Third Anniversary of Stupendously Wrong Inflationista Letter

[TakeAStepBack]

Well, based on reading the letter, it appears they are inserting their opinion into the matter. That QE runs the risk of inflation and debasement. And again, it's not as though this assertion is completely without warrant. What they didn't do, was say that inflation and debasement (although debasement is taking place anyway) are imminent. Or that they will occur in two year, three years, etc...

This is the same thing I brought up before about guys like Schiff and Paul who were predicting, literally, a collapse in the housing bubble that everyone laughed at them over one even existing. They were completely disrespected in their opinion on the matter and later were vindicated for being 100% correct. The time lapse of that prediction to its fruition was over 6 years. That prediction was based on the root cause of artificially held interest rates. Which is a monetary policy and a direct distortion to markets. As predicted.

 

[JimmieD]

Well, based on reading the letter, it appears they are inserting their opinion into the matter. That QE runs the risk of inflation and debasement. And again, it's not as though this assertion is completely without warrant. What they didn't do, was say that inflation and debasement (although debasement is taking place anyway) are imminent. Or that they will occur in two year, three years, etc...

So the letter wasn't really a warning?

This is the same thing I brought up before about guys like Schiff and Paul who were predicting, literally, a collapse in the housing bubble that everyone laughed at them over one even existing. They were completely disrespected in their opinion on the matter and later were vindicated for being 100% correct. The time lapse of that prediction to its fruition was over 6 years. That prediction was based on the root cause of artificially held interest rates. Which is a monetary policy and a direct distortion to markets. As predicted.

What QE does run a legitimate risk of doing is misallocating capital. This is far different from producing inflation. QE does not necessitate inflation because there is no mechanistic way of transmitting QE into the broader money supply, and QE may in fact shrink the broader money supply. There is no mechanicistic way of QE entering the broader money supply because the bank reserves the Fed produces will never leave the Fed. There isn't a stash of cash sitting in a bank vault just waiting to be unleashed on the economy.

Maybe there is hope that QE could spur inflation, but there is no guarantee.

 

[TakeAStepBack]

So the letter wasn't really a warning?

Well, it starts out "we believe", not "be warned". So i don't see any warning in there. Do you?

What QE does run a legitimate risk of doing is misallocating capital. This is far different from producing inflation. QE does not necessitate inflation because there is no mechanistic way of transmitting QE into the broader money supply, and QE may in fact shrink the broader money supply. There is no mechanicistic way of QE entering the broader money supply because the bank reserves the Fed produces will never leave the Fed. There isn't a stash of cash sitting in a bank vault just waiting to be unleashed on the economy.

http://www.nber.org/feldstein/projectsyndicatemarch2012.html

CAMBRIDGE – During the past four years, the United States Federal Reserve has added enormous liquidity to the US commercial banking system, and thus to the American economy. Many observers worry that this liquidity will lead in the future to a rapid increase in the volume of bank credit, causing a brisk rise in the money supply – and of the subsequent rate of inflation.

That risk is real, but it is not inevitable, because the relationship between the reserves held at the Fed and the subsequent stock of money and credit is no longer what it used to be. The explosion of reserves has not fueled inflation yet, and the large volume of reserves could in principle be reversed later. But reversing that liquidity may be politically difficult, as well as technically challenging.

Anyone concerned about inflation has to focus on the volume of reserves being created by the Fed. Traditionally, the volume of bank deposits that constitute the broad money supply has increased in proportion to the amount of reserves that the commercial banks had available. Increases in the stock of money have generally led, over multiyear periods, to increases in the price level. Therefore, faster growth of reserves led to faster growth of the money supply – and on to a higher rate of inflation. The Fed in effect controlled – or sometimes failed to control – inflation by limiting the rate of growth of reserves.

The Fed began an aggressive policy of quantitative easing in the summer of 2008 at the height of the economic and financial crisis. The total volume of reserves had remained virtually unchanged during the previous decade, varying between $40 billion and $50 billion. It then doubled between August and September of 2008, and exploded to more than $800 billion a year later. By June of 2011, the volume of reserves stood at $1.6 trillion, and has since remained at that level.

Maybe there is hope that QE could spur inflation, but there is no guarantee.

Why would anyone hope for inflation in the future? And furthermore, who made a guarantee on it?

 

[JimmieD]

I'm afraid that article is misguided. Banks do not lend out reserves. Those reserves will be sitting at the Fed until the Fed itself decides to remove them.

That article does not address the 2 objections I've posted elsewhere; in fact it demonstrates the problem.

(1) Banks do not lend out reserves - reserves are not cash sitting in a bank vault waiting to be distributed in the economy.
(2) The article does not bring up anything about collateralized banking (ie, "shadow" banking). It's understanding of the money supply is too narrow.

 

[SteadyMercury]

Well, it starts out "we believe", not "be warned". So i don't see any warning in there.

I didn't know there were such strict opening verbiage guidelines for something to be considered a warning.

So if I tell a speeding driver "I believe there is a speed trap ahead because I usually see one there" it isn't a warning? You're just being obtuse.

 

[JimmieD]

Well, it starts out "we believe", not "be warned". So i don't see any warning in there.

I didn't know there were such strict opening verbiage guidelines for something to be considered a warning.

Apparently it's just a random letter with no particular purpose or meaning. Or if there is any meaning at all to the letter, then here is what we can take away from it. In between now and the apocalypse, if inflation were to ever arise, these people could say "told ya so."

If I'm to believe what TakeAStepBAck is saying, then the assertions of this letter are not empirically testable. There is no way to falsify their beliefs and so no way to ever say they are wrong (or right for that matter). So even if the letter is to be understood the way TakeAStepBack thinks it should be understood, then it has no practical use.

Luckily, I know better and know QE does not necessitate inflation.

 

[SteadyMercury]

In between now and the apocalypse, if inflation were to ever arise, these people could say "told ya so."

The Phoenix Suns will win the NBA Championship.

 

[oldfart]

Maybe there is hope that QE could spur inflation, but there is no guarantee.

Why would anyone hope for inflation in the future? And furthermore, who made a guarantee on it?

When the equilibrium real interest rate is negative and nominal rates are near zero, there is no way other than inflation to lower the real interest rate. i=r + rho.

 

[TakeAStepBack]

Do we really need to lower the interest rate further? I realize these are the talking points of the fed, who believes we certainly need a good dose of inflation (gee, that sure is funny, isn't it? NO, not really). Trying to resolve a situation with the same tactic that created it in the first palce seems liek the deffinition of insanity to me.

 

[TakeAStepBack]

I'm afraid that article is misguided. Banks do not lend out reserves. Those reserves will be sitting at the Fed until the Fed itself decides to remove them.

That article does not address the 2 objections I've posted elsewhere; in fact it demonstrates the problem.

(1) Banks do not lend out reserves - reserves are not cash sitting in a bank vault waiting to be distributed in the economy.
(2) The article does not bring up anything about collateralized banking (ie, "shadow" banking). It's understanding of the money supply is too narrow.

Reserves dont even exist. The fed creatd them out of nothing. You guys can go ahead and cheer for the wall st bail out of QE if you want, but it I'm not going to argue any longer about whether the letter above signees need to apologize for being wrong on a prediction never made. And certainly not one where the OP is the one making the decision about when their non-prediciton should come to fruition.

Have fun with this cheerlead. Thats all it really is. Some sort of woo hoo to QE wall st bail outs.

 

[Widdekind]

...

I just doubt many of them hold up since most arguments that I've seen (1) treat bank reserves as equivalent to cash in a vault waiting to be lent out and (2) define money too narrowly.

All those bank reserves the Fed creates will never leave the accounts at the Fed. I don't think a lot of people realize this.

Taper Tantrums: 3 Myths About Quantitative Easing | TIME.com
​

Inexpertly, the Fed bought back the bad bank debts, with "poker chips", having "cash equivalent" trade-in value, at (and only at) the Fed.

The $4T of QE "poker chips" will allow those banks, over coming decades (and centuries?), to lend against those $4T, as if they were cash. Thus, according to the economic mechanics of fractional-reserve banking...

those $4T will, eventually, cause colossal inflation, to the tune of $40-400T (depending upon what you say is the actual-in-practice reserve requirement, 1-10%). However, those $40-400T will have to be loaned into existence, individual car-loan by car-loan; boat-loan by boat-loan; house-loan by house-loan. Because banks will now be on their best banking behavior ("of course"), all of those loans will be good, solid, sound, profitable & productive loans... thus those $40-400T will only emerge, into inflationary existence, as the economy can accommodate them, profitably & productively, safely & soundly.

In exaggerated "Ron Paul & Alex Jones speak" (in need of noteworthier names), global police-state one-world order will have risen, fallen, re-risen, re-fallen, re-re-etc. many many times, before (all of) the $40-400T emerges into the economy. The current $4.0T of "poker chips" are credits-on-account, valid only at the Fed, considered as equivalent to cash, only in their computer accounts. From now until the far-future reign of "Judge Dredd the umpteenth", banks will have hoards of "Fed poker tokens", and be aggressively looking to (soundly, safely, productively, profitably) loan against the "Fed trade-in cash equivalent value" of those "poker tokens" ($4T), so lending actual money into existence ($40-400T). With every big bank looking for (sound, safe, productive, profitable) loan opportunities, supply for credit will swamp demand for credit, and so the "price" of credit, i.e. interest-rates, will remain low, for a long long time (cp. "QE-infinity"). I.e. low interest-rates will basically be "begging" for borrowers, which ought-and-should (theoretically) expedite credit, to new innovative entrepreneurial initiatives, which, flush with funds, ought-and-should grow the economy, as swiftly as the innovative initiative of Americans allows.

Ultimately, many many years from now, bailed-out banks will have earned profits, from $40-400T of good loans, which good loans will have been the basis, of colossal economic expansion. Until then, banks will have piles of "poker chips", and be looking to loan.

 

[Widdekind]

http://www.nber.org/feldstein/projectsyndicatemarch2012.html

such seems sensical -- inflation is a hypothetical risk, entirely dependent, upon lending, from banks, to the private sector (persons, businesses):

During the past four years [2008-2012 AD], the United States Federal Reserve has added enormous liquidity to the US commercial banking system... Many observers worry that this liquidity will lead in the future to a rapid increase in the volume of bank credit, causing a brisk rise in the money supply – and of the subsequent rate of inflation.

That risk is real, but it is not inevitable... The explosion of reserves has not fueled inflation yet...

But this rise in reserves did not translate into rapid growth of deposits at commercial banks, because the Fed began in October 2008 to pay interest on those reserves. Commercial banks could place their excess funds in riskless deposits at the Fed, rather than lending them to private borrowers. As a result, the money supply has grown by only 25% since 2008, despite the 40-fold increase in reserves since that time...

The risk is that the commercial banks could always decide to start using those excess reserves, forgoing the low rate of interest paid on deposits by the Fed (only 0.25%) and lending those funds to firms and households. Those loans would add to deposits and cause the money supply to grow. They would also increase spending by the borrowers, adding directly to inflationary pressures...

So inflation is a risk, even if it is not inevitable.

so, whilst lending is limited, inflation is limited, too

 

[Widdekind]

from JD in the other inflation thread:

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf

Neither individual banks nor banks as a whole can "lend out" reserves… banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers. That possibility is not allowed… bank reserves have to remain "parked" at the central bank…

Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit "creation"--credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves… Loans create deposits… Then the deposits need a certain amount of reserves to be held against them…

Banks don't lend out of … reserves. They lend by creating deposits…

QE, and the supply of excess reserves that it entails, should lead, over time, to more credit creation than would have occurred in the absence of the QE… the fact that banks have excess reserves on their balance sheet should induce banks to lend a bit more than they would otherwise have done…

QE, by definition, involves the central bank supplying (massive amounts of) excess reserves. This would normally push the overnight interest rate down to, or close to, zero…

QE allows the central bank to change the composition of the aggregate portfolio held by the private
sector; the central bank takes out of that portfolio the government debt and other securities it buys and replaces them with reserves…

the ability of QE to lead to credit creation that otherwise would not have occurred being severely limited, one should not put much store in monetary policy's stimulatory potential in a de-leveraging environment [i.e. everybody is paying down debt, not looking to borrow more money, i.e. low demand for credit; no new borrowing = no new loans = no new money]

 

[Widdekind]

.. I refer you to Larry Summers speech last week at the IMF Symposium...

Larry Summers IMF Speech On The Zero Lower Bound - Business Insider

-- The Fed could allow for greater inflation, and thus incentivizing people to spend now if they're hoarding money.

-- We could also move to a cashless society where all money is electronic. This would make it impossible to hoard cash outside the bank, allowing the Fed to cut interest rates to below zero, spurring people to spend more.

Both ideas would theoretically overcome the problem of the zero lower bound.

Inexpertly, both policy suggestions "erode" savings (cash-on-hand, deposits), so resembling expropriation -- qualitatively "negative" measures, in the apparent absence, of "positive" incentives, luring savings out as voluntary loans (manganese nodules ?)

 

[Toro]

There's asset inflation.

But there isn't consumer price inflation.

 

[Kimura]

Money creation doesn't cause inflation ("inflation is always and everywhere a monetary phenomenon" is a turd). Spending simply cannot create a sustainable inflation.

A continuous rise in general price level is a result of effective demand being in excess of the actual capacity of the economy to accommodate increased production.

For example, we can see this occur if the expenditures of the government sector surpass the saving desire of the non-government at close to full employment, whereby we see an increase in the bargaining power of labor and materials are then bid up so to speak. Or we can see inflation in supply shocks or bottlenecks in the supply chain (oil comes to mind).

Inflation cannot be predicted by solely looking at government spending as a single variable. You cannot ignore demand.

 

[Widdekind]

Money creation doesn't cause inflation ("inflation is always and everywhere a monetary phenomenon" is a turd). Spending simply cannot create a sustainable inflation.

A continuous rise in general price level is a result of effective demand being in excess of the actual capacity of the economy to accommodate increased production.

For example, we can see this occur if the expenditures of the government sector surpass the saving desire of the non-government at close to full employment

Kimura is seemingly stating, that large, i.e. deficit-based, government expenditures, can flood the economy w/ spending, so causing price inflation

Similarly, large, debt / credit-based expenditures, by the public, can flood the economy w/ spending, etc.

Borrowing-based spending inflates over-all spending... which can cause price inflation; at present, little borrowing is occurring (macro-economically speaking -- people borrow more, at lower interest rates, but only so-low-they-are-negative interest rates, would induce enough borrowing, and the extra spending, to improve the economy enough, to put everybody back to work)


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EDIT
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Inexpertly, on banks' balance sheets, taxes detract from Deposits (L) and Reserves (A); then, on the Fed's central bank balance sheet, reduced Reserves (L) are shuffled over into Government Deposits (L). Whenever the Government subsequently spends, all paychecks, to persons & businesses, are considered "as good as cash"; GD decrease, private-sector Deposits increase, banks' Reserves increase; and, on the Fed Balance Sheet, GD ----> R. Now, if the Government overspends, then first it borrows from the private sector, and the lending is economically akin to taxes ("voluntary extra taxes"), same mechanics. If the Government still over-spends, outstripping private sector savings willingness (per Kimura), then the Fed acts as lender-of-last-resort, purchasing Government bonds, which increase the Fed balance sheet assets (A), even as the new GD increase (L) on the other side.