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Wednesday, February 4, 2015

Central bank policy, in one post


From The Kakistocracy:

I haven’t written much lately about The Economy. And that is a failure to prioritize, as he is the second most important American in history. The Economy has (capriciously, one must concede) modified what this country produces and who draws assistance for not producing it. One feature that was previously of grave concern to The Economy was the government’s bond purchase program called Quantitative Easing. That’s always been a formidable sounding name. Evoking images of plucky 4SD prodigies poring over abstruse datasets. Tuning economic models to the exquisite precision of a Patek Philippe. Uncovering the encrypted key to turn the impenetrable lock. Allowing The Economy to slip its surly bonds and soar untrammeled into the starlit night.

Though a perhaps less inspirational scene is the more accurate.

The Economy sucks, so we’ll print an avalanche of money to paper it over.

How much do we print?

How the fuck should I know? Just do it. We’ll figure it out later.


Some four and a half trillion subsequent, QE got “tapered.” Kind of like America’s founding stock…tapered. Though before progressing on to the QE news that now has most of you quivering like a housecat, I wanted to point out a fact that the Federal Reserve will not: money printing is a tax. Inflation is a tax. The truth is the government could operate exclusively through QE financing and defenistrate the antiquated tax regime entirely. It’s always surprised me that Krugman hasn’t suggested exactly that. Though I’m sure even the more obtuse of the herd might start noticing the outline of an abattoir in that scenario. But it is technically feasible. And if it were, do you think you’re getting those ten naval carrier groups protecting our freedoms for free? Unfortunately no. You’re still out the tab; only the form of payment is altered.

And at least one Fed president says the public has a delinquent balance.
Reuters) – The Federal Reserve should consider restarting its controversial bond-buying stimulus if inflation does not start moving back to 2 percent once downward pressure from the recent drop in oil prices dissipates, a top Fed official said on Tuesday.

(Minneapolis Fed President Narayana) Kocherlakota’s view is likely in the minority at the Fed, which stopped its bond-buying program last October after the U.S. unemployment rate dropped faster than expected. Most Fed officials now believe it is only a matter of time before inflation, which is running well below the Fed’s target, will improve as well.

Kocherlakota said Tuesday that it is a mistake to assume that just because the real economy is healing, inflation will automatically return to healthy levels.

Ah yes. Those dreadful sticky wages. All prices should perpetually rise, except the price for labor, which must always perpetually fall. I'm not privy to the Fed's personnel manuals, but I'm guessing the wages of central bank employees are damn near Loc-Tite.

Anyway, with that impressively alien name, I decided to hop over to Wiki and have a look for Herr Kocherlakota:

Kocherlakota was born in Baltimore, Maryland, to an American mother and an Indian American father, both of whom earned PhDs in statistics from Johns Hopkins University. They taught at the University of Manitoba in Winnipeg, Manitoba, Canada, where Kocherlakota spent most of his childhood.

I asked this once at Marginal Revolution: if we can 'quantitatively ease' (i.e., print money and buy our own debt with it), why don't we just eliminate taxes and the Fed can print up the money the government needs. The answer I got, as best I can phrase it, was 'institutional structures are needed to assure optimal outcomes.' That is how these creatures think, all 130+ IQ points of them.

The truth is far more ghastly than poor old Joe Sixpack with his flag and his hope in the institutions and his son in the military can ever possibly comprehend: the people at the top of the food chain are being given freshly printed money and buying real goods and services with it. Strip away all the arcane lingo and formulas, and that is all there is to it.

Thus, the inexorable, grinding price rise as the early bidders take goods off the market and the new money works its way through the economy, eventually immanentizing into groceries at $50/bag. This is ameliorated only by phenomena such as the Saudis suddenly deciding to open the taps, or that part of the real economy still allowed to function and harness productivity gains.

All the macroeconomics, econometrics, Krugman's tears, Cramer's screams, all of it is to obscure the fact that we are printing money and handing it out to some people first. (The fancy phrase for this is, money is non-neutral in the short term and neutral over the long term.) That is why government is living so high on the hog and Wall Street is swimming in cash. Slowly, the false capital crowds out the real capital (the savings from prior production). Slowly, the bubble economy replaces the real economy. It works so long as it works, until it doesn't.

10 comments:

Kakistocracy said...

institutional structures are needed to assure optimal outcomes

I love that explanation. Just precious.

Tyler Cowan: “Why are you people leaving me buried to my neck in the Mojave Desert?”

Unpleasured Bean Eaters: “Because institutional structures are needed to assure optimal outcomes. Good day.”

I agree with your assessment and to expand the notion further, imagine alternate applications of a conjured $4.5 trillion. If there are 150 million taxpayers, each one could have received $30,000 refundable in their return. That may have titillated The Economy.

Though to buy down interest rates they wanted a massive bond purchase program. So they could have purchased directly from the treasury at issuance. I would have still found it wildly inappropriate, though at least there would have been the cover of bland neutrality. Though even that was discarded.

The Fed actively chose beneficiaries. It printed money and decided who would and would not receive it. Wall Street, yes. Main Street, no. A great many people from all walks of life took huge losses in the carnage of 2008-2009. How many had those made whole by newly minted fiat? Could Anti-Gnostic have strolled into the regal Atlanta Fed, placed his MBS on the counter, and asked kindly to have it purchased back at par since its market value had dropped to only . 40 on the dollar? My 8-ball says “outlook not so good.”

And so managements who had chosen poorly and rendered their institutions insolvent as a result were simply healed. By taking dollars out of your pocket and slicing off an end. Thus providing Bernanke with the photo opportunity to stand before anxious executives and proclaim, “We have secured seven-figure bonuses in our time!”

Alexandros HoMegas said...

"wanted to point out a fact that the Federal Reserve will not: money printing is a tax. Inflation is a tax. "

I watched a Bill Still documentary where he say this, Central Banks are a hidden tax.

Anonymous said...

Just wanted to point out that (a) that inflation is a tax is well known, this is covered in macroeconomic textbooks, (b) there are arguably benefits to low levels of inflation (and it is arguable) and these may justify the inflation tax at that level and (c) to raise all government revenue through money printing would require substantially higher levels of money creation and inflation, high enough that any of the benefits of being off the 0 inflation point would be dramatically outweighed by the costs of high inflation. Low inflation being good does not logically imply that high inflation is better.

And while Tyler Cowan is an interesting guy, he's neither representative of economists no particularly important in the profession. What he is is very famous for blogging.

Kakistocracy said...

that inflation is a tax is well known

That's true. Though it's also well known that symmetric-key algorithms should be used for bulk encryption. It's in all the cryptology textbooks.

The question is how many well know this?

I'll wager it's a very low percentage of the public in both instances. Thus an abundance of caution might lead a FRB chairman to spare at least 30 seconds in testimony reiterating the point before the presses start rolling.

Also one other note on funding the government via QE. The highest monthly purchase rate for QE3 was $85b compared to a (for instance) $248b outlay in the most recently available fiscal month. That's a substantial gap, though not an inconceivable one.

Anonymous said...

My interpretation of the Fed's action is that QE is temporary in a specific sense. The goal was to flood the market with reserves both to boost the economy and to support particular financial markets. Because of the situation in the economy at that time (and now) this level of intervention would not result in the kind of inflation typically associated with that level of monetary increase (nor did it). Over a long enough time, this level of buying would/could not be sustained and so at some point not only would the buying be reduced, but much of the earlier transactions would be unwound.

The level of purchases at the peak of the problem would not be sustainable for the long run. You don't want to end up as Zimbabwe.

The Anti-Gnostic said...

IOW, to keep an insolvent sector afloat where it continues to soak up capital and make hazardous investments, confident in the knowledge it will not be allowed to fail.

Anonymous said...

I think it’s important to distinguish between institutions that were illiquid from those that were insolvent. Mostly the truly insolvent institutions (e.g. Washington Mutual) ended up being privately bought out, although often to the detriment of the buying institution - but that’s another story.

Much of the Fed’s involvement was more in support of the “shadow banking market” as a whole rather than particular institutions and IMO was necessary at the time to keep things going until order could be returned or a replacement system developed.

I’m no friend of the current financial system. I’m for restricting the size of banks, higher capital requirements and, in general, tighter regulations. But given the situation the country found itself in after 2007, I think the Fed had little choice to intervene. Things could have been much, much worse.

But now is the time we should be thinking about how to restructure the financial sector. Should we be managing more of the derivative contracts through clearinghouses? Do we want mortgages to continue to be financed through the shadow banking system or do we try to return to the old thrift-based system? Can you even put the genie back in the bottle?

I think focusing on the Fed is mostly a distraction from the serious issues that face the economy, which is why it’s such a popular thing to do. My view is that if you fix the underlying issues that caused the crises in the economy then you won’t have to worry about the Fed intervening in the future. And if you don’t fix them, which is probably likely, then the Fed is going to have to intervene again because it’s better than everything falling apart.

Anonymous said...

Just to add, I think too much is made of the moral hazard problem. Many of the companies that made the worst investments (Washington Mutual, Wachovia, Countrywide, all the little monoline mortgage issuers, Bear Stearns, Lehman) blew up their investors or at least greatly damaged them. The reality was that the executives of many of the financial companies didn’t care whether their firm had an implicit guarantee or not. They were willing to take the risks since they could always walk away from a bankrupt company.

Anonymous said...

Thus, the inexorable, grinding price rise as the early bidders take goods off the market and the new money works its way through the economy, eventually immanentizing into groceries at $50/bag.

My knowledge of economics is pretty low. What would be some concrete examples of this that's happened during big money print ups? Money goes to a large bank, then lent to some investor who buys up grain or steel, then sits on it long enough to drive the market up to where they pay loan back and still get a nice profit? Even without any knowledge of econ, I've always been suspicious of unsound money, but have always been limited in citing real examples of its drawbacks.

The Anti-Gnostic said...

It is impossible to point to a discrete example. The new money enters the economy and immediately becomes dispersed in numerous and complex transactions.

The clearest example you will find is the loss of seignorage as the currency slowly falls to its intrinsic value, a process the government tries to circumvent by using ever cheaper materials. Even the humble copper penny is too rich, so now it's mostly zinc. Silver of course has long since disappeared from circulation.

Manufacturers are doing the same sort of thing to maintain profit margins, by the way. In my lifetime, the 1 7/8 2x4 has slimmed down to 1 1/2.