Anyone willing to bet on a devaluation of the dollar when all the debt bubbles burst?

[pbrower2a]

Bubbles are slightly inflationary as they devour capital. Busts of bubbles are deflationary.

[Warren Dew]

I'm only half way through this thread so far, but it's dense and worth reading carefully, so I wanted to respond to this before I forgot in the course of reading the rest of the thread.

(05-24-2016, 09:18 AM)Mikebert Wrote:

(05-24-2016, 12:14 AM)Kinser79 Wrote:

(05-23-2016, 06:27 PM)Mikebert Wrote:

(05-21-2016, 12:19 AM)Kinser79 Wrote: The Fed only has two leavers it can work economically, the interest rates and money printing.  The interest rate is already at its minimum.  That leaves money printing.

Interest rate policy IS money printing.

I would argue that interest rate policy is indirect money printing.  Lowering the interest rate usually signals to borrowers it is time to borrow and that for spenders it is time to spend.

Interest rate policy is performed using open market operations.  If the Fed wants to keep interest rates low they buy government debt.  They buy it with dollars they create.  Monetary easing adds money to the economy.  When the Fed hikes rates they sell government bonds for dollars, removing those dollars from the economy.

That is one way by which the Fed controls interest rates, yes.  The other way, which is the more normal way when natural interests rates are not so low, is by controlling the discount rate at which banks can borrow against reserves.

Granted, the  two mechanisms are not independent, so they ultimately control the same thing, namely money supply.  So basically both of you are right.

(05-24-2016, 09:18 AM)Mikebert Wrote: Normally the bond being uses are short term government securities.  One could do open market operations with other kinds of bonds.  When they do that they call it quantitative easing.  During 1942-1951 the Fed performed open market operations with both short term and long term debt maintaining interest rate pegs on both.

I think the term "quantitative easing" mostly refers to the direct purchase of bonds in large quantities - the Fed owns a large fraction of all U.S. government bonds - in place of using the discount window or similar measures more directly related to the interest rate.

One interesting issue here is why the discount rate has been so unsuccessful in increasing the money supply.  It's not just low interest rates, as consumer debt - credit card - interest rates has remained high rather than dropping with the discount rate.  There's no sign that the risk premium has increased in lock step with the decrease in discount rates, so that doesn't seem to be the explanation.

I believe the explanation is the tightening of capital requirements in the wake of the financial crisis.  With the tight capital requirements, banks are limited in how much they lend out by capital, rather than by deposits.  Since deposits are not in demand, interest rates on deposits drop with the discount rate, but since capital is the  limiting factor, loan interest rates can remain high.  This means that low discount rates are prevented from flowing through to consumption the way they normally would via lower consumer credit interest rates.

This is a good example of where regulations - in this case capital requirements - have an unintended effect, in this case a contractionary effect on the economy.

[pbrower2a]

Interest rates are high on consumer loans, and lenders push consumer borrowing because such is extremely profitable. A bank that gets practically free money from the Fed and lends at 20% for a credit card has a hugely-profitable client.

I am tempted to believe that while we are stuck with every possible effort to extend 3T practices (heavy consumer spending with the aid of subprime lending) as long as Big Business can get away with it, we will find ourselves soon enough with the sort of economy that we associated with the 1950s -- largely pay-as-you-go consumerism that puts more emphasis on goods and services than on lending.

It will not be a matter of choosing for merchants; it will be necessary for political and social stability. As a general rule, creditors are generally on the Right side of the political spectrum, and to the extent that they have control of people through debt they are reactionary. Remember: the slaved owed his mater everything. Debtors tend to be on the Left, seeking a more vibrant economy and perhaps inflation to discharge or trivialize debt. People in hock up to their eyeballs have cause for seeking revolutionary change because they have little choice (especially if they have low incomes) for any tangible improvements in their lives.

Small-scale creditors, people who might own a bank account, some government bonds, a life-insurance policy, and maybe a hundred shares of stock, have a stake in the capitalist system... but also in its vibrancy. They don't want things to get so bad that they must sell those off for survival. Those were the people who had buttons that read I LIKE IKE. Conservative, yes -- but not fascistic.

Today there are few small savers. Life-insurance policies are relics. People are more likely to be in debt for $8000 in consumer spending (and I do not mean a new car or household improvements for which one has a tangible asset) than $8000 in stock or bonds.

The placidity of the post-Crisis High of the "I LIKE IKE" era resulted in no small cause from people having assets instead of being heavily in debt. Barack Obama might be fairly similar in competence, temperament, and ability to Eisenhower; he is probably about as good as Ike. But neither Kennedy nor Nixon, either of which could easily have been seen as the successor of Eisenhower at this time 56 years ago, was a reckless demagogue exploiting mas distress. Healthy political orders have no room for a demagogue as crass as Donald Trump. A nation of scared debtors creates such room.

[Warren Dew]

(06-07-2016, 08:41 AM)playwrite Wrote: Have you guys figured out this other fundamental mistake yet -

I believe that stricter capital requirements in the wake of the financial "crisis" replaced deposits as the fundamental limit on the amount that the banks could loan, as I alluded to in my previous post on this thread.

What's your explanation?

[Mikebert]

(09-08-2016, 11:44 PM)Warren Dew Wrote: That (open market transactions) is one way by which the Fed controls interest rates, yes.  The other way, which is the more normal way when natural interests rates are not so low, is by controlling the discount rate at which banks can borrow against reserves.

I think the term "quantitative easing" mostly refers to the direct purchase of bonds in large quantities - the Fed owns a large fraction of all U.S. government bonds - in place of using the discount window or similar measures more directly related to the interest rate.

The discount rate has not been a significant tool of policy for a long time.  I think you are confusing the discount rate with the federal funds rate.  This is the rate set by normal open market operations.

Quantitative easing does indeed involve the purchase of bonds, just as do normal open market operations.  It differs in that it targets long-maturity bonds.  That is, it is an effort to influence long-term rates.

[pbrower2a]

The American economy does not suffer from a shortage of capital.