credibility.

[Injin]

however deeply I may be in denial it pales beside your denial of the existence of zero. The above is really a case of the pot calling the kettle black, so try and come up with more constructive input once you have climbed out of the wreckage of your credibility.

Zero quite simply doesn't exist and it's perfectly possible to have a counting system that only counts real things. You could also try not taking throaway phrases so literally. (no, i didn't mean write it down and throw it away....)

However, you are in deep deep denial about the nature of the system.

[scepticus]

Zero quite simply doesn't exist and it's perfectly possible to have a counting system that only counts real things.

please stop.

[the_duke_of_hazzard]

please stop.

According to Injin, the hole he's digging doesn't exist.

[Bloo Loo]

however deeply I may be in denial it pales beside your denial of the existence of zero. The above is really a case of the pot calling the kettle black, so try and come up with more constructive input once you have climbed out of the wreckage of your credibility.

zero exists...what it is doesnt...thats why its zero.

course zero counts as part of a number....10 makes sense because of the zero. then again, zero and the numbers are all constructs of the imagination and therefore only exist in the heads of man...same as infinity.

[Guest Noodle]

Zero quite simply doesn't exist and it's perfectly possible to have a counting system that only counts real things. You could also try not taking throaway phrases so literally. (no, i didn't mean write it down and throw it away....)

However, you are in deep deep denial about the nature of the system.

+1 unless we are actually living in a vacuum, I'm struggling to see how zero exists. It may exist as a number (condition) or in a test tube.

Scep, what do you mean by 'zero' and in what context?

[Bloo Loo]

+1 unless we are actually living in a vacuum, I'm struggling to see how zero exists. It may exist as a number (condition) or in a test tube.

Scep, what do you mean by 'zero' and in what context?

+10

[scepticus]

+1 unless we are actually living in a vacuum, I'm struggling to see how zero exists. It may exist as a number (condition) or in a test tube.

Scep, what do you mean by 'zero' and in what context?

tell me how many flying pink elephants you can see right now please.

or alternatively, tell me how many A1-abrams tanks are in your driveway or parked outside your house if you want something 'real' to count'.

Thanks.

[scepticus]

+10

what is the +10 being added to?

[Injin]

what is the +10 being added to?

Something.

Your trouble is you think ideas are superior to real things.

[sharpe]

Popular belief has it that the Fed is intervening in the market to keep rates suppressed at the zero bound.

But in reality cutting Fed Funds rates is actually all about driving short-term rates in risk-free assets below where they would otherwise trade via market forces, so as to incentivise risk-taking. This process hence stimulates the economy.

However, once market forces push ‘real’ rates below a level where a central bank can easily incentivise risk-taking, a liquidity trap situation may come into the making.

That is to say, no matter how much zero-rated money you push into the system, no incentive exists to draw that money into riskier assets.

So how does that apply to where we are now?

As ever, one place to look for clues is in the yield curve. Below you find the current state of the US Treasury curve, the US swap curve and the US Treasury-inflation protected curve:

For one, there seems to be an obvious convergence point around the 11-month mark, where Tips get propped back into positive territory, Treasuries yields begin to bounce higher, and the swap rate comes off rapidly.

In which case, is that the point where the Fed’s interventions are possibly supporting rates from falling through the zero bound, rather than suppressing them lower?

And would market forces otherwise force them into negative or special status?

Well well well. First Bill Gross, now isabella K is starting go Sceptical. Who next, I wonder? Answers on a forum thread please.

are negative rates on bonds free money for the government? did yields on treasuries go negative briefly a couple of years ago.

could I ask why the government would be unhappy at free money from investors?

[scepticus]

Something.

Your trouble is you think ideas are superior to real things.

how many real battletanks are within 50 metres of your dwelling?

[Guest Noodle]

tell me how many flying pink elephants you can see right now please.

or alternatively, tell me how many A1-abrams tanks are in your driveway or parked outside your house if you want something 'real' to count'.

Thanks.

I can tell you how many tonnes of spuds are growing. Or how many doors there are here. Or that the kettle is currently off.

[Injin]

how many real battletanks are within 50 metres of your dwelling?

None.

But there is plenty of other stuff, not nothing.

[scepticus]

are negative rates on bonds free money for the government? did yields on treasuries go negative briefly a couple of years ago.

it can work like this. The government offers a 1 year bond for 1000. It pays a small amount of coupons too - say 50 in coupons. The issue is oversubscribed and there are not any left. Due to a flight to risk, the value of the bond rises to 1100. I'm risk averse, so I buy the bond in the secodary market. Now if I hold this bond to maturity I will only get 1050 back at the end of the term. I lose 50. That is a negative nominal rate on a bond held to maturity. And it has happened previously.

This does not represent free money for gov. They still pay 50 in coupons. However if this keeps happening the price of new issues will get bid up. The more this happens the flatten the yield curve gets where buyers get in at any maturity they can for essentially no yield. Then buyers in the secondary market will take losses.

Unless the government then specifies that certain maturities will pay negative coupons the whole curve would flatten. However assuming deflation is going on (which seems reasonable in this scenario, the government would need to more or less destroy the money they receive in nagative coupons to keep the base money supply in line with oustanding credit in the broad money supply, because if they don't the interbank rate will stay at zero and the yield curve will stay flat.

[scepticus]

None.

But there is plenty of other stuff, not nothing.

my question was reasonable. There may be other stuff but there are 'none' battletanks outside your house. My question was about battletanks and one requires the mathematical language to answer 'none. None is zero.

Now all of you go away and stop being so silly. Noodle, you should be ashamed of yourself!

[Injin]

my question was reasonable. There may be other stuff but there are 'none' battletanks outside your house. My question was about battletanks and one requires the mathematical language to answer 'none. None is zero.

Now all of you go away and stop being so silly. Noodle, you should be ashamed of yourself!

Erm

But the real world is superior to mathematical language, lugnuts.

There are no battletanks, there never were.

Simply your idea was wrong, not the real world.

[Guest Noodle]

my question was reasonable. There may be other stuff but there are 'none' battletanks outside your house. My question was about battletanks and one requires the mathematical language to answer 'none. None is zero.

Now all of you go away and stop being so silly. Noodle, you should be ashamed of yourself!

That's 150 tonne of spuds, 9 doors and kettle now going . . . on!

You lose!