Tuesday, December 30, 2014

With not a wisp of concern


At Moneyness:

... let's say that QE was not irrelevant and can be held responsible for a large chunk of the rise in equity prices over the last few years. Even then, the real economy, and therefore the poor, would have been equal beneficiaries of QE. As I pointed out in my previous post, financial markets are not black holes. Newly-created money, insofar as there is an excess supply of the stuff, cannot stay 'stuck' in financial markets forever. For every buyer of a financial asset there is a seller, and that seller (or the next seller after) will choose to do something 'real' with the proceeds, like buying a consumption good, investing in real capital, or hiring an employee—the sorts of purchases that benefit the poor...

In the post Koning is considering stories that he doesn't find satisfying. I want to be careful not to say anything that sounds like I think he accepts those explanations. But in the above excerpt, it is the "QE was not irrelevant" story that is not his. The rest of that excerpt *is* Koning, the "the poor would have been equal beneficiaries" part, and the repeating what he said in his previous post, and all that.

Koning writes:

For every buyer of a financial asset there is a seller...

I hate that. It's such a wrong thing to say. It implies that the number of buyers is equal to the number of sellers, when obviously it is the number of buyings and the number of sellings that are equal.

In a world skewed by inequality it is likely that there are sometimes many buyers and few sellers, sometimes many sellers and few buyers.

"For every this there is a that" is a terrible, terrible argument. It confuses the truth. But that's not the worst of the worst. Koning writes:

... and that seller (or the next seller after) will choose to do something 'real' with the proceeds...

In other words, Koning says nobody hoards money. The Fed Q-ease new money into existence, and the first recipient spends it on something real. Or the second recipient.

But if things ever did work that way, they don't any more. We just don't want to spend anymore. That's what the change was, back when things suddenly changed. You know. It happened at the same time that the money multiplier stopped working. People don't spend money they have, and people don't borrow to spend money they don't have. That was the change. Yet Koning says no one hoards money.

So, what does Koning's graph show? Oh -- no, nothing. Koning doesn't show a graph. Here, use mine:

Graph #1: The sudden change in the blue line was the Fed's response to the sudden increase in hoarding.
Po people don't have money that makes them money. So let's don't look at MZM or M2 money. Let's look at spending-money, the money readily available for spending -- the money the Fed calls M1. And let's compare M1 money to the total assets of Federal Reserve Banks, which were significantly increased by the Quantitative Easing. Koning was talking about the Quantitative Easing, remember.

Graph #1 compares spending-money to total Federal Reserve assets. Used to be, for every $800 of Fed assets there was about $1200 of spending-money. The red and blue lines ran side-by-side, roughly parallel, the blue line low. But with Quantitative Easing, that all changed. The Fed started increasing its assets (blue) and has been increasing its assets ever since.

Fed assets jumped from being less than M1 money, to being more than M1 money. From about two thirds, to about four thirds of M1 money. And the difference is even greater now. People don't hoard? What was Koning thinking?? Obviously, whoever has the newly-created money is in no great rush to turn it into spending-money.

NOTE:
FRED's title for the dataset shown in blue is All Federal Reserve Banks - Total Assets, Eliminations from Consolidation. It would have been simpler if they just called it All Federal Reserve Banks - Total Assets. The word "eliminations" in there makes it seem that the blue line must show less than the total. I don't think that's the case. I think they add up (or consolidate) the holdings of the dozen Fed banks and then eliminate some items to avoid double-counting. Net instead of gross. Something like that.


One more bit from the Moneyness quote above, before we move on:

... that seller (or the next seller after) will choose to do something 'real' with the proceeds, like buying a consumption good, investing in real capital, or hiring an employee—the sorts of purchases that benefit the poor...

Please don't call me "poor".


Almost done. In the same post, Koning writes:

Say we change where central banks inject new money. Instead of conducting QE with a select group of banks, central banks now purchase directly from the populace. And instead of buying financial assets, they bid for stuff that regular folks own, like cars, houses, and wedding rings...

No.

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.

Koning seems to have missed it completely.

3 comments:

Auburn Parks said...

The thing that is infinitely aggravating to me is just how confused the mainstream concept of QE is. Here's 2 points they get utterly wrong:

1) QE adds new "money". Thats only true if we completely ignore TSY securities (Ill ignore MBS for this argument since they are a little more complicated, and I dont have the best grasp of the operational details of MBS, and if I dont know, I keep my mouth shut).

The mainstream has no problem acknowledging that time deposits in private banks are "money". There they are prominently included in the M2 figure. Yet, the mainstream completely ignores the fact that TSY securities are nothing but time deposits at the central bank. whats the difference between a 6-month CD at Chase and a 6-month T-bill?

marketability and risk, thats it

And yet nobody would ever say that a reduction in private bank CD's in exchange for an increase in demand deposits at private banks is "new money". And yet this is precisely what the mainstream does wrt QE.

2) And this is of course related to #1. Is just the basic level of understanding accounting. Nobody is wealthier the day after they sell their Tsy securities than the day before. And nobody is poorer the day after they buy their TSY securities than the day before. And since the TSY security market is the largest and most liquid market on Earth, owning TSY securities is no hurdle at all to spending money.

But as you rightly point out Art, these people are not spending their money in a way that benefits the economy, they are simply saving their money in a different form.

And capitalism runs on spending not on saving. If rich people have all the money, they are necessarily going to continue saving it as there is simply no way they can buy enough TVs, dinners, rounds of golf, movie tickets, cars, boats, etc etc etc to significantly impact GDP and employment.

geerussell said...

Auburn Parks covered it well above, I just want to underscore this:

Art said...

The trouble with QE was that it took the assets out of the economy and left the liabilities in.

and

Obviously, whoever has the newly-created money is in no great rush to turn it into spending-money.

This is why I like to bang on the accounting so hard. Because analyzing QE as though it were a "helicopter drop" of newly created money while neglecting what was taken away is an oversight that leads to bad analysis. Koning makes that mistake, responding to Koning's argument on his terms compounds it.

I mean accounting here in the most basic and literal sense. A before & after inventory to account for the assets and liabilities involved. A process that doesn't require me to actually be an accountant any more than I have to be a mathematician to balance my checkbook.

If I print a new hundred-dollar bill, hand it to you and you don't spend it, it makes sense to puzzle over why that is. You just experienced a $100 increase in financial assets. I'd want to explore the mystery of why you're hoarding.

If I print a new hundred-dollar bill, hand it to you and take away $100 in bonds, is there really a big "why didn't you spend the newly created money" mystery to solve here? No. Because you didn't experience a net increase. I'm not surprised by your lack of a spending spree because you have the same amount of financial assets as you did before. There is no new hoarding relative to your position before.

The Fed is doing the latter in QE. This context is square zero for any analysis of QE and its effects.

The Arthurian said...

If I print a new hundred-dollar bill, hand it to you and you don't spend it, it makes sense to puzzle over why that is. You just experienced a $100 increase in financial assets. I'd want to explore the mystery of why you're hoarding.

For me it would be "found money"... money over and above what I've budgeted. I could splurge. But since I've not obligated the money for anything, I might just put it in my piggy bank.

If I print a new hundred-dollar bill, hand it to you and take away $100 in bonds, is there really a big "why didn't you spend the newly created money" mystery to solve here? No. Because you didn't experience a net increase.

If I wanted to spend $100, I'd bring my bond to you, sell it, and then go spend the money.

But the QE transaction is your idea. You want me to spend money, so you come to me and pester me until I sell you my bond and pocket your $100.

But I already had that money saved, and I did not suddenly decide to spend it. I was saving it as a bond before you came to me, and I'll be saving it as cash after you leave. For me, little has changed.

Geerussell, you and I see different priorities and describe different motivations, but arrive at the same outcome. That's how it is in the real world, I think.