Bill Nelson on Fed losses

David Beckworth has a great podcast with Bill Nelson. At one point Nelson discussed recent Fed losses due to rising interest rates (which depress the market value of bonds held by the Fed.)

Nelson: Sure. Yeah. So as you know, I send out these periodic emails on monetary policy to anybody who wants to receive them. And if they’ve your listeners who want to receive those emails, should just email me, they’re free. And I’m happy to add you. But I sent one out a couple weeks ago, pointing out that the Fed probably lost about $500 billion in the first quarter. And that we’ll know in a month or so when the Fed releases its quarterly update of its balance sheet, or maybe even sooner when the New York Fed releases its annual projection of Fed income and balance sheet. But in any case, the logic was fairly simple. The Fed’s interest rates rose very sharply in the first quarter. On average the yield curve rose about one and a quarter percentage points.

And the duration of the Fed’s securities portfolio, it indicates is about five years. And so if you just do the math, that’s a 6% loss. And a 6% loss on eight and a half trillion dollars in securities is about $500 billion. So, that’s a loss on their books. Some might argue that that doesn’t matter because they’ll never realize that loss. But I, really as any good economist, would completely disagree with that. And one way to think about it is really the same view that you were just describing that Seth articulated, which is that the present discounted value of remittances are lower by $500 billion. And you can think about that either as the loss on the securities or the rise in the IORB rate. But basically they’re going to be remitting to Treasury and therefore you and I, and everyone else are going to be paying higher taxes with a present value today of $500 billion. That’s just what the math tells you.

And the losses of course could be considerably higher as interest rates keep going up. And I agree that primarily the problem here is political. But it is a real loss. If you think about the consolidated balance sheet of the Federal Government, the Fed’s QE actions shortened up that balance sheet. They replaced long-term debt with short-term debt. They’re borrowing through the Overnight RRP Facility and through reserve balances, that’s the new debt. And they retired as it were long-term debt that they bought. So the consolidated balance sheet of the U.S. Government now has a shorter duration. Which means that the government is now more exposed to the rising short-term interest rates then they would’ve been if the Fed had not taken these actions. And that’s a real effect.

Now a hasten to add that a comprehensive view of this needs to take into account the benefits that accrued from the Fed’s actions. So, insofar as the Fed’s QE stimulated the economy, and that boosts tax revenues, and that’s something that needs to be considered as well. Now, I think you could probably make a pretty good case that the Fed’s three trillion or so of purchases around in the spring of 2020 to sort of save the financial system were extraordinarily beneficial. In terms of the long flow-based QE program that they then launched into, I am less convinced that that actually added a lot of value. But many would disagree. And so it’s that whole picture that needs to be considered.

For simplicity, I’m going to focus on the Fed’s holdings of T-bonds. They also hold some MBSs, but nothing important hinges on that distinction, at least for the purposes of this post.

How should we think about these losses being absorbed by the Fed? Let’s start with the fact that in a fiscal sense the Fed is part of the federal government. So when the value of T-bonds declines, that’s a gain for the Treasury and an equal loss for the Fed. For the consolidated federal government balance sheet it’s a wash.

Nelson suggests that the loss from rising interest rates is real. Does that contradict what I’ve been saying? Not really, it depends how one frames the question.

Image a world with a Treasury that borrows long-term, but there is no Fed. In that case, rising interest rates would benefit the Treasury in the sense that the market value of their debt would be smaller than if they had faced rising rates with nothing but short-term debt. Their previous decision to borrow long would have been wise, in retrospect.

Now imagine the Fed is created and starts buying up some of that long-term Treasury debt, and replaces it with interest bearing reserves (a short-term liability.) The Fed has effectively shifted the consolidated federal balance sheet toward shorter maturities. So the federal government gains less than otherwise from a period of rising interest rates. In that sense the Fed has imposed a loss (as Nelson suggests). The Fed’s $500 billion loss reduces the Treasury’s even larger gain that results from having the market value of its previously issued long-term debt fall by much more than $500 billion.

Given that the Treasury is a huge borrower, it might seem odd for me to claim that the Treasury gains from higher interest rates. Consider this statement by Nelson, which seems to suggest the opposite:

Which means that the government is now more exposed to the rising short-term interest rates then they would’ve been if the Fed had not taken these actions.

Once again, there is no contradiction once you understand what’s going on. Rising interest rates affect the Treasury in two distinct ways. First, the Treasury benefits from a decline in the market value of its existing liabilities. But only longer-term liabilities; T-bill prices are barely affected at all. Second, the Treasury is hurt because it has to pay higher rates on future borrowing.

Now let’s consider a scenario where the higher interest rates reflect higher inflation (the Fisher effect). In that case, the Treasury is an unambiguous winner. The real value of its existing debt declines, and the real interest rate paid on new debt does not increase. This is one way the government benefits from the inflation tax. (Others include seignorage and increased capital gains tax revenue.)

In the past year, real interest rates have risen somewhat, but remain very low. (Near zero on 5 and 10-year bonds, and negative on shorter maturities.) So I suspect that the high inflation of 2021-22 has been a net plus for the federal government, despite somewhat higher real interest rates for new borrowing.

PS. It’s possible the Fed might need a bailout (although I doubt it.) But if it does, it’s mostly a symbolic issue, sort of like the symbolic Social Security “trust fund”. Of course symbolic issues can become political, and I’d expect a Fed bankruptcy to be highly controversial.

PPS. My argument might not seem to apply to Fed holdings of MBSs, but keep in mind that those are close substitutes for T-bonds. From the perspective of the consolidated federal balance sheet, the distinction between the Fed buying T-bonds and MBSs is not that important. It has some importance for capital allocation, but even there I believe the big problem lies elsewhere (the Treasury guarantee of MBSs, for instance.)


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46 Responses to “Bill Nelson on Fed losses”

  1. Gravatar of agrippa postumus agrippa postumus
    24. May 2022 at 17:14

    the treasury and fed are not anything but a creature of the people; so if the treasury “benefits” from inflation, other side of the coin is the people lose, or rather a sector of the people do: the net savers.

  2. Gravatar of Market Fiscalist Market Fiscalist
    24. May 2022 at 18:48

    If one believes that hitting an NGDP target should be achieved solely by adjusting the money supply by swapping treasuries for money then I don’t see how one can avoid the conclusion this may have some effect on taxation.

    Take an economy which has issued a lot of treasuries in the past which it now constantly rolls over. It currently has a balanced budget. As it gets some revenue from interest payments it can set tax lower than would be the case without this interest revenue.

    Start from a point where the economy is in equilibrium and the CB targets stable NGDP growth.

    Demand for money (permanently) falls and the CB steps in and buys treasuries to keep NGDP on trend. Interest revenue has now fallen so to maintain a balanced budget taxes must rise (or spending must fall).

    Is my thinking wrong ?

  3. Gravatar of Market Fiscalist Market Fiscalist
    24. May 2022 at 19:07

    Oops, I should have said:

    ‘As it makes interest payments it must set tax higher than would be the case without these interest payments”.

    and

    “Interest payments have now fallen so to maintain a balanced budget taxes can fall (or spending can rise)”.

  4. Gravatar of Effem Effem
    25. May 2022 at 02:45

    I’d prefer a post on Nelson’s prediction that the Fed will raise its inflation target to 3% rather than sufficiently tighten. This strikes me as a significant change, with the power to have large redistributive effects. Economists should absolutely call for a shift of this magnitude to be require an act of Congress.

  5. Gravatar of Tom M Tom M
    25. May 2022 at 05:11

    GREAT post – I continuously listen to portfolio managers/economists for privates sound the alarm over “Federal Reserve Losses!!!” When I ask why this is an issue for them – the typical answer is that “It’s always a bad thing when the government is losing money” or some similar response. I am astonished at the lack of understanding when it comes to the Federal Reserve / Federal Government and balance sheet interaction.

    Is it cynical or optimistic to hope these individuals (some of whom are at the the top of their field) are really just using this as a type of marketing tool?

    One point of clarification – In the second to last paragraph of Nelson’s comment:

    “They replaced long-term debt with short-term debt… So the consolidated balance sheet of the U.S. Government now has a shorter duration. Which means that the government is now more exposed to the rising short-term interest rates then they would’ve been if the Fed had not taken these actions. And that’s a real effect.”

    Wouldn’t the shorter duration mean the government was LESS exposed to rising short-term rates? Ex. If a higher portion of the Fed Balance sheet was made of long-term treasuries, the “loss” he is referring to would be even larger?

  6. Gravatar of ssumner ssumner
    25. May 2022 at 05:57

    Market, You said:

    “If one believes that hitting an NGDP target should be achieved solely by adjusting the money supply by swapping treasuries for money then I don’t see how one can avoid the conclusion this may have some effect on taxation.”

    Yes, but the effect is actually rather modest in the US.

    Effem, I’ve done some posts on that in the past. I think that sort of change is unlikely.

    Tom, The idea is that rising rates immediately raise the cost of short term borrowing (T-bills), as they roll over quickly, whereas the longer term loans are already mostly locked in, and relatively few new long term bonds are issued each month.

  7. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. May 2022 at 07:46

    If the FED can take the U.S. off the gold standard, the Gold Reserve Act in 1934, making it illegal for the public to possess most forms of gold, then the FED can also nationalize the banks.

    Every time a commercial bank buys securities from, or makes loans to, the non-bank public, it simultaneously creates an equal volume of new money, demand deposits, somewhere in the payment’s system. Thus, the DFIs do not loan out existing deposits, saved or otherwise. The banks pay for their earning assets with new money, not existing deposits.

    The banker’s interests and the public’s interests are diametrically opposed. You sterilize open market operations of the buying type by raising reserve ratios, not by raising the payments on IBDDs.

  8. Gravatar of Lizard Man Lizard Man
    25. May 2022 at 08:14

    What would happen were the Fed to go bankrupt? My suspicion is that if Republicans don’t control the White House, congressional Republicans will want to use a potential Fed bankruptcy as a bargaining chip/leverage point, the same way they have used the debt ceiling in the past. My guess is that the fear of such a scenario will raise real interest rates and slow down economic growth, which would mean that the Fed would want to buy assets to push down real rates and keep inflation from falling (assuming that they were meeting their inflation target prior to the bankruptcy scare.) But I am not sure what would happen to nominal interest rates.

  9. Gravatar of Michael Rulle Michael Rulle
    25. May 2022 at 09:21

    Halfway through reading Nelson’s essay, my first thought was “what happened to zero sum”?. My second thought was the public had the exact losses forgone as the Fed had increased losses.

    I had forgotten that the Fed buys the majority of newly issued treasuries——which your example reminded me of.

    Then you brought up that borrowers benefit from inflation, all else equal. Of course the public does not as we are not net borrowers—-hence our investments lose value and our real taxes rise on investments and work related income.

    I wonder how this changes the government’s behavior? My sense is it maximizes the worst case. For example, rather than using inflation to reduce the amount of real debt owed (of course that still is true that it does) it uses it to borrow even more.

    I suppose vastly improved real output can keep pace or out pace——but under my concept that the government maximizes for the worst case we will always just borrow more.

    At least, that seems to have been the case for at least the last 20,years.

  10. Gravatar of Brent Buckner Brent Buckner
    25. May 2022 at 10:30

    I gather that after the 2011 accounting change it became more unlikely that the Federal Reserve could require a capital top-up:
    https://www.ft.com/content/44dec822-5cff-3678-bfef-5446796eb5dd

  11. Gravatar of foosion foosion
    25. May 2022 at 12:30

    How can an entity with the power to create money go bankrupt?

  12. Gravatar of KG KG
    25. May 2022 at 18:33

    So lets say the fed becomes “bankrupt” when IOER surpasses the interest on their portfolio of govt bonds for a sufficient period of time. The treasury should be willing to recapitalize the Fed using their paper gains (devaluation of the debt). However, bailing out the fed doesn’t seem politically neutral to me. Inevitably the public would be angry that the fed “lost” so much money and needed a govt bailout. Congress might severely curtail Fed independence.

    What if the Fed foresees the political windstorm and tries to avoid going bankrupt by printing more money to cover their paper losses? This action would be inflationary, but has a chance of avoiding going hat in hand to the treasury and possibly losing independence.

  13. Gravatar of TallDave TallDave
    26. May 2022 at 11:43

    and remember, the “virtuous dividend” that Fed paid back to Treasury on QE assets was something north of a trillion dollars all told

    that’s a significant reduced future tax liability, and nearly a free lunch

    CB bankruptcy as a concept only makes sense in a very limited technical accounting sense, after all CBs can buy any biddable asset by just making numbers appear in accounts

    of course Fed paper losses might have real consequences for future taxpayers, but so does inflation… obviously no one wants Fed to play options trader with QE assets at the expense of the entire economy

    so not really worth worrying about unless Fed buys half the world’s rare art and sets it on fire, or bets a trillion on red

    at any rate QT should make for quite an interesting June

  14. Gravatar of sean sean
    26. May 2022 at 18:21

    I find your opinion obvious.

    But this is the kind of macro work that can confuse 95% of the public, maybe even 99% of the public because most people don’t think about these things long enough to see the consolidated balance sheet effect.

  15. Gravatar of Jeff Jeff
    26. May 2022 at 23:24

    >What if the Fed foresees the political windstorm and tries to avoid going bankrupt by printing more money to cover their paper losses? This action would be inflationary, but has a chance of avoiding going hat in hand to the treasury and possibly losing independence.

    Realistically I think this is the most likely outcome. The COVID response demonstrates just how far the Fed is from Scott’s technocratic ideal. It is still a very human, very middlebrow, very political institution and, like all bureaucracies, can be expected to have a strong instinct towards self-preservation. For years their staff had been war-gaming “financial crisis 2.0”, so when COVID hit they pulled that plan straight off the shelf seemingly without much consideration of how appropriate it would be in the circumstances. It’s unreasonable to think that the leadership of that kind of organization would have the fortitude to tip it into bankruptcy, regardless of any prior commitments as to the rate inflation, unless overwhelming political influence were being brought to bear.

    As far as I can tell the inflation target has already de facto risen to 2.5%, based on the interview I heard with Evans last fall. I guess that “rounds to 2” so to the people in charge it won’t seem like a very big sin. Of course 1.5 also “rounds to 2” though they were always very unhappy with that number.

  16. Gravatar of Todd Ramsey Todd Ramsey
    27. May 2022 at 05:37

    Scott,

    Perhaps the Fed has not abandoned FAIT.

    It seems the Fed’s interpretation of FAIT does not promise to seek inflation below 2% after periods of running above 2% ?

    From the 2020 Statement on Longer-Run Goals and Monetary Policy Strategy: “…following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” It does NOT say they will make up overshoots by undershooting.

    Bernanke explicitly points that out in his new book: (regarding the Statement on Longer-Run Goals) “…the Committee would henceforth try to make up for past undershoots (though not overshoots) of the inflation target.”

    If I misunderstand, I would love your help in understanding.

    But if you concur the Fed is striving to achieve these two definitions of FAIT, it would be great if you acknowledge that. Your voice carries weight. When you shout “the Fed has abandoned FAIT” from the rooftops, the Fed’s credibility is undermined.

  17. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. May 2022 at 06:22

    re: “Bernanke’s new book”. He convicted himself.

    re: “they pulled that plan straight off the shelf” Yup.

    William McChesney Martin Jr reimposed interest rate pegs causing the Great Inflation. Volcker turned the nonbanks into banks causing the S&L crisis. Greenspan dropped legal reserves by 40% causing the housing bubble. Bernanke destroyed real-estate, the nonbanks, and the home builders. Powell increased the Gini coefficient to the highest level in 50 years.

  18. Gravatar of ssumner ssumner
    27. May 2022 at 08:12

    Todd, I’ve heard that argument, but I don’t buy it. And if true, then why the hell call it average inflation targeting?

  19. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. May 2022 at 08:22

    Medicare could become insolvent by 2024. The Social Security reserve fund will run out by 2035.

    The president’s fiscal 2022 budget, which is the first to project deficits of more than $1 trillion for 10 consecutive years, estimates that FY 2022 interest on debt of $26.3 trillion will be $305 billion and reach $941 billion in FY 2031

  20. Gravatar of Todd Ramsey Todd Ramsey
    27. May 2022 at 08:39

    Scott often writes that the credibility of the Fed is extremely important. That they should do what they said they would do.

    The Fed appears to be trying to do what the 2020 Statement said they would do: shoot for 2% inflation going forward after a period of overshooting. The median Fed governor has a prediction of 2% inflation going forward.

    We might not agree with the 2020 Goals and Strategy, but they appear to be striving toward the stated goals.

    In fact, if they were to pursue inflation below 2% going forward, they would be deviating from the 2020 Statement policy.

    Does what they call it really matter, as long as they are doing what the Statement said they would do?

  21. Gravatar of foosion foosion
    27. May 2022 at 09:23

    @Spencer “Medicare could become insolvent by 2024.”

    When could the Defense Dept become insolvent?

    “first to project deficits of more than $1 trillion for 10 consecutive years”

    Percentage of GDP is more meaningful than raw numbers, given a generally expanding economy.

  22. Gravatar of Gianis Gianis
    27. May 2022 at 10:50

    Scott, these are pointless discussions. The Fed cannot need a bailout, they have a ‘deferred asset’ accounting principle, which lets them run de facto on negative equity. See here p13: https://www.federalreserve.gov/pubs/feds/2013/201301/revision/201301pap.pdf

  23. Gravatar of David S David S
    27. May 2022 at 11:01

    Foosion—thank you for reminding us of the Dean Baker rule of putting large numbers in proper context. I still wish we hadn’t pissed away 3 trillion dollars on the War on Terror.

    If we have sub 2% inflation from 2025 through 2029 we can declare FAIT a resounding success. Even if that happens (which I’m not willing to bet on) it doesn’t excuse the Fed from the fumbling of the past 9 months.

  24. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. May 2022 at 11:44

    Core PCE peaked, the Fed’s preferred inflation gauge, 5.3% (Jan), 5.0% (Feb), 4.8% (Mar), 4.7% (Apr) at the same time long-term money flows peaked (a mathematical constant). You can lead a horse to water but can’t make it drink.

  25. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. May 2022 at 12:02

    re: “When could the Defense Dept become insolvent?”

    Overseas defense spending (our far flung 800 military bases in at least 70 countries) in conjunction with domestic expenditures, adding $752.9 billion in 2022 to both the Federal deficit and the current account deficit), adds nothing to civilian productive capacity or to the supply of goods available in the marketplace. It was solely the Pentagons fault that the U.S. $ ceased to be convertible into gold, as the private sector, contrary to the public sector, ran trade surpluses up until that time.

    The funds being borrowed do not increase our productive capacity, nor increase the efficiency of the work force. Rather the funds are used largely to finance transfer payments to non-productive recipients and to finance “dead-weight” military hardware. Since the goods and serves being finance by these monstrous deficits are not offered in the marketplace, additional and un-necessary inflationary and interest rate pressures are generated in the economy. And the magnitude of these deficits guarantees that a significant proportion of these deficits will need to be monetized. They are war economy budgets and therefore, require the controls dictated by a war economy in order to be properly funded.

    And the mal-distribution and mis-allocation of available savings, or mal-investment, is exacerbated thereby reducing future gains in productivity and incomes.

    The one factor that explains our paradoxical situation is the continuing high demand for dollars by foreigners for long-term investment in the U.S. (bridging the payment’s gap in our trade deficits).

    It is in fact unprecedented that a country could have chronic foreign deficits and not have its currency drop sharply in the foreign exchange markets. This is the first time that a reserve currency country could operate with chronic international deficits and not have its currency “dethroned”.

  26. Gravatar of Jeff Jeff
    27. May 2022 at 15:23

    >Does what they call it really matter, as long as they are doing what the Statement said they would do?

    “the Committee seeks to achieve inflation that averages 2 percent over time”

    What you are describing would have been called “flexible asymptotic inflation targeting”

  27. Gravatar of ssumner ssumner
    27. May 2022 at 21:26

    Todd, I don’t agree that they are doing what they said they’d do.

  28. Gravatar of Todd Ramsey Todd Ramsey
    28. May 2022 at 07:49

    @Jeff

    You misleadingly cherry picked from the 2020 Statement.

    In context, the full quote explicitly references undershoots but makes no mention of remedy for overshoots:

    “…the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”

    This quote was reaffirmed on 1/25/22.

    I agree that Flexible Average Inflation Targeting is a misleading name for their policy. However named, the Fed IS trying to do what the 2020 Statement said they would do: shoot for 2% inflation going forward.

  29. Gravatar of Kevin Erdmann Kevin Erdmann
    28. May 2022 at 08:46

    Todd,

    Thanks for those citations. That was my general understanding. I didn’t realize they had been that explicit.

  30. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. May 2022 at 09:30

    As Trump said, Powell is “clueless”. He’s a cowboy “navigating by the stars”.

    The banks will be nationalized. The FED will expand its reliance on 13(3)’s portfolios, subsidized bank lending.

    The Phillips curve, and U *, will be repeatedly denigrated.

    Bernanke’s conventional wisdom is wrong: “a flawed and over-simplified monetarist doctrine that posits a direct relationship between the money supply and prices”…”that QE…tends to stimulate consumer spending-the “wealth effect”. That QE…is more like the same household buying a government bond that adds to its savings”…that QE…tends to increase economic inequality “is not persuasive”.

  31. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. May 2022 at 10:00

    St. Louis Fed Economic News Index: Real GDP Nowcast (STLENI)

    Q2 2022: 2.68 Updated: May 27, 2022

    N-gDp is still too high.

  32. Gravatar of Jeff Jeff
    28. May 2022 at 11:21

    @Todd and Kevin

    I don’t think the quote that I gave was misleading or cherry-picked in any way. They problem with your interpretation is that 1) the word “average” has a meaning, and 2) the latter clause in the sentence is subordinated to the former by use of the word “therefore”. The construction of the sentence implies that the particular judgment in the latter clause follows from the principle stated in the former.

    If I say “Addition is commutative, therefore 2+3=3+2,” it is absurd for me to later come back and say that I took no position on whether 4+5=5+4.

  33. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. May 2022 at 05:38

    Bernanke in his new book mistakenly argues that: “a nominal GDP target effectively assigns equal weight to inflation and growth at all times”…”but it is also consistent with zero growth and 5 percent inflation”

    Not that I understand everything about the framework, but if you cap N-gDp, then you cap inflation, so you don’t get chronic stagflation. Thus, the rate-of-change in short-term money flows never pushes up the rate-of-change in long-term money flows to destabilizing levels.

  34. Gravatar of lysseas lysseas
    30. May 2022 at 01:53

    Off topic: Telegraph is discussing low inflation in Switzerland. Although I haven’t read the story from their website as it requires a subscription, from third party references and from the comments, the Central Bank doesn’t seem to be considered as a factor.

  35. Gravatar of lysseas lysseas
    30. May 2022 at 01:54

    Forgot the link

    https://www.telegraph.co.uk/business/2022/05/21/alpine-nation-inflation-may-have-peaked-already-did/

  36. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. May 2022 at 04:22

    Bernanke: “On the margin, FAIT put more emphasis on achieving a strong labor market—which the FOMC had (correctly) characterized as providing “broad-based and inclusive” benefits”…”In mid-2021, Fed policy makers saw the economy as still far from full employment”

    U * is an effect, not a cause.

  37. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. May 2022 at 04:25

    https://planetnewsday.com/market/bernanke-why-the-fed-didnt-act-faster-to-rein-in-inflation/

    “Bernanke: Why the Fed Didn’t Act Faster to Rein In Inflation”

  38. Gravatar of Kester Pembroke Kester Pembroke
    30. May 2022 at 09:15

    An important article on how the Federal Reserve is finally coming around to the buffer stock theory of inflation that is a the core of MMT’s view of inflation.

    http://bilbo.economicoutlook.net/blog/?p=49871

  39. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    31. May 2022 at 07:24

    Bill Mitchell doesn’t know a credit from a debit either — nor money from mud pie (like Bankrupt-u-Bernanke). You have to examine U * in retrospect. An N-gDp target on the other hand is forward looking. Obviously, to forecast R-gDp, Real GDP Nowcast, you have to forecast N-gDp.

    Sumner’s framework, N-gDp targeting, was incontrovertibly prescient in the first half of 2021.

  40. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    31. May 2022 at 08:38

    People just don’t get it, like the GFC (as George Selgin pointed out was illegal), or the 2019 repo spike. Powell cannot aggressively raise the remuneration rate on IBDD above money market rates causes disintermediation, a destruction of the carry trade. Disintermediation is made in Washington.

  41. Gravatar of Dr Richard Dr Richard
    31. May 2022 at 11:34

    https://twitter.com/AlecStapp/status/1531425341687877632

    Scott,

    How do you explain high inflation when the dollar is at record strong levels? I thought inflation meant the dollar would be worth less.

  42. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    31. May 2022 at 16:30

    The high dollar is from exchange rate and funding risks, a contraction in the E-$ market (inverted yield curve).

    Studying economics makes you want to throw up. As Richard Brautigan said in “Trout Fishing in America”: “My teachers could easily have ridden with Jesse James for all the time they stole from me”

    If you want to know what’s going on read “The Fed Guy” – Turbo Tightening
    https://fedguy.com/

  43. Gravatar of Negation of Ideology Negation of Ideology
    1. June 2022 at 04:04

    Related story:

    https://www.reuters.com/markets/us/fed-carrying-330b-unrealized-losses-its-asset-according-q1-financial-statement-2022-05-27/

    One issue I haven’t heard anyone address is that paying interest on required reserves is optional on the Fed’s part, and does nothing to tighten. Only paying interest on excess reserves is a tightening action.

    If they did that, then just didn’t reinvest their bonds as they come due, they could tighten quite a bit without having any realized losses. If that’s not enough they could raise the required reserve ratio.

    To the extent this is a problem for the Fed, it’s a self-inflicted one.

  44. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. June 2022 at 05:41

    “In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, 2020.”

    Contrary to Volcker, “believes in principle the Fed should pay interest on reserves held against deposits on rounds of equity” and Friedman, legal reserves were never a tax. They were “Manna from Heaven”. Never are the banks intermediaries in the savings->investment process.
    https://www.dallasfed.org/~/media/documents/research/er/1995/er9504c.pdf#:~:text=As%20the%20introductory%20quote%20indicates%2C%20Milton%20Friedman%20%281959%29%2C,fiat%20money%E2%80%94unbacked%2C%20interest-free%20bills%20of%20the%20central%20bank.

  45. Gravatar of ssumner ssumner
    1. June 2022 at 07:47

    Richard, It seems like strong real GDP growth in the US has boosted the real exchange rate for the dollar, but it’s a bit of a surprise that inflation is high when the dollar is this strong.

    Negation, I believe that reserve requirements have been abolished.

  46. Gravatar of TallDave TallDave
    3. June 2022 at 08:28

    “it’s a bit of a surprise that inflation is high when the dollar is this strong.”

    I thought so too at first, but then realized it’s really the relative inflation rate that matters to the exchange rate — after all EU and others are also seeing record-high inflation

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