central banks Markets MMT

‘QE Infinity’, MMT And ‘Public-Private Policy Partnerships’ For A Brave New World

Exploring the future of the monetary-fiscal policy nexus.

Exploring the future of the monetary-fiscal policy nexus.
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8 comments on “‘QE Infinity’, MMT And ‘Public-Private Policy Partnerships’ For A Brave New World

  1. SouthBySE

    QE Infinity debases and makes the currency risky and prices financial assets far above their true economic value…….there is nothing more dangerous than that for risk averse investors and savers.

  2. vissisitude

    As far as MMT goes, it’s fairly easy to see that global QE did little to structurally solve any problems in the long-run, but QE may have provided some stability for failing corrupt entities — but the main factor that added stability was simply time, i.e., the weak hands were shaken out during the collapse and the strong hands continued on with production and consumption. The QE illusion may have bought some time, but its stimulation for the average person was never measurable. As for Japan, the biggest take away is the control and management of gov debt and the helping hand of taxpayers to support low growth — which seems to be somewhat like the trump economy, i.e., very little growth, massive debt and lower unemployment — and all that relates to distortions of The Philips Curve and the conundrums related to the Participation Rate and crashing yields. The Baby Boom Mess going forward will make this entire mess into afar larger mess …

    I remain lost in the confusion of how Treasury and Fed are interconnected to debt, surplus and deficit as all that relates to the Fed balance sheet — and the latest IOER/SRF. None-the-less, the latest crap I’ve read suggests the un-important trump deficit deficit may have been somewhat linked to recent (and prior) congressional budget compromises, which may have brought about quirky distortions with normal Fed activities. This is so far over my head that I apologize for posting, but what the hell, it’s a puzzle — just like MMT and the concept as to why (up to this point) Japan hasn’t become Argentina.

    Monetary Policy and the Federal Reserve:
    Current Policy and Conditions September 4, 2019

    … By accounting identity, the assets on the Fed’s balance sheet exactly match the sum of its liabilities and surplus. By statute, Congress has limited the size of the Fed’s surplus as a budgetary offset for unrelated legislation. P.L. 114-94 capped the surplus at $10 billion. P.L. 115-123 reduced the surplus from $10 billion to $7.5 billion. P.L. 115-174 reduced the surplus from $7.5 billion to $6.825 billion.

    FRED chart showing their assets/liabilities: https://fred.stlouisfed.org/graph/?g=p52l

  3. vicissitude

    Oh no, not again!

    Mr. H, et al, I’m seriously just chasing a general theme here, which started with the IOER chaos. After reading far too much stuff, which is way over my head, I’m just curious if the trump debt machine, aka Treasury deficit machine (and the GOP trump fiscal budgets) have in some way altered money markets in some weird 3-d chess kinda way. Since day one, when trump took over, the spending spree of trillions was somewhat overlooked by a lot of people that were excited about tax cuts and the pea and shell bullshit associated with MAGA and the re-birth of Reaganomics V2. The trump budgets spread massive debt out over a YUGE timeline and then lie about almost everything along the way — so my general motivation is to look under the hood because, I don’t believe anything about anything in the trump fake fantasy — and I believe the deficits will become a YUGE issue, which trump and his fellow GOP gangsters want to run away from.

    It’s interesting that trump the bully is playing so many games with the Fed Boneheads and then, to add pressure to that game, congress gets to play games with Fed surplus capital, which of course helps make the deficit game look just a little better (as they look for pennies, in a trillion dollar farce).

    Just some ideas that are out there, but sort of points to the concept that the Fed structure is screwed up and can be taken advantage of by the bad guys — what a surprise!

    Monetary Policy and the Federal Reserve:
    Current Policy and Conditions September 4, 2019

    By accounting identity, the assets on the Fed’s balance sheet exactly match the sum of its liabilities and surplus. By statute, Congress has limited the size of the Fed’s surplus as a budgetary offset for unrelated legislation. P.L. 114-94 capped the surplus at $10 billion. P.L. 115-123 reduced the surplus from $10 billion to $7.5 billion. P.L. 115-174 reduced the surplus from $7.5 billion to $6.825 billion.*

    The Congressional Budget Office (CBO) estimated that P.L. 115-174 would reduce the budget
    deficit by $23 million over 10 years.7 CBO estimated that only one provision would reduce the
    deficit—Section 217 requires the Federal Reserve (Fed) to transfer $675 million from its surplus
    account to the Treasury, where it is added to general revenues. CBO estimated that this provision
    would increase revenues by $478 million on net over 10 years.8 CBO assumed when making the
    estimate that the Fed would finance the transfer by selling Treasury securities, which otherwise
    would have earned $177 million in income that would have been remitted to the Treasury in the
    next 10 years. Thus, the provision can be thought of as shifting Fed remittances from the future to
    the present, as opposed to representing new economic resources available to the federal
    government.

    Interest on Reserves: History and Rationale, Complications and Risks
    By Peter Ireland

    … the Fixing America’s Surface Transportation Act of 2015 drew directly on the Fed’s surplus capital, earned as profits from its carry trade, to help fund federal highway spending; the Bipartisan Budget Act of 2018 did the same to finance more general increases in government spending. The risks of pushing still further are described most vividly by Plosser (2017: 8):

    As Taylor (2016: 719) notes, IOER “enables the Fed to be more like a discretionary multipurpose institution rather than the rule-like limited purpose institution that has delivered good policy in the past and that can deliver good policy in the future.”

    ==> Analysts deride the move as little more than an accounting gimmick. The Fed already returns the interest earned on its portfolio of holdings to the Treasury Department. That payment was worth $80 billion last year alone. The Fed’s surplus account provides a capital buffer in years when the central bank suffers losses, but ultimately, the money belongs to Uncle Sam anyway.

    “Legislators who care about the integrity of the budgeting process should not support this budgetary sleight-of-hand,” former Fed Chairman Ben Bernanke wrote in a 2015 blog post.
    The move two years ago also created a dangerous precedent, said Sarah Binder, a senior fellow at the Brookings Institution who studies the relationship between Congress and the central bank. That Congress would return to the trough for the new budget deal underscores the Fed’s political vulnerability.

    “Congress treating the Fed like a cash cow is Exhibit A in the myth of Fed independence. A decade of criticism from the Hill has weakened the Fed’s political standing — making it easy prey for politicians who want to claim they’ve paid for new spending,” Binder said. “If the Fed’s public standing were stronger, lawmakers might have second thoughts about raiding the Fed’s rainy day funds.”

    https://www.cnbc.com/2018/02/09/congress-taps-federal-reserve-to-pay-for-budget-deal.html

    ==> Macroeconomics Blog (Aidan Savage Nov 2018)

    Policy Implications
    The Fed’s floor system, in short, has caused banks to increase their investment in the Fed at the expense of investing in the private sector. The question, then, becomes whether the Fed is any better than banks in allocating this credit. Put differently, is the Fed as a financial intermediary–funding short and lending long–really providing a better financial service than would have been provided by the private sector financial firms? It is not obvious to me that the answer is yes.

    What is obvious to me is that the Fed’s floor system creates a whole set of other problems. First, as a profitable financial intermediary, the Fed is setting itself up for political shenanigans. Recall Congress taping into the Fed’s capital surplus in 2018 and 2015. Though these transfers were relatively small and to some extent accounting gimmicks, they show how tempting a large, profitable Fed balance sheet can be to Congress.

  4. Anonymous

    Why not print money and have the Fed (a risk tolerant “investor”) buy 20% of the equity market and buy every dip? This would lower the cost of equity and potentially increase investment (P,P&E) and in people. And if profits fall due to competition (ie lower inflation) then just buy more stock in a downdraft (which may not happen due to the Fed purchased) AND real consumer purchasing power increases. It is foolproof, nothing can go wrong.

    • Harvey Cotton

      Don’t be absurd. That would be like if a company borrowed money to buy their own shares at its highest price instead of making capital investments, or if a government printed money so that it could buy its own debt.

      If you had your policy, shares would go up because the Fed would be ultra-accommodative and because the number of tradable shares would be reduced by one-fifth. The Fed could then use these capital gains and dividend income to buy Treasurys. Congress could then reduce income taxes further, and the Fed can use the coupon payments from the Treasurys to give -2% interest loans to banks, who can park that money back at the Fed for +2%. Eventually, even though the money supply would be at record levels, liquidity would probably still be thin so the Fed and the banks can just switch commercial paper every day as needed. Inflation would be kept in check by not measuring things that cost more. Political discontent would be kept in check by social media, guns, and reality TV, and income inequality would be countered by unlimited streaming options and enhanced cell phone features.

  5. vicissitude

    Re: Chicago Fed Letter, No. 395, 2018

    “These reductions generally occur when the Treasury approaches the debt ceiling—a limit set by Congress on the amount of money the government can borrow. Similar to a household that wants to pay its bills without taking out a loan, the Treasury, when it faces a tight debt limit, must spend down its checking account until Congress allows it to borrow more.”

    ==> Interesting relationships between Fed rates and Treasury capital:

    https://fred.stlouisfed.org/graph/?g=p5hX

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