Wednesday, December 31, 2014

Repeating that last part


The trouble with QE was not that it bought the wrong assets. Asset-buying by the Federal Reserve is the wrong solution no matter what they buy. The trouble with QE was that it took the assets out of the economy and left the liabilities in. It was the liabilities that created the problem to begin with, excessive liabilities -- liabilities created by the unsustainable growth of debt.

The Fed decided to buy up assets when the one thing that would have solved the problem quickly would have been to pay off the liabilities. The asset-holders would have got their money just the same. But we would have found some relief from the costly burden of excessive debt. And that is the key that would have allowed economic growth to resume with vigor.

But no. The supply-side mindset puts all the focus on the asset side, with not a wisp of concern for the liability side of things. Therein lies the problem.

6 comments:

Auburn Parks said...

Art-

" The trouble with QE was that it took the assets out of the economy and left the liabilities in. It was the liabilities that created the problem to begin with, excessive liabilities -- liabilities created by the unsustainable growth of debt."

I totally agree with you focus on the problematic and unsustainable levels of private debt. But with QE, you are getting things mixed up.

There is no way to "get rid of the liabilites" in the case of QE (wrt T-securities). QE exchanges TSY securities (Govt liabilities) for reserves (Govt liabilities). QE has nothing to do with private debt (WRT its T-securities portion).

The only ways to get rid of private debt:

Default\bankruptcy
Paying off debt out of income

QE has nothing to do with either of these 2 approaches. Only Govt deficits and or a massive redistribution of national yearly income to debtors can allow for the private sector to deleverage while not causing a depression.

The Arthurian said...

"There is no way to "get rid of the liabilites" in the case of QE..."

Well I guess that's the trouble with QE then, huh.

Happy new year, Auburn Parks.

Auburn Parks said...

Happy new year to you too Art-

QE is exchanging different types of Govt liabilities, and since Govt liabilities are assets or wealth of the non-Govt. What good would be accomplished by reducing the financial wealth of the non-Govt by reducing Govt liabilities?

The real problem with QE is that it doesnt add any Govt liabilities for the private sector to hold as wealth. Only fiscal policy deficits can add Govt liabilities.

The Arthurian said...

"The real problem with QE is that it doesnt add any Govt liabilities for the private sector to hold as wealth."

So you are saying that the real problem with the economy is that there is not enough financial wealth for the private sector to hold?

You would have to convince me.

Auburn Parks said...

There is not nearly enough (private sector debt-free) wealth for the private sector to hold given the enormous amount of private debt.

Govt deficits add financial wealth to the private sector that does not have any private sector liabilities attached to it.

Every private sector bank loan has a private sector debt attached

Every private sector security issued has a private sector debt attached

Every private sector stock or equity issued has a private sector debt attached

The only way for the private sector to receive debt free income, is for the Govt to provide it through deficits or to run a trade surplus where the foreign sector is providing the income.

After all, what do you think all private sector parties use to settle their debt obligations? Govt liabilities!

geerussell said...

Hi Art,

This is a great excuse to roll out this old chart from way back.

There are two ways to reduce the burden of debt. Reduce the debt, or increase the equity on which it rests.

I'd say there's a pressing need to pursue both avenues. As you like to say, policies that encourage private debt reduction.

With the understanding that paying down debt diverts dollars away from consumption, creating drag on demand. Opening the fiscal spigot relieves that drag and can even go all the way into providing lift.

Complimentary approaches of debt reduction and increased incomes.