Public Debt Is Money: Eloquent Explanation By Coppola

[scepticus]

http://www.pieria.co.uk/articles/ultra-liquidity

This is a nice clear explanation of why government debt == money (not debt), a point I have been making for years. Also on the blurring of "money" and other asset classes.

The article concludes:

"If ultra-liquidity is here to stay, as seems likely, we must either re-unify monetary and fiscal policy or resign ourselves to central bank impotence. There is no longer any justification for even the pretence of separation. Fiscal and monetary authorities together need to find new ways of transmitting policy to a world flooded not only with reserves, but with liquid assets of many kinds."

Well worth reading in its entirety.

[Bloo Loo]

"Lindau Meeting for Economic Sciences."

Its not a science.

[Venger]

http://www.pieria.co.uk/articles/ultra-liquidity

This is a nice clear explanation of why government debt == money (not debt), a point I have been making for years. Also on the blurring of "money" and other asset classes.

The article concludes:

"If ultra-liquidity is here to stay, as seems likely, we must either re-unify monetary and fiscal policy or resign ourselves to central bank impotence. There is no longer any justification for even the pretence of separation. Fiscal and monetary authorities together need to find new ways of transmitting policy to a world flooded not only with reserves, but with liquid assets of many kinds."

Well worth reading in its entirety.

Public Debt Is Money

I do not like her - one of her previous articles I disagreed heavily with: http://www.pieria.co.uk/articles/consumption_booms_and_housing_busts

Of course we won't have consumption boom - consumption is set to fall due to high house prices, rents, and excessive debt. If we want consumption, we need less debt and a hpc and new mortgage lending to solvent/younger renters at lower prices.

Government can create liquidity by creating debt, but this is not the same thing as creating capital. Anytime a central bank monetises an asset with printing press-money, it also creates a liability. Only the market can create capital by valuing assets above liabilities. There are market check both against higher inflation (to maintain investors return) and deflation - if markets see too much printing without reforms/returns, they will dump bonds, interest rates rise, currency crisis etc, to preseve their position as best they can.

Sometimes, as in 1929, Governments and Central banks can not overcome forces making for contraction just by manipulating numbers on their balance sheets.

Also, there is a limit to everything, including the good credit of governments. When exhausted, even the governments of richest industrial countries may face the dilemma Sweden answered with 500 percent interest rates and deep cuts in government spending. When it appears that authorities are most determined to inflate depression away, that very perception could put the economy on the verge of slipping into the deflationary vortex.

Edited August 28, 2014 by Venger

[Bloo Loo]

QE just creates liquidity.

It is not debt.

Nobody owes anything on it...not the Central bank, no-one.

[Venger]

QE just creates liquidity.

It is not debt.

Nobody owes anything on it...not the Central bank, no-one.

I hope that is irony.

[R K]

I don't have any issue with short term govvy debt being 'money' but she's very confused in several paragraphs in her article.

Suggesting sterling is German 'money' i.e. equivalent 'cause you can pay for stuff in Germany without having to convert it into bank notes first at a bank is silly semantics. You still have to convert it to Euros.

Similarly suggesting long-term debt is liquid and thus the term-premia is irrelevant is nonsense. How is she going to collect furutre coupons if she sells her term debt today? The term premia hasn't dissapeared as she's pretenting it has, it just that she ain't getting it, the buyer is instead.

and here she's even arguing against herself!

Credit risk does matter, of course. But we are amazingly good at ignoring it when it suits us, and liquidity trumps credit risk anyway: we like to believe that we can always get out of a risky investment if it is sufficiently liquid. So a highly liquid asset is likely to be regarded as low risk. Not that liquidity is always certain, of course. CDOs were highly liquid near-money assets prior to the financial crisis. Now, they are about as liquid as flies in amber, and worth considerably less.

and here she's confusing liquidity spreads with interest/yield - which I suspect is her main mistake throughout the article

And the more technology improves market liquidity – and the more regulators push for improvements to market liquidity – the lower returns will be across all classes of financial asset. Perhaps this might explain not just falling term premia, but falling interest rates generally for the last thirty years?

The article is littered with similar simple arguments which fail even a common sense test, which is a pity.

What is very clear though is that in the real economy, there is still a distinct shortage of liquidity despite years of monetary easing

So having just told us that every asset is now ultra liquid and 'money' she goes on to say how there's a shortage of liquidity in the real economy. Sorry, mate, doesn't make sense.

Edited August 28, 2014 by R K

[zugzwang]

She's talking about the governbankment (c. Democorruptcy). It doesn't work, that much seems clear, but then we're already familiar with the shortcomings of command economies viz. the Soviet Union. In a hyper liquid environment as yields approach zero speculators must use ever increasing leverage to generate consistent operating profits and compensate their employees, or retrench. The sharp fall in London hedge fund bonuses reported last week is consistent with the idea of dwindling profitability in financial markets. Eventually these finance houses and hedge traders will be forced to take on extraordinary risks to survive or face liquidation. Neither option is viable in the long-term. Those countries with the greatest exposure to financial markets (i.e. the UK) are likely to be hardest hit by this turn of events.

Edited August 28, 2014 by zugzwang

[Venger]

And even long-term investors need some liquidity. We really don't need insurance companies, pension funds and the like becoming like the Ancient Mariner – surrounded by liquidity but dying of thirst. Liquid assets may not make any money, but they do make it possible for companies to meet their day-to-day obligations. It's a balance, really. Too much liquidity, you can't make any money. But too little liquidity, and you become like that fly embedded in the amber. Dead.

We'll see just how liquid things really are, going forwards. No use for any company to invest in anything when it's massively ponzi overvalued, and prone to correction. I'm prepared for violent panic with musical chairs back to liquidity, with very few chairs. Also, I want to see utter complaceny annihilated - including many people of her age living in the clouds about the value of their £720,000 homes and pointing to the long-wave HPI, as though it can't reverse. You're the living dead if you're full exposed to over-valued assets.

It has been calm for so long – a storm must be brewing

Jan Straatman

25 Jun 2014

It’s tempting, with the European Central Bank toying with quantitative easing, to believe the rally in asset prices will continue indefinitely. But the risk of a painful lurch across risk markets is ticking higher. Bond and equity valuations are stretched and volatility is close to record lows.

The market is so dominated by one long-term view on interest rates that the impact of a change in this view is likely to be profound. Added to that we have a vastly changed liquidity environment. Available liquidity has collapsed. The Dodd-Frank Act banned banks from proprietary risk-taking – so they can no longer warehouse risk and run a “book” of assets. Marketmakers close their books at the end of each day.

Tougher capital controls also restrict bank activities. Banks’ balance sheets allocated to marketmaking are 25% of pre-2008 levels. Since the financial crisis, the US corporate bond universe has doubled in size, but dealer inventory is four times smaller. The problem is that less capacity for liquidity makes volatility spikes much more likely, especially if investors all rush for the – smaller – exit at the same time.

This also explains why, despite the ECB’s efforts, lending to non-financial businesses in 2014 is still negative. ... The golden age of exceptionally low volatility is in its last act. We’ve already seen straws in the wind. In the middle of May, peripheral European bonds gave up almost a quarter of their year-to-date gains in just four trading sessions. This shows what can be expected when the rush for the exit begins. One of the few investment techniques that can cope with the scrum is a nimble absolute return approach – buy and hold in the current environment is little more than the triumph of hope over experience.

http://www.efinancialnews.com/story/2014-06-25/false-sense-of-security-no-more-low-volatility

Anybody who tells you that money is the root of all evil, doesn't ******ing have any. They say money can't buy happiness. Look at the smile on my face! And best of all, I am liquid. - Boiler Room. (2000)

ECB's Nowotny: Monetary policy options limited to trigger loan demand

VIENNA Wed Dec 11, 2013 9:34am GMT

(Reuters) - There are limits as to what monetary policy can still do to stimulate demand for credit to fund investments, European Central Bank Governing Council member Ewald Nowotny said.

"Credit availability is not a problem now but what we see is that demand is very low," Nowotny, who is also governor of the Austrian Central Bank, told a news conference on Austrian bank stability on Wednesday.

"The possibilities of monetary policy are more or less limited," he added. "It is the demand side that decides investments."

[zugzwang]

"The possibilities of monetary policy are more or less limited," he added. "It is the demand side that decides investments."

Indisputably true. Industrial capacity in US oil and gas extraction has grown by 50% since 2008 - the impact of drilling a quarter of a million shale gas/oil wells. Ask yourself where the US economy would have been without this enormous investment and one-off transformation? The real driver of whatever economic growth the US has seen in the last six years has been down to this boom in energy technology and production and nothing whatsoever to do with Bernanke and Yellen's monetary fumbling.

[Venger]

Indisputably true. Industrial capacity in US oil and gas extraction has grown by 50% since 2008 - the impact of drilling a quarter of a million shale gas/oil wells. Ask yourself where the US economy would have been without this enormous investment and one-off transformation? The real driver of whatever economic growth the US has seen in the last six years has been down to this boom in energy technology and production and nothing whatsoever to do with Bernanke and Yellen's monetary fumbling.

Maybe so, but I've got a suspicion - even accounting for new tech required to exploit some of it - it's been a long term plan - always their own vast energy/resources to exploit in such times.

What was the conclusion in a recent article about the above? Of US being more energy independent.... fewer dollars flowing around the rest of the world, narrowing US deficits, and more trouble to come for RoW.