Comments on News N Economics: Monetization, sterilization: What’s going on betwe...

THANK YOU

2009-05-24T11:25:48.443-04:00

THANK YOU

If, as Nuriel Rubini believes, we are facing anoth...

2008-11-30T12:32:00.000-05:00

If, as Nuriel Rubini believes, we are facing another $1-1.8 trillion in credit write-downs, what effect does this have on the potential inflation you are discussing?

Rebecca - thanks mightily for this response. All I...

2008-11-28T15:58:00.000-05:00

Rebecca - thanks mightily for this response. All I would say at this stage is that markets are supposed to discount at least a year ahead, so it shouldn't be too long before we get their verdict...meanwhile it looks to me like a race to the bottom for the dollar, pound and euro - but I guess that's what postponing the inevitable for over a decade leads to.

Hi Stevie,Thank you for your comments!In part 1 (a...

2008-11-28T13:16:07.684-05:00

Hi Stevie,

Thank you for your comments!

In part 1 (and 2 relates), you asked, “Are you saying this means containing emerging inflation will be near-on impossible because the losses on the Fed's stock of assets as velocity STARTS to pick up (& the time when action needs to be taken) will still be too large to sterilize(?) previous actions in good time?”

Yes, that is exactly what I am saying. Clearly, the risk right now is not adding enough liquidity to the system – hence, the quantitative easing and $1.3 trillion in liquidity added since last year via TAF, PDCF, TSLF, discount window, etc. However, the Fed is accepting collateral (which is doesn’t disclose, by the way) for each of these loans, which could make unwinding the liquidity (taking it back) difficult if the market for some of the collateral (let’s say CMBS????) hasn’t stabilized yet.

At some point, the market is going to price in the risk of inflation: the Fed doesn’t get it right, and is forced to leave the liquidity in the system, resulting in an inflationary boom. However, it is also likely that the Fed has no problem unwinding the collateral back into the market, and the current liquidity infusions did the trick! It’s all going to be about timing, but don’t forget, we have a nasty recession underway, and I expect that this will not be a problem until at least later 2009 or even into 2010.

Thanks again for reading!

Rebecca

Rebecca - I have just discovered this THRILLING (y...

2008-11-27T13:12:00.000-05:00

Rebecca - I have just discovered this THRILLING (yes, I'm not ashamed!) thread. I think I need to read it an awful lot of times 'til I halfway understand it, but meanwhile, in muddled ignorance:

1/ "I am sure that the Fed is not going to unload its stock of assets until they are good and ready to; thus, there is a larger risk that the Fed unwinds too late, rather than too early."
Are you saying this means containing emerging inflation will be near-on impossible because the losses on the Fed's stock of assets as velocity STARTS to pick up (& the time when action needs to be taken) will still be too large to sterilize(?) previous actions in good time?

2/ "As soon as the cork that is stopping up the credit flow in the banking system pops, the Fed must remove the excess liquidity in order to avoid an inflationary boom."
Are you saying in essence that given 1/ above, the Fed will almost certainly not be able to remove(some/a lot/most of?)this excess liquidity?

I look forward hugely to your response - thanks!

Hi Anonymous,Thank you for your comment!You said, ...

2008-11-23T18:02:38.729-05:00

Hi Anonymous,

Thank you for your comment!

You said, "Are you certain the credit market can ultimately be unfrozen?"

No, not certain. However, with $1.3 trillion of new liquidity in the banking, my bigger concern is inflation. Furthermore, with Obama ready to pass a huge stimulus bill upon Inauguration, the economy may start to improve (grow again) in the second quarter of 2009. As soon as the economy stabilizes and starts to rebound, credit markets are sure to respond.

No, not single. As I state quite clearly in my "about" section, I am happily married to a very handsome German, Matthias.

Thank you for reading,

Rebecca

Two questions:1) Are you certain the credit market...

2008-11-20T21:58:00.000-05:00

Two questions:

1) Are you certain the credit market can ultimately be unfrozen? While I understand that's a common perspective, why would businesses and individuals borrow (or lend) in a severely contracting economic environment? Now, if the monetization spigots open up...sure.

2) Single? ;-)

R,Thank you so much for your responses. They are ...

2008-11-03T21:21:34.286-05:00

R,

Thank you so much for your responses. They are really helpful.

My sense after reading your comments is that the dividing line between inflation and deflation is thinner than people think. So the less risk of one, the more risk of the other. I think consensus is one is a remote possibility and the other (deflation) is not. This just creates more risk of a shock to long term interest rates, in my mind. Maybe the Fed would be better off being up front with people on this one.

Hi Dave,Thanks for reading! And thank you for comm...

2008-11-03T18:14:35.977-05:00

Hi Dave,

Thanks for reading! And thank you for commenting!!

“Are you saying the reserve balance growth is not monetization, period? Or is it not monetization because the velocity of reserve deposits is zero?”

RW: Because the velocity of reserve deposits is close to zero and banks are hoarding cash (albeit inter-bank lending is moving – am writing about that tomorrow). It seems to me that the fed is going back to the old monetary theories – print money until prices (interest rates) are forced to rise.

“The Fed's balance sheet is reaching a point where removing liquidity can only happen by disposing of risk assets (unlike in Japan, where the BOJ just sold government bonds). Can a less-levered financial system absorb those risk assets (at par)? I'd imagine the capacity to absorb them is many, many years away. Since this is the case, won't the market begin to predict that the liquidity will turn out to be inflationary under any mild recovery scenario?”

RW: I agree and this is a very good point…timing. The Fed is absorbing a wide range of collateral in exchange for the funds – not just treasuries. It’s not clear to me how exactly the Fed would unwind its riskier assets unless a market has been defined for them. But I am sure that the Fed is not going to unload its stock of assets until they are good and ready to; thus, there is a larger risk that the Fed unwinds too late, rather than too early. As a broader range of credit indicators turn around, I imagine that markets will start to price in inflation. Gold will rise…maybe, treasuries will sell off, saving will rise, the $US will fall. It’s back to the first half of this year, but for other reasons.

“Lastly, can the Fed have any impact on the real economy as long as velocity of reserves is zero or plunging? The idea is that preventing bank failures arrests a contraction in the money supply; but broader M measures are falling due to de-levering. So won't the Fed have to do something to actually "cut checks" to the real economy? The CP facility is a start, but my guess is it only helps large firms with access to guaranteed bank credit back stops. So Fed CP buying is only easing the strain on bank balance sheets, and not contributing to the purchases of goods and services.”

RW: This is one interesting thing about what the Fed is doing. While interbank lending is functioning just fine, term lending is not. M2 is rising, but in a world of credit, that doesn’t seem to have much stock. De-levering is certainly the worst-case-scenario, and the Fed cannot “force” banks and firms to lend to one another. However, eventually banks will need to earn profit and I think that they will go back to business and mortgage loans. Further, the CP facility is not bounded, so the Fed can print as much money as it wants for that market.

Sovereign wealth funds can/are also potential suitors – I just read in the WSJ that the royal family of Abu Dhabi is putting $11.6 billion into Barclay’s. Stranger things have happened than the Gulf and SE Asia flocking to cheap U.S. deals….

“If the Fed has to print to purchase goods and services because velocity is plunging, then I believe you will see inflation much sooner than you think.”

RW: I agree. Back to classical monetary economics – if you print it, inflation will result. I am much more apt to talk about the risk of an inflation boom going forward, rather than a deflation bust! Further, if Congress doesn’t pay back its new $300 billion stimulus bill, and there are TARP net losses, we may be looking at added inflation by debt monetization (as you suggest).

Awesome, awesome comments! Hope this helps, and thanks again for reading!
R

BTW, when I say the Fed may by goods and services,...

2008-11-03T09:59:00.861-05:00

BTW, when I say the Fed may by goods and services, what I really mean is it finances the government's buying (i.e. monetization).

Two questions/points on an excellent post:-Are you...

2008-11-03T09:52:19.130-05:00

Two questions/points on an excellent post:

-Are you saying the reserve balance growth is not monetization, period? Or is it not monetization because the velocity of reserve deposits is zero?

-The Fed's balance sheet is reaching a point where removing liquidity can only happen by disposing of risk assets (unlike in Japan, where the BOJ just sold government bonds). Can a less-levered financial system absorb those risk assets (at par)? I'd imagine the capacity to absorb them is many, many years away. Since this is the case, won't the market begin to predict that the liquidity will turn out to be inflationary under any mild recovery scenario?

-Lastly, can the Fed have any impact on the real economy as long as velocity of reserves is zero or plunging? The idea is that preventing bank failures arrests a contraction in the money supply; but broader M measures are falling due to de-levering. So won't the Fed have to do something to actually "cut checks" to the real economy? The CP facility is a start, but my guess is it only helps large firms with access to guaranteed bank credit back stops. So Fed CP buying is only easing the strain on bank balance sheets, and not contributing to the purchases of goods and services.

If the Fed has to print to purchase goods and services because velocity is plunging, then I believe you will see inflation much sooner than you think.