tag:blogger.com,1999:blog-582368152716771238.post2487391978867142673..comments2024-03-28T11:14:02.660-05:00Comments on The Grumpy Economist: Deflation PuzzleJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger47125tag:blogger.com,1999:blog-582368152716771238.post-73546201278283829832016-04-02T22:01:27.639-05:002016-04-02T22:01:27.639-05:00government bonds owned by the Fed are still counte...government bonds owned by the Fed are still counted as part of the outstanding public debt. Ahttps://www.blogger.com/profile/17386123430230365251noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39820975788836821232016-03-20T12:00:58.871-05:002016-03-20T12:00:58.871-05:00You, the taxpayer, pays interest on reserves. It&...You, the taxpayer, pays interest on reserves. It's a transfer from the treasury to banks. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72196072707241750152016-03-20T12:00:01.896-05:002016-03-20T12:00:01.896-05:00It is a subsidy. Reserves ought to pay zero. IOR...It is a subsidy. Reserves ought to pay zero. IOR takes cash that would have otherwise gone to the treasury, to pay for roads and bridges, and instead incentivizes banks to hold on to reserves, instead of shoving them out the door as currency. <br /><br />Try withdrawing currency sometime. Limits and pseudo-criminal surveillance everywhere. You'd think that the central bank would want more currency circulating outside the banking system. They don't, and this shows the lie. <br /><br />The installation of IOR was an immense tightening of monetary policy, one that hands seigniorage to banks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81764726605186545832016-03-19T11:19:57.046-05:002016-03-19T11:19:57.046-05:00Dustin,
His model is incomplete. A nominal inter...Dustin,<br /><br />His model is incomplete. A nominal interest rate with no borrowers / lenders at that interest rate will tell you nothing about the inflation rate.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19483429845277046112016-03-18T13:04:14.407-05:002016-03-18T13:04:14.407-05:00Melissa,
The Fed's predictions have proven unr...Melissa,<br />The Fed's predictions have proven unreliable, which shouldn't be a surprise (EMH), yet the Fed continues to believe in their own power of prediction.<br /><br />The Fed should rely on market predictions. Market participants determine the path of inflation via their market actions (save, invest, consume), and their market actions are informed by their expectations. The Fed could easily accomplish this but is reluctant to value market expectations.<br /><br />I fear that until the Fed comes to this realization, monetary policy via the interest rate channel will continue to confound.Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5972542774993495242016-03-18T08:32:13.907-05:002016-03-18T08:32:13.907-05:00Frank, Yes I meant to use the term "Fed"...Frank, Yes I meant to use the term "Fed". You haven't addressed Prof Cochrane's model, which doesn't account for credibility.Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90822372712516657852016-03-17T23:05:09.180-05:002016-03-17T23:05:09.180-05:00Since the Fed is unable to accurately predict how ...Since the Fed is unable to accurately predict how their policies are affecting inflation, does that mean the fundamental economic theories as related to modern economics need to be revised? Melissa De Leonnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-71562567304469586132016-03-17T15:02:20.183-05:002016-03-17T15:02:20.183-05:00Dustin,
Key phrase:
"If the FRB guarantees....Dustin,<br /><br />Key phrase:<br /><br />"If the FRB guarantees..."<br /><br />First, it is not the Federal Reserve Board (FRB) that conducts open market operations, it is the Federal Open Market Committee (FOMC). These are not the same:<br /><br />https://en.wikipedia.org/wiki/Federal_Reserve_Board_of_Governors<br />https://en.wikipedia.org/wiki/Federal_Open_Market_Committee<br /><br />Second, neither the FRB nor the FOMC can guarantee anything into perpetuity. Both are made up of men and women who are appointed, serve their term, and then replaced. Joe can vote to purchase government bonds today and Jane can vote to sell government bonds when she replaces Joe.<br /><br />So, like I said. The only body can can extinguish the federal debt is the federal government.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46156855866590997652016-03-17T11:58:00.965-05:002016-03-17T11:58:00.965-05:00Charles, What's wrong with a faster rate of in...Charles, What's wrong with a faster rate of inflation, as long as it doesn't go too far above the 2% target? It's widely agreed that 2% is about the optimum rate.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13834830165481775222016-03-17T11:17:42.720-05:002016-03-17T11:17:42.720-05:00If the FRB guarantees to continually re-up asset p...If the FRB guarantees to continually re-up asset purchases when the current securities it holds mature, then the debt is effectively extinguished. It is equivalent to a debt that never matures. Taxes would never be allocated to retire this debt. It would be notional. New debt will pay for the old debt, forever. In an extreme case, all government expenditure could be financed this way. Just one asset (reserves) swapped for another (T securities), right?<br /><br />Obviously, this would lead to inflation even if the Fed has a low nominal rate target and is holding excess reserves. I question any model that suggests otherwise. To be sure, market rates would rise, right along with inflation, as a result.Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77822592642126926462016-03-17T09:04:07.447-05:002016-03-17T09:04:07.447-05:00Dustin,
"...then the debt is effectively ext...Dustin,<br /><br />"...then the debt is effectively extinguished..."<br /><br />No, it is not. The federal debt is an obligation of the government. Only the federal government can extinguish that obligation.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66463194956764861282016-03-16T08:40:00.772-05:002016-03-16T08:40:00.772-05:00The models that Prof Cochrane uses do not account ...The models that Prof Cochrane uses do not account for changeable, man-made laws. That is why he didn't mention them in his post. To recap:<br /><br />1) Interest rates have two effects on inflation: a short-run "liquidity" effect, and a long-run "expected inflation" or "Fisher" effect. <br />2) In a liquidity trap, the liquidity effect is absent.<br />3) Because there are excess reserves, we are in a liquidity trap.<br />4) When the liquidity effect is absent [such as in a liquidity trap], the expected inflation effect is all that remains. Inflation must follow interest rates.<br /><br />These are asserted as economic truths. There is no mention of what the US Congress in 2016 allows or does not allow the Fed to do. I contest this. If the Fed were to buy assets and roll them over into perpetuity (even just the trillions they already hold!!), then the debt is effectively extinguished. There are 2 consequences - either:<br /><br />1) inflation will rise despite a low nominal rate target and presence of excess reserves, or<br />2) we have a free lunch<br /><br /><br />Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31014495081097846222016-03-15T21:47:07.229-05:002016-03-15T21:47:07.229-05:00Dustin,
"I doubt that the fundamental econom...Dustin,<br /><br />"I doubt that the fundamental economic principles that Prof Cochrane asserts are bound by legalism."<br /><br />Sure they are. See property rights, contract law, bankruptcy law, etc., etc.<br /><br />What does an interest rate even mean without these legal underpinnings?<br /><br />Central bank makes a loan at 5% interest to me and I decide I just won't pay them back. What effect does that 5% interest rate have on the inflation rate when I am in effect paying 0% interest on the loan - actually negative interest since I am not repaying principle either?<br /><br />There is nothing "fundamental" or "natural" about a lending arrangement. It is a man made contrivance that we as voters have decided should be regulated by government.<br /><br />I know John espouses free market principles, but I have yet to see anything from him to suggest that he is in favor of eliminating property rights or tearing up bankruptcy and contract law.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66745686960801599952016-03-14T14:17:16.450-05:002016-03-14T14:17:16.450-05:00Frank,
I doubt that the fundamental economic princ...Frank,<br />I doubt that the fundamental economic principles that Prof Cochrane asserts are bound by legalism. Anyway, the FRB has already acquired trillions in assets that it could effectively extinguish. There is also no obvious limit to how much further the FRB could go.<br /><br />How can anyone seriously claim that vaporizing all of this debt wouldn't cause inflation despite low-to-zero nominal rates? Indeed, rates wouldn't stay low for long.Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30391344731329681762016-03-13T23:09:47.308-05:002016-03-13T23:09:47.308-05:00Can the fed buy stocks? Private debt ? Although Po...Can the fed buy stocks? Private debt ? Although Pople here believe money and bonds are substitutes, they're not. Have the Fed buy up to 10-year maturity treasuries, and the treasury to issue only perpetual bonds. Put money on the hands of anybody who might spend it, and have the issuer to take advantage of invstor demand lengtening mauturities. I doubt the liquidity effect will be absent if this is an open ended program ...Jose Romeu Robazzinoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89428487052741080362016-03-13T19:12:04.732-05:002016-03-13T19:12:04.732-05:00Dustin,
"The Fed can overpay for treasuries....Dustin,<br /><br />"The Fed can overpay for treasuries..."<br /><br />The Fed is limited to paying no more than the sum of the interest and principle payments that a government bond offers. Any more than that, and the Fed is purposely buying government bonds at a loss which it is not permitted to do. For instance, the Fed cannot pay $1 million for a bond whose interest and principle are worth only $100.<br /><br />"Also, it can roll over its purchases into perpetuity..."<br /><br />The Fed can roll over it's purchases as long as there are willing sellers for the debt. There is nothing to guarantee a perpetual supply of government debt for the central bank to purchase.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42791370521142693742016-03-13T15:41:34.827-05:002016-03-13T15:41:34.827-05:00Eventually, the effect of low rates, deflation is ...Eventually, the effect of low rates, deflation is protectionism. As this is a symptom of economic problems, consumers borrow more as they have this low cost buffer. But this creates more bondage tied to the nation in which it occurs. Therefore, the effect is to affect migration and globalization to some degree.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39770971346585322542016-03-13T10:27:14.497-05:002016-03-13T10:27:14.497-05:00Frank,
The Fed can overpay for treasuries, thereby...Frank,<br />The Fed can overpay for treasuries, thereby by creating arbitrage opportunities and so ensuring an endless supply of willingness. Also, it can roll over its purchases into perpetuity, effectively sterilizing government debt. So back to Ben's original and correct comment....Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-16790341286830061492016-03-12T18:37:00.977-06:002016-03-12T18:37:00.977-06:00In no way is it a subsidy. Many central banks, inc...In no way is it a subsidy. Many central banks, including the Fed, run monetary policy by paying interest on reserves. Remember that central banks under this system set and control the supply of reserves - so reserve volumes are adjusted so as to meet the target. But because the supply of reserves is controlled by the central bank, the banking system must hold these reserves, which are risk-free and earn a very low rate of interest.<br /><br />In this way, talking about excess reserves is pointless. All those excess reserves at the Fed merely reflect the QE programs the Fed ran. Moreover, the reserves cannot be lent out - they are essentially trapped in the interbank system (unless the public starts demanding cash holdings).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81995016255586340032016-03-12T08:03:33.871-06:002016-03-12T08:03:33.871-06:00Ben,
"But even without that direct ability,...Ben, <br /><br />"But even without that direct ability, the Fed can always print money and buy even more Treasuries, or other debt-yielding instruments and increase its balance sheet, thus essentially monetizing debt."<br /><br />1. The central bank (Fed) by law is not permitted to bid on government debt at auction.<br /><br />2. To buy U. S. government debt, the central bank must find a willing seller of that debt. The central bank cannot force someone to sell their U. S. debt holdings.<br /><br />And so no, the central bank can't always print money and buy more U. S. debt. It can run out of willing sellers for that debt.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26840504465822157932016-03-11T21:09:53.901-06:002016-03-11T21:09:53.901-06:00Frank Restly:
Yes, the Fed has to pay banks the I...Frank Restly:<br /><br />Yes, the Fed has to pay banks the IOER, and if the Fed raises rates, then the IOER rises. <br /><br />I contend there are koo-koo accounting rules that apply to central banking. A central bank should have the power to "print money." It is a power of the sovereign and very useful at times. Let the Fed print money and pay IOER. <br /><br />But even without that direct ability, the Fed can always print money and buy even more Treasuries, or other debt-yielding instruments and increase its balance sheet, thus essentially monetizing debt. <br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87675477710681694142016-03-11T10:42:35.334-06:002016-03-11T10:42:35.334-06:00VG,
Bingo you have hit the nail on the head. For...VG,<br /><br />Bingo you have hit the nail on the head. For any loan you need both parties to agree to the terms (including the interest rate). Notice there is no credit growth rate in the Fisher equation.<br /><br />And so before jumping to the conclusion that lowering interest rates will lead to lower inflation and higher interest rates will lead to higher inflation, you must be able to determine the effect of interest rates on the supply and demand for credit.<br /><br />If the central bank raised it's overnight lending rate to 20% but could not find any borrowers at that interest rate, what would happen to the inflation rate?<br /><br />Would the inflation rate jump up to something close to 20% or would the inflation rate remain where it is or collapse?<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79598150976110944022016-03-11T07:33:12.736-06:002016-03-11T07:33:12.736-06:00May be there is no liquidity trap maybe banks are ...May be there is no liquidity trap maybe banks are very risk adverse and the very low interest rates does not compensate riskVGhttps://www.blogger.com/profile/02956233528907870174noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19421097379740979222016-03-10T22:44:38.535-06:002016-03-10T22:44:38.535-06:00Frank thanks for your thoughtful response. Now I t...Frank thanks for your thoughtful response. Now I think I see. So paying interest on reserves reduces the interest paid back to the Treasury, which increases the deficit which, in principle, could represent a future taxpayer burden. Charles DuBoishttps://www.blogger.com/profile/17139978413665218618noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90549830034745985952016-03-10T18:29:44.984-06:002016-03-10T18:29:44.984-06:00The fed pays interest on all reserves, required an...The fed pays interest on all reserves, required and excess.Charleshttps://www.blogger.com/profile/00607057013050715435noreply@blogger.com