Cullen Roche interview

[Tom Brown]

I'd try working out your argument/example with  this:

http://econviz.org/macroeconomic-balanc ... isualizer/

That tool was built with a different philosophical framework from what Cullen uses, but as far as I can tell the accounting details are all correct. My one quibble is with their text description for one of their pre-canned examples (in the "Step-by-Step Walkthrough" activated with the gray button near the top... I think it was step six I had a problem with). Other than that, I highly recommend it.

Not everybody that I respect as an economist would be on board though. For example, Nick Rowe doesn't like the accepted way central bank accounting is done, and I think he'd prefer that money issued by the CB be thought of as a pure asset (no one's liability). He's very much in the minority on that though.

[moda0306]

Kshartle,

Which one of these would leave you feeling more inclined to "bid up the price of assets."

- Waking up and finding out that the bond portion of your PP had been converted to cash (pretend for a sec that you invest in bonds).

- Waking up an finding out that $100,000 of treasury bonds has been added to your investment account?

[Kshartle]

Thank you Tom.

I guess I am missing the point. It was my understanding that the argument from the MR school is that QE is not expansive of the money supply (inflation) because it is an "asset swap".

Is my understanding correct?

[Kshartle]

Kshartle,

Which one of these would leave you feeling more inclined to "bid up the price of assets."

- Waking up and finding out that the bond portion of your PP had been converted to cash (pretend for a sec that you invest in bonds).

- Waking up an finding out that $100,000 of treasury bonds has been added to your investment account?

The latter.

I would not be able to bid up prices without selling the bonds. The dollars I recieve for them have to come from someone else which means they can not use them. Therefore what I use them on will see upward pressure in price but what he/she does not buy now will see downward pressure. Therefore there is no inflation or general rise in the price level from me selling my bonds and buying stuff.

[Gumby]

How is this:

Before QE:
Government              Bank            FED
  $0                        $100            $0



After QE:
Government              Bank            FED
  $100                    $100          $100 bond

The bank should start with a $100 bond, not cash. If we are just talking about QE, the Treasury auction should not be a part of your example — since the Treasury auction is an example of fiscal deficit spending, which does result in a net deposit of equity in the private sector.

There is more money in the hands of the government chasing the same amount of goods and services.

A fiat government never feels rich or poor. They always have the ability to spend.

If the FED doesn't buy the bonds from the bank the bank will not be able continue adding bonds to it's balance sheet and government will be forced to tax more or print to maintain it's level of spending and increase it to meet the growing unfunded liabilities.

Not so. Whenever the government deficit-spends, its deficit-spending creates the very reserves that banks will use to buy the next round of T-bond issuance. That's what Tom Brown was referring to when he talked about dollars getting "recycled". Treasury bond auctions are just reserve drains — to drain excess reserves after they swell from deficit spending.

[moda0306]

Thank you Tom.

I guess I am missing the point. It was my understanding that the argument from the MR school is that QE is not expansive of the money supply (inflation) because it is an "asset swap".

Is my understanding correct?

MR would say it is expanding the money supply in one measure, but they do point out that short-term treasury bonds are about as close to money as you can get.

[Gumby]

Thank you Tom.

I guess I am missing the point. It was my understanding that the argument from the MR school is that QE is not expansive of the money supply (inflation) because it is an "asset swap".

Is my understanding correct?

MR would say it is expanding the money supply in one measure, but they do point out that short-term treasury bonds are about as close to money as you can get.

In other words, QE expands the monetary base, but doesn't increase the private sector's equity (or purchasing power).

[moda0306]

Kshartle,

Which one of these would leave you feeling more inclined to "bid up the price of assets."

- Waking up and finding out that the bond portion of your PP had been converted to cash (pretend for a sec that you invest in bonds).

- Waking up an finding out that $100,000 of treasury bonds has been added to your investment account?

The latter.

I would not be able to bid up prices without selling the bonds. The dollars I recieve for them have to come from someone else which means they can not use them. Therefore what I use them on will see upward pressure in price but what he/she does not buy now will see downward pressure. Therefore there is no inflation or general rise in the price level from me selling my bonds and buying stuff.

Well the latter is "deficit spending," and the former is "QE."

I would not feel at all like spending more if my bonds were turned to cash.  Not.  One.  Bit.  In fact, one could argue that now that I have lower interest income, I actually may consume less going forward.  (Think of a retiree who just had his 4% long-term treasury bond swapped for a MM account paying .25% interest)

And in terms of having to trade the bonds for someone else's cash already in existance, not really...  I'm sure if you use the $100,000 in treasuries as collateral, the bank will loan you $100,000 no problem.

See how balance-sheets are SO much more important to your nominal purchasing power as opposed to what the base dollar amount on your balance sheet is?

And I may be wrong, but I think if both parties truly wanted to exchange bonds for a good/service, you are allowed to do so.

[Kshartle]

The bank should start with a $100 bond, not cash. If we are just talking about QE, the Treasury auction should not be a part of your example — since the Treasury auction is an example of fiscal deficit spending, which does result in a net deposit of equity in the private sector.

The auction must be included. It's success depends on the FEDs actions. Everyone knows the FED is buying so they can buy without fear, they have a willing partner who will bid up the price and take on their risk because it can create money out of thin air.

The point is the entire process.....including the auction......ends in the final result of the Government having money it didn't have before...the bank having a very small amount more if at all and the FED having a bond.

Essentially, the end result would be the same if the FED simply printed and bought the bonds directly. Do you see how obvious the inflation would be then? The government is getting money to spend that it did not tax, borrow or spend. You can only pretend it's borrowing if you think they will actually pay off the principle and the FED won't roll it over. Even if you think they will do this.....it's still inflation until it happens (the principle pay back).

[Kshartle]

Thank you Tom.

I guess I am missing the point. It was my understanding that the argument from the MR school is that QE is not expansive of the money supply (inflation) because it is an "asset swap".

Is my understanding correct?

MR would say it is expanding the money supply in one measure, but they do point out that short-term treasury bonds are about as close to money as you can get.

In other words, QE expands the monetary base, but doesn't increase the private sector's equity (or purchasing power).

Of course not. It enables the government to deficit spend more and more and bid up the general price level.

[Xan]

Translation guide:
FED = Fed
pretell = pray tell
principle = principal
it's = its (much of the time)

[Kshartle]

And I may be wrong, but I think if both parties truly wanted to exchange bonds for a good/service, you are allowed to do so.

Yes but the ladies at the gentlemen's club don't pull out the g-string for a bond coupon.

Actually, we could open an establishment that catered to bond brokers near wall street. We could call it "strips".

Double entendre.

[Gumby]

The auction must be included. It's success depends on the FEDs actions. Everyone knows the FED is buying so they can buy without fear, they have a willing partner who will bid up the price and take on their risk because it can create money out of thin air.

Huh? Primary Dealers don't "fear" Treasury auctions if the Fed isn't buying them. Do you really expect us to believe that all of the Treasuries purchased before QE1 were bought in fear?

No. Primary Dealers want Treasuries when they have excess reserves (that swell from government deficit spending) so they can earn a return on their excess reserves. So, they willingly buy the Treasuries at auction whether the Fed is willing to buy them or not. (Not only are they willing to buy the Treasuries but Primary Dealers are contractually obligated to buy them whether the Fed buys them or not.)

Essentially, the end result would be the same if the FED simply printed and bought the bonds directly. Do you see how obvious the inflation would be then?

Again, now you are talking about fiscal spending, which does have inflationary pressure.

[Kshartle]

Translation guide:
FED = Fed
pretell = pray tell
principle = principal
it's = its (much of the time)

grassy ass

[moda0306]

A few other "expectations" that would affect my willingness to "bid up prices" more than having bonds swapped for cash:

- My feelings about whether I'll have a job next month.

- My prediction on what my SS benefits might be (well.. I'm 29 so not really... just saying in general)

- My feelings about the productive capacity of the U.S. going forward.

- If the fed changes its inflation target.

- If the fed changes its unemployment rate target.


It's all about EXPECTATIONS.  The fed has been doing this for so long, and the member banks and treasury are so soaked into the process, that the fed literally could say things, and do the opposite, and expectations of future actions of the fed alone would lead to more market movements than the fundamentals of what it's doing today.

This is why in Japan, long-term interest rates ROSE instead of falling when their "fed" tried to lower rates today.  EXPECTATIONS of what the BOJ would do in a more recovered economy TRUMPED the fundamentals of reducing the supply of LT bonds on the market today.

[Kshartle]

The auction must be included. It's success depends on the FEDs actions. Everyone knows the FED is buying so they can buy without fear, they have a willing partner who will bid up the price and take on their risk because it can create money out of thin air.

Huh? Primary Dealers don't "fear" Treasury auctions if the Fed isn't buying them. Do you really expect us to believe that all of the Treasuries purchased before QE1 were bought in fear?

Why do you think they sell them to the Fed? The prices are extremely high. Higher price = greater risk.

How would you feel about loaning trillions to an entity that keeps getting farther and farther into debt with no conceivable way of ever paying it back with money that isn't devalued?

Ohhhh...wait.....you are doing that...just not the part about trillions.

[Gumby]

Of course not. It enables the government to deficit spend more and more and bid up the general price level.

No. The government can infinitely deficit spend even if the Fed doesn't buy any bonds via QE. Tom Brown already explained this here...

The "rolling over" is done from the Tsy side: they decide to sell more bonds to cover maturing one, regardless of who owns the maturing ones. The Fed buying or selling bonds doesn't have anything to do with the rolling over process.

All else being equal (no further purchases of bonds by the banks or the Fed), if the Tsy were to simply deficit spend such that the total gov debt were to climb at a constant rate, then this has no effect on the money supply at all. It does have an effect on the net financial assets held by the non-bank public. Essentially the Tsy would be taking $ from A to pay B with no change in the total $ amount. It's like they are recycling $, and in the process issuing bonds to A. Now independent of this gov deficit spending, the pubic could be taking on more loans, in which case the M1 supply could grow via that mechanism. Or shrink, if they were net paying down loans.

You will want to read that twice and ask him questions if you disagree.

[Kshartle]

It's all about EXPECTATIONS.  The fed has been doing this for so long, and the member banks and treasury are so soaked into the process, that the fed literally could say things, and do the opposite, and expectations of future actions of the fed alone would lead to more market movements than the fundamentals of what it's doing today.

Again this is a point of dissagreement. I don't agree that reality changes based on sheer belief. If the fed prints money and gets it to the gubmit, though the banks or whatever....it raises the general price level over time. It doesn't matter what the market thinks or expects today, at least not in the long run.

The government taking on more and more debt makes it less credit worthy. That requires a higher interest rate for it's borrowings. To the extent the rates are artificially suppressed now just means the game goes on longer but this makes higher rates inevitable, or outright default or default through devaluation.

[Kshartle]

The government can infinitely deficit spend even if the Fed doesn't buy any bonds via QE. Tom Brown already explained this here...

The "rolling over" is done from the Tsy side: they decide to sell more bonds to cover maturing one, regardless of who owns the maturing ones. The Fed buying or selling bonds doesn't have anything to do with the rolling over process.

All else being equal (no further purchases of bonds by the banks or the Fed), if the Tsy were to simply deficit spend such that the total gov debt were to climb at a constant rate, then this has no effect on the money supply at all. It does have an effect on the net financial assets held by the non-bank public. Essentially the Tsy would be taking $ from A to pay B with no change in the total $ amount. It's like they are recycling $, and in the process issuing bonds to A. Now independent of this gov deficit spending, the pubic could be taking on more loans, in which case the M1 supply could grow via that mechanism. Or shrink, if they were net paying down loans.

You will want to read that twice and ask him questions if you disagree.

This doesn't make sense. Where does the government get the money to deficit spend?

[moda0306]

The bank should start with a $100 bond, not cash. If we are just talking about QE, the Treasury auction should not be a part of your example — since the Treasury auction is an example of fiscal deficit spending, which does result in a net deposit of equity in the private sector.

The auction must be included. It's success depends on the FEDs actions. Everyone knows the FED is buying so they can buy without fear, they have a willing partner who will bid up the price and take on their risk because it can create money out of thin air.

The point is the entire process.....including the auction......ends in the final result of the Government having money it didn't have before...the bank having a very small amount more if at all and the FED having a bond.

Essentially, the end result would be the same if the FED simply printed and bought the bonds directly. Do you see how obvious the inflation would be then? The government is getting money to spend that it did not tax, borrow or spend. You can only pretend it's borrowing if you think they will actually pay off the principle and the FED won't roll it over. Even if you think they will do this.....it's still inflation until it happens (the principle pay back).

So essentially what you're saying is that the system is rigged and the government has no real spending constraint based on how the circle-jerk between the fed, treasury and member banks works, creating a system where treasury bonds are essentially looked at as uber-liquid cash-like assets and while Open Market Operations are part of this process, the actual individual operations they have don't fundamentally change anything because the market knew they would do it anyway, which means QE is not inflationary when it actually happens.

I think we're all in agreement now... case closed .

I am half kidding, but I'll concede that but for this circle-jerk of banking that involves Open Market Operations (what we usually see to mean when we say QE) is going to result in more inflation than a gold-based system or barter system... does that sound like something CLOSE to what you want to hear?

But once it is established, and people now see our "treasury debts" for what they are, QE or OMO are going to not have a huge affect, especially when the natural rate of interest is near zero...

So K, maybe there is a bit of talking past each other here... so I'll maybe help a bit:

- The government has set up a monetary system that involves it using its own debt as a mechanism to put money into the market, simultaneously feeding the money supply and controlling interest rates.

- This process results in some inflation over time... markedly more inflation than a barter or gold-based system that didn't involve fiat money

- (We'll save argument for which is best for later)

- Open Market Operations (trading cash for t-bills/bonds) is a vital part of this process that backs the direction the fed wants interest rates to go, and (as part of a monetary system that actually WANTS some inflation) contributes to a general rise in the price level.

--- What Gumby and I are saying (if he agrees with all of what I've said above), is that the market KNOWS the system is rigged, and prices t-bills/bonds accordingly, as well as VIEWS them accordingly... like they're essentially interest-bearing money.  What you're saying is that the market essentially "re-learns" how badly it's getting f*cked (or whatever you think is happening) each day, so when the fed swaps cash for bonds, the market should (either now or "eventually) lose its sh*t and start bidding up assets.

I'm really not trying to put words in your mouth here.  I think we agree on more than we think we do (careful with agreeing on this point... it could cause a black hole).  I think part of the run-up of price-levels in the 1970's was the economy's accounting for this new monetary system that essentially used treasury bonds in a very different way than they had been.

[Kshartle]

Of course not. It enables the government to deficit spend more and more and bid up the general price level.

No. The government can infinitely deficit spend even if the Fed doesn't buy any bonds via QE.

Everyone knows this already. The QE makes it easier because the government doesn't have to do the printing itself (unpopular and obvious inflation), tax everyone (unpopular), or pay interest (causing bigger deficits and ecnomic problems, crashing the housing markets, stocks, etc.)

[Gumby]

Of course not. It enables the government to deficit spend more and more and bid up the general price level.

No. The government can infinitely deficit spend even if the Fed doesn't buy any bonds via QE.

Everyone knows this already. The QE makes it easier because the government doesn't have to do the printing itself (unpopular and obvious inflation), tax everyone (unpopular), or pay interest (causing bigger deficits and ecnomic problems, crashing the housing markets, stocks, etc.)

So, again, this is just a complaint about Congressional (fiscal) deficit spending.

All of our conversations up until this point were about whether QE itself causes inflation. Now that we have shown that QE itself doesn't cause inflation, you seem to have changed the conversation to Congressional spending.

Most people would agree that Congressional (fiscal) deficit spending is inflationary.

[moda0306]

It's all about EXPECTATIONS.  The fed has been doing this for so long, and the member banks and treasury are so soaked into the process, that the fed literally could say things, and do the opposite, and expectations of future actions of the fed alone would lead to more market movements than the fundamentals of what it's doing today.

Again this is a point of dissagreement. I don't agree that reality changes based on sheer belief. If the fed prints money and gets it to the gubmit, though the banks or whatever....it raises the general price level over time. It doesn't matter what the market thinks or expects today, at least not in the long run.

The government taking on more and more debt makes it less credit worthy. That requires a higher interest rate for it's borrowings. To the extent the rates are artificially suppressed now just means the game goes on longer but this makes higher rates inevitable, or outright default or default through devaluation.

But why is it a big surprise to anyone if "the fed prints money and gets it to the gubmit," if this system was laid out before hand?

And, further, you don't know that the private sector wouldn't be lending to the government at low rates to begin with... you just throw out that assumption based on what seems like very shaky evidence.

The government taking on "more and more debt" only makes it less credit-worthy if people didn't rush to them to begin with.  In a recession where people want safe savings and the private sector is not going to invest due to a demand deficiency, people LIKE lending to governments... at least if they think they'll be around in a few years.

[Kshartle]

I'll concede that but for this circle-jerk of banking that involves Open Market Operations (what we usually see to mean when we say QE) is going to result in more inflation than a gold-based system or barter system... does that sound like something CLOSE to what you want to hear?

Well......it's a step in the right direction if you agree that QE is inflationary (expansive of the money supply - no reference to prices).

A big step.

Now all we need to do is come an agreement on the effects of inflation and what will happen to the economy if the rate of inflation (monetary expansion) stops growing or ceases altogether.

Then we can move onto the likelihood of these events, and how it's impossible to make a real return in long-term bonds in the long-run.

What are you doing with the rest of the year?

[Kshartle]

Now that we have shown that QE itself doesn't cause inflation, you seem to have changed the conversation to Congressional spending.

QE is the printing of money to buy bonds.

The result is more money than there was before with the same amount of goods and services.

Am I on a really sick and twisted version of Candid Camera or the Truman show?