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Federal Reserve balance sheet trends

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Re: Federal Reserve balance sheet trends

#251

Post by fallingfrog »

AnimalMuppet wrote: post #236
fallingfrog wrote: post #232

Earlier quoted context omitted.

Right but my point is, as soon as it happened the fed went into a panic and printed trillions of dollars and started buying junk bonds, giving the impression that they will do whatever it takes to make the market not drop. No matter the cost. And the market shot back up even though there are 26 million people who just lost their jobs. But you know, this is still an unfolding story so who knows, maybe all the free loa…

Or, maybe you're right, and the market would have fallen a lot further (or at least not recovered) if the Fed had done nothing. And, on that one, we won't even find out, because that's not what the Fed did.

And I can see the point too that in the short term in the middle of a crisis, they did what they had to do for the economy to survive. It’s after the crisis is over, and things start recovering, that they are really going to have to make unpopular decisions or reinflate the bubble.

Re: Federal Reserve balance sheet trends

#252

Post by AnimalMuppet »

fallingfrog wrote: post #251
AnimalMuppet wrote: post #236

Earlier quoted context omitted.

Or, maybe you're right, and the market would have fallen a lot further (or at least not recovered) if the Fed had done nothing. And, on that one, we won't even find out, because that's not what the Fed did.

And I can see the point too that in the short term in the middle of a crisis, they did what they had to do for the economy to survive. It’s after the crisis is over, and things start recovering, that they are really going to have to make unpopular decisions or reinflate the bubble.

Absolutely agree. Getting back to stability is going to be... interesting.

Re: Federal Reserve balance sheet trends

#253

Post by kyuudou »

wegs wrote: post #225
TacticalTable wrote: post #197

Earlier quoted context omitted.

Assuming this comes to pass, what would the optimal move be to protect savings from inflation? Is this where Gold comes in handy?

Hard to say. It's easy to identify safe investments, but if you look at markets, money has flooded there already. People get paid to think about this sort of thing day-in-day-out. People need food, shelter, and medicine, so those are well inflation-protected. But housing prices would collapse if everyone is unemployed for long. Food producers may get sued of COVID19 outbreaks which are happening at plants already (es…

> And you can't eat gold. It's as fiat as anything else.

It's a good way of inter-generational wealth storage still. Also it's useful along with a basket of currencies to diversify with especially in countries with high inflation or value volatility e.g. Venezuela. It's highly regarded in 2 of the most populated countries in the world (India and China) and that is not apt to change any time soon.

Sure, in a full grid-down situation it's useless and "junk silver" would be more useful as a temporary currency but that is a slim possibility.

Re: Federal Reserve balance sheet trends

#254

Post by SantalBlush »

_gx90 wrote: post #190
thomashobohm wrote: post #185

Earlier quoted context omitted.

Please, this isn’t Soviet Russia, economists disagree about practically everything, so the whole argument that the profession has a serious groupthink problem is unconvincing to me. The reason why economists mostly agree on this particular topic-the way the Fed operates-is because it’s exceedingly transparent, theoretically (not to mention mathematically) simple, and empirically verifiable.

>Please, this isn’t Soviet Russia, economists disagree about practically everything, so the whole argument that the profession has a serious groupthink problem is unconvincing to me. They disagree on a lot of things, that is true, but the one thing they all seem to agree upon (except for Austrian economists) is that the economy can be effectively modelled and that effective policy prescriptions can be derived from sa…

Statistical models exist primarily for the falsification of hypotheses. The Austrians didn't submit such models so their theories could never be subjected to the same scrutiny that mainstream theories are. "It's too complex" is a cop-out, and Austrian theory's lack of math is enticing to people who don't want to put forth the effort involved in rigorous study (i.e., internet scholars). They pretended to be agnostic about economic principles, when really they just applied ad hoc explanations for economic events (which they were free to do because they weren't constrained to those pesky mathematical models).

Re: Federal Reserve balance sheet trends

#255

Post by AnimalMuppet »

roenxi wrote: post #246
AnimalMuppet wrote: post #237

Earlier quoted context omitted.

I would say that the dollar had already lost a bunch of its value by 1968. It's just that the gold peg hid that when you measure the value of the dollar in gold. But if you look at inflation during the 1950s, the dollar was losing value then as well. Now, sure, the dollar lost a lot of value between 1968 and now. I don't deny it. But it also lost value between 1935 and 1968. Measuring the value of the dollar in terms…

It was about ~$20/oz when it started around 1900 and the government claimed ~$35/oz at the end. That is about 50% value loss, maybe a bit worse, in the 70 years of the gold standard. $35 to $1,650 looks a lot more like a collapse in value. And that is after the demand for gold presumably plummeted because it wasn't official money any more, and mining got a lot more efficient through the 70s to the 90s. Maybe the Asia…

OK, let me try this again: You can't measure dollar inflation by the gold price when the dollar is pegged to gold.

And, gold was pegged to $20/oz. Then at some point in the Depression, it was moved to $35/oz in a step function. It wasn't gradual.

And I argue that the actual value of gold wasn't $35/oz at the end of the gold standard. That's why the value shot up so quickly when the market was allowed to determine the price - because $35 was the wrong price on day one. There was a lot of inflation between 1935 and 1968 to catch up for that was not reflected in the $35 price, because $35 was never a market price.

How do I know that $35 was the wrong price? Because the US was bleeding gold. Other countries were buying gold from the US at $35, and the US could see that the official price was unsustainable.

Re: Federal Reserve balance sheet trends

#256

Post by kyuudou »

xiphias2 wrote: post #218
AnimalMuppet wrote: post #213

Earlier quoted context omitted.

OK, but the peak was 8 years ago. So you can say that gold outperformed the S&P over 20 years. But you can't say that over any span less than 8 years, and maybe not even over 10. So, when you say "I don't expect this trend stopping", I see a trend that already stopped - that stopped 8 years ago, in fact.

Sure, you're both right, I didn't really explain why I think it's we're in the part of the business cycle where gold performs better. As these cycles take a long time, it's better to look at long term charts, like this: https://www.macrotrends.net/1378/dow-to-gold-ratio-100-year-... Gold is an asset that was able to keep its value for 5000 years (unlike fiat currencies), and it has to be mined, it can't just be creat…

Also important to consider what it's being valued in. The USD index is based on a basket of several other currencies, for example. Finding an objective comparison point to determine what is pegged to Things of Real Value to Most Humans is multivariable to say the least. Gold seems to be more stable over the long-term with regards to things like houses, suits, food staples and such.

Re: Federal Reserve balance sheet trends

#257

Post by kyuudou »

_gx90 wrote: post #47

I've said it before, and I'll say it again. Central banking is the greatest scam in the history of mankind that cartelises the banking sector, gives them the privilege of access to the printing press, and is the root cause of the boom-and-bust cycle. It has managed to convince people (particularly mainstream economists) that its institution is necessary for "financial stability" but what it really does is absolves ba…

Yes, for those care about anthropogenic climate change, inflationary debt-backed currencies encourage exponential rates of consumption.

Re: Federal Reserve balance sheet trends

#258

Post by fbonetti »

RobertoG wrote: post #244
fbonetti wrote: post #214

Earlier quoted context omitted.

> So, what you are saying is that government deficits are inflationary because they add money to the economy, but, on the other hand, government surplus don't retire money from the economy? Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything. A deficit or surplus is merely the delta between total revenues and an arbitrarily defined budget. Inflation is caused…

I'm a little late, but I want to answer for the sake of completeness. >>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything." You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject). Now, it seems to me that we agree also that a government deficit…

You also seem to be arguing that centrals banks don't create new money, which is an odd assertion, especially for a proponent of MMT. From the article you posted:

> "QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the assets will be left holding the newly created deposits in place of government bonds."

> "QE has a direct effect on the quantities of both base and broad money because of the way in which the Bank carries out its asset purchases. The policy aims to buy assets, government bonds, mainly from non-bank financial companies, such as pension funds or insurance companies. Consider, for example, the purchase of £1 billion of government bonds from a pension fund. One way in which the Bank could carry out the purchase would be to print £1 billion of banknotes and swap these directly with the pension fund. But transacting in such large quantities of banknotes is impractical. These sorts of transactions are therefore carried out using electronic forms of money."

Re: Federal Reserve balance sheet trends

#259

Post by RobertoG »

fbonetti wrote: post #250
RobertoG wrote: post #244

Earlier quoted context omitted.

I'm a little late, but I want to answer for the sake of completeness. >>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything." You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject). Now, it seems to me that we agree also that a government deficit…

> My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money". It's rare for the federal government to run a surplus, but it did have one for four years straight in 1998, 1999, 2000, and 2001[1]. During that that time, the monetary base increased 32%[2] and the M2 money supply increase 23%[3]. No matter how you look at it, des…

My point is that with a government surplus there is less money being spent in the economy, the same way that with a government deficit there is more money spent in the economy. I don't think this is polemic.

Now, in order the government to run a surplus, it has to tax more that it spend. The money that is taxed in excess of the money that is spend, it's the money that it's retired from the economy. Ergo, taxes retire money or "destroy money".

Please, note, that when a government is running a deficit, it's effectively spending new money into existence but, that doesn't mean that all the money comes from the fiscal instance of the government. That's the reason we can see years when the government is in surplus and an increase in the monetary base at the same time.

Where is that money coming from if not from a fiscal deficit? It's coming from the central bank creating reserves. Why the central bank create new reserves if the government is not spending more than it tax? Normally, it would be for only one reason, manage the interest rate.

The credit department of commercial banks doesn't check if they have reserves before given a loan, they check if the loan make business sense (or they should) and then get the reserves in the interbank market. If there are not enough reserves in the system for the demand of credit in the economy, the interest rate will go up (offer and demand dynamics in the interbank market). The central bank has a interest rate target, so, in order to keep it in target, they have to add the reserves necessaries. The central bank don't have control of the monetary base, because if they control the quantity of money, they would loss control of the interest rate.

So, if in years of government surplus, the monetary base grow, that means that central bank had to add reserves to the system. Assuming it was not some crazy QE program, that means that the economy was demanding more credit. Also, we can deduce that in those years, while the public debt was going down, the private debt was going up.

This is related also to the (for me) very interesting concept of sectoral balances (1). If the government is running a surplus, and the GDP is the same or growing, and the external balance of payments is the same, that means that the private debt have to increase.

>>"It's rare for the federal government to run a surplus [..]"

Yes, very rare. It's interesting to think about why is that the case in the context of the sectoral balance model.

(1) -

http://bilbo.economicoutlook.net/blog/?p=21287

http://bilbo.economicoutlook.net/blog/?p=32396

Re: Federal Reserve balance sheet trends

#260

Post by RobertoG »

fbonetti wrote: post #258
RobertoG wrote: post #244

Earlier quoted context omitted.

I'm a little late, but I want to answer for the sake of completeness. >>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything." You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject). Now, it seems to me that we agree also that a government deficit…

You also seem to be arguing that centrals banks don't create new money, which is an odd assertion, especially for a proponent of MMT. From the article you posted: > "QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the…

>>"You also seem to be arguing that centrals banks don't create new money"

Not exactly. My undernstanding is that all money comes from the government. That is clear with banknotes for instance, it comes only from one place, but the same is true for bank reserves. Reserves originates in the Central Bank that is part of the government.

Now, if the government want to spend into something, let's say to pay a service to a private company, it tells the central bank to credit the appropriate account of the private company bank with the appropriate quantity. Money was effectively spent into existence, and, this will have inflationary effects.

On the other hand, if, for instance, in order to finance a crazy QE program, new reserves are created in the banking system, that money is available for banks to make loans, but that doesn't mean that a loan will be made. It's not until that loan is fulfilled that the new reserves will have an inflationary effect.

That's the reason why the QE programs were not inflationary. They affected the interest rate, but that was not enough because there were not appetite for loans in the economy. I think this has been calling "pushing a string". The MMT perspective would say "those QE programs are not going to be inflationary but they are not the proper tool. If you want to create demand (and some inflation) you need the government to spend, because the private sector obviously doesn't want to".

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