Do central banks’ mounting losses actually matter?
ft.com
ft.com
Good to see the highest voted comments are sane, but the sanity ratio is pretty low compared to other topics.
edit: On second read this sounded confrontational. I only ask because its really dangerous to make such broad non-refutable statements, especially when the conspiracy theorist label is used to no longer engage with people who dont share your narrative.
Differently put, where exactly did you exit the conversation? Because thats really important information to realize if you are in an echo chamber.
Here's a recent example where almost every comment in the thread is so off the mark as to be unrecognizable for the comments section of your local TV news station. https://news.ycombinator.com/item?id=33028673
This one:
https://news.ycombinator.com/item?id=33156617
No, the fed having negative equity doesn't stop them controlling the money supply. Unless like, they've literally sold all their assets and there's still too much money left in the system, but that's so far away from being a possibility that it's not worth considering. And even if it did happen, there would be options.
Here we've got fed negative equity apparently resulting in revolutions, wars, and famines:
https://news.ycombinator.com/item?id=33156855
Here we've got "don't be fooled, they just want profit and power":
https://news.ycombinator.com/item?id=33156394
Here's a conspiratorially-toned objection to the whole concept of central banking, likening it to centrally-planned economies and implying it will be equally disastrous:
https://news.ycombinator.com/item?id=33160065
> Differently put, where exactly did you exit the conversation?
I'm still early on in my journey learning about economics (I'm a physicist turned software engineer), but after only learning a little bit it is pretty easy to spot the people who've learned almost nothing but confidently assert it's all a scam or whatever, and pretty much dismiss them.
But walking away from them doesn't mean entering an echo chamber. There are plenty of legitimate objections to how central banking is done. For example, whenever central banks monetise government debt, they buy it via private investors who therefore get to skim a bit off the top. It doesn't really feel fair for these middlemen to make bank off the central bank deciding to fund the government's deficits, an interaction that need not involve them. On the other hand, keeping the central bank and the government at arm's length from each other is an excellent idea. So how best to balance this?
It's starting to look like fiscal policy can be more powerful than monetary policy. How can we leverage this to stabilise the economy without handing the government too much power it might misuse?
Should the target inflation rate be higher? Should we target a different metric, like, nominal GDP? Should the target be symmetric? Should it be level targeting or rate targeting? Can interest rates be negative? Is the zero lower bound an actual problem, or is more QE a fine and sensible response and we're just a little too scared of it? Should the Fed pay interest on excess reserves? Is a corridor system better than a floor system for rate targeting? How can we best deal with moral hazard?
Even though I've got plenty yet to learn, it is extremely clear to me that some kind of control of the money supply is necessary, otherwise you get depressions. So I am not expecting to encounter much serious argument for getting rid of central banks entirely, unless someone invents a distributed way of achieving the same goal, or has a feasible plan for the government taking on the role instead of a central bank. If someone's got a serious argument, I'll hear it, but if it's from the "it's all a scam, we should never have left gold" crowd, I'm not expecting much. It's not a scam, it's a legitimate attempt to make a system that works, and it would be much worse if we were still on gold. Yet there seems to be something about the topic that draws otherwise smart people into dismissing the whole thing.
I disagree, and I will attempt to explain myself clearly.
Artificially modifying the money supply or interest rates (cost of money) breaks the market’s ability to self-regulate. Artificially low interest rates and money creation leads to an artificial boom period. This pushes investment into areas where it would otherwise not be directed (consumer goods vs producer goods / generally bad investments i.e. subprime mortgages, risky tech, etc..). This eventually results in a bust period as the system realizes its mistakes.
The real problem is the creation of an artificial boom, the bust is just a natural reaction to that boom.
The market is artificial. For an example it it operates (largely) within constraints that are external - laws.
Modifying the money supply is a lever that can be used to achieve goals - such as a desired inflation rate.
Whether its a good idea or when and how is the appropriate way to use it is another question. Implying it is bad because it is "artificial" begs the question of what's "natural". The market is clearly not natural.
OP probably meant "more free-market / laissez faire" vs "less free-market / centrally planned".
As banks loaned more and less, and people spent faster and slower through the business cycle, the total amount of bank money and the velocity it was spent at would grow and contract. Prices would therefore be unstable, because prices follow changes in the money supply and the velocity of money. Money would become scarce, and thus interest rates high, right when central banks would be cutting rates. The business cycle is self-reinforcing, there's no natural equilibrium to it at all, and if not smoothed by a government or central bank, can result in tragedies like the great depression.
And in a world where economies are still growing, without growth in the monetary base we would in the long run have deflation, which most economists think is worse than small positive inflation.
I don’t exactly understand your thesis, because, of course the federal reserve existing more than a decade before the Great Depression and is a primary driver for the credit expansion that caused the Great Depression to be so large and long lasting. Artificial manipulation, as I described above, is what causes the natural movements of an economy to be so extreme.
If there is a particular institution that is exacerbating the peaks and troughs of the business cycle, it is credit itself. Going back a few centuries, in Europe anyway, the usury laws used to forbid (Christians anyway) from lending money at interest, being seen as effectively a form of theft (think of laws limiting loan sharks now). The business cycle is tied right back to the credit cycle (to the extent that the words are used almost interchangeably), and if you remove the existence of credit, you remove much of the boom and bust cycle that goes with it. This said, it's worth determining if this is REALLY what you want, as prior to the availability of credit, the ability to start businesses and innovate was significantly reduced, and generally, only available to the particularly wealthy.
Central banking was just a means of trying to bring some order to the chaos that all of this credit flowing around was having. Sometimes it seems to work well; other times, it feels like the cure may be worse than the disease. Either way, it's worth knowing about the beast its there to attempt to cage.
So, you have no idea what you are talking about but you FEEL like you do? Bitcoin (now called Bitcoin Cash) has been working as cash perfectly for over 10 years with no central control necessary.
Wrong.
Bitcoin Cash (BCH) is a fork of Bitcoin (BTC). Bitcoin Cash is a spin-off or altcoin that was created in 2017.
I think much of it has less to do with people being stupid but topics being complex. And the attempts to make sensible complexity reduction. With a complexity ceiling being very real. At a certain point there are too many perspective with too much knowledge assumed on peoples part, which might not all be relevant. Which is why i personally tend to stay from discussions with big words like capitalism. Making sure everyone is talking about the same thing is just far from trivial.
I think the scam part might be one of those stupid things that might entail more then it first seems. Unfortunately "the economy" isnt as easy to model as physical systems. Because in the end its nothing but the behavior of market participants. And while its possible to set incentives, through interests rates and the like, we arent as rational as we would like to think. What people believe plays a big part in determining their behavior and as such, changing that is just as much a means of influencing the economy as interest rate cuts. Or differently put, inflation being inflation expectation.
It of course doesnt mean that the problems of a store of value based currency disappear, but its also important to keep in mind on the topic. Especially since the complexity ceiling might be exploited to shape beliefs which in turn influence the economy.
I however dont have an answer to how communication on topics at the complexity ceiling could work. But i think its important to at least understand where communication breaks down for what reason.
In a way, it's like climate change. Extremely complex and hard to model, which invariably attracts conspiracy thinkers ready to whip it down into digestible quotes and ideas.
"experts": This matter is too complex and jargon-filled for you to take part in the debate.
"lay people": Explain again why we have an institution that alternates between handouts to asset owners and crashing the economy? I think prices going up exponentially with time might be bad for my welfare!
"experts": Those crazy conspiracy theorists! At it again. They can't even using the word inflation the way we defined it.
...
There are complex things involved here, but a lot of it is pretty obviously bankers being confused at the idea that there are options other than taxpayers backstopping their obviously bad gambles.
It looks like this round it might turn out pension fund style entities are the ones backing the whole show, I have my popcorn at hand if so and my pitchfork if it happens to be me. I don't want to pay for stuff that I never supported to start with. I don't want my taxes spent on foreign military expeditions either, I think that is actually bad for the economy.
So much confusion is caused by the inability to distinguish between "gift" and "loan".
The problem with allowing banks to hard-fail is that imposes real, huge costs on customers even if the deposits are 100% covered, because the failover is not instant and you end up with money locked up for a period and are unable to make your own payments.
> prices going up exponentially with time might be bad for my welfare!
And prices going down exponentially is bad for investment, and precisely keeping prices the same forever is impossible; that's why the target is 0-2% and central banks have been extraordinarily successful at meeting that target through interest rate adjustment.
> pension fund style entities are the ones backing the whole show
Pension funds are more or less obliged to buy the safest assets they can?
QE4 was the better part of a trillion dollars. That much money moves through a system that is too complex and jargon filled for the layman to understand, and you want them to believe that there is nothing to see here?
1. The people on the other side of the bad loan, who aren't expected to pay back the money, are making bank by taking on silly levels of risk and then benefiting from the bailouts.
2. These loans aren't available to ordinary people or businesses because the terms would obviously put any individual far too far ahead. We can tell they are unfair just from that.
3. There isn't any reason to believe the loans are being paid back. Every time it looks like debts might get called in on aggregate, people claim financial crisis and there is another big round of lending.
> The problem with allowing banks to hard-fail is that imposes real, huge costs on customers even if the deposits are 100% covered
Yeah. People can't funnel their savings to incompetents and expect a good outcome. They should be very picky and reserved in deciding who to trust with their money, and there should not be coordinated giving of massive funds to a small pool of institutions who are regularly discovered to be wasting the resources they are entrusted with. This is one of the reasons we put up with the economy, it is supposed to keep power away from those sort of fools.
They need to be sent broke when they screw up badly. And people shouldn't be punished for saying "they're all untrustworthy, so I'm keeping money under my mattress".
> And prices going down exponentially is bad for investment, and precisely keeping prices the same forever is impossible
You've missed a bunch of options here though, namely the infinite number of functions that aren't exponential. Prices could be a random walk around an average, for example.
> Pension funds are more or less obliged to buy the safest assets they can?
I'm not following the story too closely, but the word I heard was the UK pension funds were getting margin called on their safe assets.
Which people? Which loans? Please please be specific.
> These loans aren't available to ordinary people or businesses because the terms would obviously put any individual far too far ahead
Again, which loans? What are the collateralization rules for them? What are the interest rates? Do you think an individual and a bank have the same credit score?
You cannot expect to be taken seriously if you just allege "crime" without specifics.
> There isn't any reason to believe the loans are being paid back
Please distinguish between "default" and "rollover". There is nothing wrong with rollover unless the risk has changed?
> Every time it looks like debts might get called in on aggregate
This can't really happen in a world of pension funds, because that's what the other side of the balance sheet is: the increasing number and amount of money owed to future pensioners. That's why the US "social security balance sheet" (which is accounted separately for some reason specific to the US) keeps increasing.
> coordinated giving of massive funds
lending?
> wasting the resources they are entrusted with
Example of "wasting"?
> Prices could be a random walk around an average, for example.
That's "inflation targeting at 0%"; it's both politically and practically achievable, but you do have to convince people that the locally-deflationary effects aren't a problem. And you can't avoid external shocks: if you embargo Russian gas, prices are going to go up, and that's inflation regardless of money supply issues.
> the UK pension funds were getting margin called on their safe assets
Yes - UK govenment bonds (gilts), which suddenly look a lot more risky in the presence of stupid policy decisions. Quite hard to find a safer asset, though.
So when you think a random walk around 0, you think of an ever-increasing positive trend? Because that isn't what a random walk looks like.
> And you can't avoid external shocks: if you embargo Russian gas, prices are going to go up, and that's inflation regardless of money supply issues.
Later on it would go down. It is a commodity market, and trade will normalise.
The issue here isn't that prices rise and fall, it is that the people who make prices rise continuously are forcing everyone to use their system. They shouldn't do that. And if there were any choices, it'd be a rare bird indeed who voluntarily signs up for a system where prices always trend up.
> Quite hard to find a safer asset, though.
I mean, maybe I've badly misunderstood what a "margin call" means, but my feeling on this one is it suggests margin is involved. It is not a conservative financial decision if they involve buying safe assets for someone's retirement on margin, because they aren't safe assets any more.
Bond prices go down and I'm at no risk whatsoever of being sent bankrupt by that, because I'm not stupid enough to start using debt in my retirement savings. To claim they're buying "safe assets" while simultaneously they are in need of assistance due to playing around in the gilt market derivatives is an impressive take.
> Which people? Which loans? Please please be specific.
When someone (A) lends money to another person (B), that person becomes a counterparty. So if B goes bankrupt, A loses money. If B is about to go bankrupt, gets big loans from a central bank then pays back A, A has effectively gotten a handout. What should happen is A loses money for taking on a risky gamble.
> Again, which loans? What are the collateralization rules for them? What are the interest rates? Do you think an individual and a bank have the same credit score?
Yeah, good point, that part doesn't actually make any sense. I was thinking about QE1 when I wrote that, but the issue there wasn't really any deals getting done as much as the general money printing.
> Please distinguish between "default" and "rollover". There is nothing wrong with rollover unless the risk has changed?
There absolutely is something wrong with rollover. If entities can perpetually roll over their debt, and the entity issuing the debt is a government entity or bankrolled by a government entity - ie, risk insensitive and unable to go bankrupt because of policy - then all the usual economic controls to make sure the money is well spent are removed.
> Example of "wasting"?
If a banking entity goes bankrupt due to enormous losses it has effectively wasted all the money it was given. Which is fine, happens from time to time, but the people responsible shouldn't get a chance to try again because the regulators like them.
> ...if you just allege "crime"...
Sorry, I missed a step here. What crime are you talking about? I don't think anything criminal is happening.
IMHO QE in the US went too far, but it was absolutely a necessary programme that stabilised the US economy at critical moments. The increased reserve requirements on banks, while dragging on bank profits since, were prudent and seem to be working well, especially compared to Europe.
From the FDIC's Deposit Insurance FAQ (<https://www.fdic.gov/resources/deposit-insurance/faq/index.h...>):
> Q: What happens when a bank fails?
> ... First, as the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank.
Honestly, I'd expect just about any judge in the country to be _very_, _VERY_ angry at a creditor that was unwilling to -free of charge- delay receipt of money owed by (typically) one or (sometimes) a few business days because the Federal Government needed that time to take over a failed bank's obligations.
This reason you've provided is just plain bogus.
What the difference between a gift and a loan that costs nothing?
The Federal Reserve can be thought of as there to balance out the cost of this arrangement (unending inflation) with the benefits it provides (expanded access to capital by those who would otherwise perhaps never be able to raise the funds -- hard to run a business when you don't have the "machinery" that makes it go).
It turns out, this is really hard. At the end of the day though, if they weren't there "picking winners" as it sometimes appears they're doing, we'd still have winners being picked, as we did under the old gold backed currencies in the past, but we'd also get to contend with the effects of banks going bust from failing to adequately navigate the markets, which would be further made turbulent by a lack of coordination between their interest rates being haphazardly determined. Presumably, those with the most money and clarity would be the only ones left after an epic game of Monopoly, and we'd be left with...a central bank, much like we have today.
Most of us here have been on both sides of that coin. There are no easy answers. We’ve all seen up close supposed experts in our respective fields that were incompetent or corrupt.
In economics, the argument seems to almost literally be "lol, we have your money hostage, if we don't start the money printers you'll go bankrupt. Yeah, we have policies that will wipe out your savings if you don't put it up as a hostage. This is in your own best interests. No your doubts aren't legitimate you're just not being reasonable and/or we don't want to engage with you in common English. All the evidence was established in 1930 and the debate is settled, we don't really need to provide it now, trust us we're right and you don't understand it anyway".
I say almost because the "lol" is not included in the serious version.
1) The world economy is too complex to be understood fully, so its best to be hands-off and let markets regulate it. Also:
2) The market is no good at regulating the world economy so we have to set up central banks, staff them with personnel from the finance industry, and give them extraordinary powers to create and destroy money and other government-backed securities. We also HAVE to let them do whatever they want with those powers, free from political pressure, since only then can they freely apply their perfect scientific knowledge of economics (which involves math now, so laypeople can't understand it without taking off their shoes) to the task of selflessly minimizing unemployment (or maybe keeping inflation down, they get to pick which) and therefore making everyone richer.
They don't explain who is going to be paying in advance. Usually it is a surprise. The approach is to wait for the crisis to come to a head then make a snap decision if it is the government that needs to settle things.
There are literal trillions of dollars floating about. Someone is fronting up real resources, somewhere. Who? What? These are important questions. I'm assuming taxpayers until proven otherwise. If people wanted to know they could design a simple system, but it is obfuscated - probably with intent but maybe not malice. Every time people figure out who is paying another add another layer of indirection gets built up to confuse the situation.
> Central bankers have no power to levy taxes
I get what you mean in context, but this is false. I pay a lot of capital gains on my gold because of them. Now I'm no aurumologist, but I'm pretty sure my lucky 10g of gold hasn't doubled in size to 20g. And yet I'm paying taxes as though it has.
Now, arguably maybe supply and demand has shifted and my shiny rock has doubled in value. But that is pretty patent bullshit, I bought it thing because there is obvious asset price inflation happening long term. And I'm being taxed as though it is growing.
Ultimately, does this mean the taxpayer is getting a higher and higher national debt? Sure. But if it's never something being paid off, then the cost of this arrangement ultimately falls to those faced with an ever larger growing money supply, which, again, is the population of Earth. Though, a curious thing happened this year, when Russia was kicked off of SWIFT, and an alliance of those willing to do business with them outside of the dollar markets started to emerge, which does threaten to throw quite a bit of turbulence if suddenly the percentage of the globe we're spreading out the cost of inflation to shrinks drastically. We've fought wars to protect the dollar's reserve status before (just ask Gaddhafi), and it does seem that sooner or later there'll come a breaking point -- but this is hard to say for sure, as we are ultimately in uncharted territory.
Basically, like it or not, most of the rest of the world is wrapped up enough in this that the taxpayers can hardly be said to be alone, except for those who seem to be in the process of crafting lifeboats for themselves. Whether that's a consolation to anyone is a question I leave up to you to decide for yourself.
They're reminded of the power of The Fed. True, they might get the exact details wrong, but they have a solid enough grip on who. They also see others (i.e., 1%) doing better and better.
"I'm struggling to pay my bills" is all they need to understand. Because the people don't understand the nitty gritty doesn't make The Fed any less accountable.
MMT is practically pseudoscience, makes unclear claims, claims a foundation in mainstream economics but makes completely wild logical leaps when it comes to policy recommendations, and it's promoted by politicians more than real economists.
What does it actually advocate that has been discredited? I get the impression MMTers want to erase the distinction between central banks and the government, and basically run everything with fiscal policy, letting the government decide how big its deficits are instead of effectively the fed deciding. Is that right?
I mean, that would work in principle, right? It would just be a bad idea because the decision is best made by an independent entity rather than the government, which has short-term incentives that may lead it to make bad decisions about spending (usually: too much).
And maybe it would be a bad idea because interest rates are a more reliable lever for controlling the money supply than tax and expenditure rates? I mean, if that's the case, it's not super obvious.
And since these things haven't been tried, I don't suppose it's those things that have been discredited.
From what I see, people are saying MMT has been discredited because large government deficits have led to high inflation recently. But this seems off to me - MMT doesn't say infinite deficits are possible, they're saying the deficits are limited by inflation. Which is true and we're now seeing the consequences of exceeding that limit.
At the end of the day, the premise that infinitely growing debt isn't the end of the world is probably sound, provided that its rate of growth is kept in check. Avoiding a situation where the money supply goes exponential is crucial. Unfortunately... https://fred.stlouisfed.org/series/M2SL looks a lot like some charts I remember from 8th grade algebra. That we likely just need to fix the trajectory rather than actually bring down the money supply should offer some solace, but those used to the sugar high of the last decade or so are likely in for a rude awakening over the next few years -- and whether that awakening is enough to rip apart civil society may ultimately be something that remains to be seen.
You do know mainstream economics isn't science right? Because it's completely unable to prove anything it predicts
DSGE is bunk, so is the Phillips curve, so is the EMH (more finance than economics), so is a whole bunch of stuff. I subscribe to complexity economics, not the standard model. But MMT is even worse than the mainstream stuff. Even central bankers think it makes no sense (https://publications.banque-france.fr/en/meaning-mmt).
So many economic theories are built on wild assumptions, like assuming everyone is rational as a basis.
Economics is closer to politics than any hard sciences imo. So on a high level like CBs it's all about narrative.
This topic seems to make intellectually-uncurious status seekers out of otherwise hacker-mentality people.
The drive to appear intelligent and to distance yourself from the crowd is never as strong as it is in those discussions. The combination of money and power plus their physical manifestation in the form of a central bank or measure you can point to acts as a lightning rod for anxiety.
1. Economic uncertainty causes stress. The economic system is complex beyond comprehension so folks reify their anxiety onto the physical manifestation of the economy - money. Thus the money supply, and by extension the Fed, become a synecdoche of a much larger system.
2. The Fed is a scapegoat for fiscal policy. Politicians and special interests peddle Fed conspiracies because it distracts from Congress’ dereliction of duty to make fiscal policy. Taxing and spending are powerful levers that many politicians are loathe to use. This is why the Fed Chair doesn’t even have to be an economist anymore. They are just a whipping boy for the public
1. It's communism, for money. We live in a society in which prices for nearly everything: food, housing, laptops, etc, are all set my supply/demand equilibrium. The market finds a clearing price, and we pay it. We accept it, and we use a bit of regulation to handle edge cases in which market forces cause externalities and distortions. It works. But for some reason, we've decided that the price of money itself should be decided by a small Politburo. Why?
2. They're always wrong. Not only does the Politburo set the price of money independent of market forces, but they are incompetent. Dot plots one year off are consistently, and embarrassingly, wrong. Comments about "froth" during an obvious housing market collapse, or "transitory" to describe persistent, and growing inflation. These are 140 IQ people who have access to the best, and most timely economic data on the planet, but they are still dumber than the 94 IQ purchasing manager of a small feed supply company who knows within 5 seconds of glancing at corn harvest and transportation KPIs that there won't be anything even remotely "transitory" about inflation.
It's bad enough having a Politburo dictate prices to us, but it's a whole other matter when the mantle adopted by these tinpot Philosopher Kings turns out to be nothing more than gross, and consistent, incompetence.
My primary objection to central banking is that their existence is an affront to freedom, and that they are catastrophically bad at their jobs.
You don't need New World Order conspiracies hatched in the woods wearing gargoyle masks and conducting Satanic rituals to know that this is a terrible idea.
And indeed, this is a place for tech people and devs who cant be experts in economy and banking.
I worked in banks as well as dev, the banks are doing dirty things under a legal umbrella, dont think of them as saints, all the wealth they have came from somewhere.
Now, a central bank, I am fine with that, it is important to keep the economy stable. They cannot always please everyone and they need to be politically independent, or not influenced. The politians understand that, most of the voter s do not. Imagine if every john doe had a say on a central banks SOPs
Guilds and banks have been the center of conspiracy theories since their invention in the late dark ages.
People are distrustful of money, especially of the people who seemingly create money out of nothingness.
To someone who doesn't understand monetary instruments, it's all conspiracy theories to explain why those people have lots of money, while I myself do not.
Like, what book(s) or curriculum do I need to study?
Genuine question.
Alternatively, you could frame it less harshly with people who have very little economic background prefer loopy theories to actually engaging with the complexity of monetary theory.
Anyone wanting to have even a hope of understanding central banking globally should read Nomi Prins "Collusion". It's pretty dense, but it explains things like inter-central bank currency swaps, which might be relevant today:
> "The following day, on June 24 [2016], just after the Brexit results were tallied, the Fed said that it stood ready to provide dollars to other central banks via the swap lines set up during the 2008 financial crisis to reduce financial market turbulence. This was ostensibly to counter the instability the vote results initiated and concerns about shortages of dollar liquidity in many places, especially Japan."
> "But it also signaled something else: that central banks would use their money-conjuring tools whenever there was a shock to the system - even if that shock appeared to be a political one - to assuage any market or currency moves that might result." p169
of course, that's why we have central banks and fiat currency.
Without that, there'd be a currency crisis every other minute; as there was on gold. You can't "spin up the gold mines" during a pandemic.
But I guess the transparency of the latter and the unpopularity for the politicians involved is too scary, so that's why we print monopoly money instead.
Inflation is only now a risk due to global supply-side problems, and changes in demand characteristics, and the cost of energy.
But even if we say the amount of money creation during the pandemic is a principle cause of inflation today -- isnt that great? In the sense that we survived a global shut down of the economy *only at the price* of 10% inflation for a few years.
People who decry central banks managing the supply of money seem only to have one, bad argument, "intuitively, money is a commodity and printing dilutes its value" -- well money *is not* a commodity.
Money is a ledger of promises whose values is proportionate to future economic activity. There is no "intuition" here. The actions of central banks have not created "monopoly money", since I can still spend mine now on basically what i've always been able to.
No. I'm saying inflation through money printing is mathematically equivalent to taxation, as it causes the same level of loss in buying power. Since one of these is more transparent in what is actually happening (taxation), that one should be used.
Additionally money printing largely affects people who hold cash which is primarily poor people. Anyone who has money invested in the marked will not be affected. Taxation can be applied selectively. Money printing is effectively a hidden tax (thus not gaining the unpopularity it deserves), which selectively favours the rich, to which a better - or at least more honest - approach exists.
Not to mention that money printing is controlled by people who were never elected and have no mandate from the electorate.
So it's only a "tax" if it (1) causes inflation to rise; and (2) rise above the level which promotes growth.
Neither of those conditions obviously obtains in the era of QE. Indeed, (1) never did.
There are videos, no doubt, if you want to understand why a positive rate of inflation promotes growth, and hence why central banks are legally obligated to "print money" to ensure a 2% target.
The relevant disagreement here, I think, isn't the basic economics. Its under what conditions the "'deliberate' inflation = tax" view is correct. Since it is correct under some conditions.
I'd dispute that it accurately describes the last decade of central bank policy, which on the whole, seems fairly successful at avoiding a post-crash depresson, and a post-pand. depression.... Both seem highly implausible feats done via taxation.
There's not much way around this as long as you're dealing with a currency that can be expanded by credit, because with or without a central bank, fractional reserve banking increases the money supply -- if anything, a central bank allows you to TRY to bring some order to that process.
But yes, the difference is that direct taxation would be paid by the higher classes, while inflation is shouldered predominantly by the lower, and both have a way at eating into economic output in real terms.
There is a scary graph in the article but this is just for mark to market gains/losses but the fed does not mark to market.
Also in theory, if they really do unwind QE (which I think they will never do), they also hold all sort of long term treasuries and ABS that they would have to sell on the open market, ie too long dated to hold to maturity. And my guess is that those are where most of the losses are (most sensitive to interest rate).
Regarding long term treasuries and ABS ... it will be much more convenient for the FED if the FED just held them to maturity, and this is probably what they would do. So I agree with you I very much doubt that they would unwind QE completely.
I only skimmed the article, but I don't see where it gives reasons why solvency matters, although it hints it might. I was under the impression it doesn't really matter if the fed is solvent, since I can't think of any concrete consequences.
Having inflation above the interest rate helps decreasing the debt/gdp ratio.
I mean, that might not be how things are set up right now, and it would make their position even more negative since newly-created cash is a liability on their balance sheet and they didn't get an asset for it. So maybe at the moment it's on the treasury to make up the difference. But I don't see a fundamental reason why that needs to be the case, it seems incidental to the current setup.
And yeah, even under the current system the treasury could sell bonds to fund the shortfall, and then the Fed could just buy those bonds (via the market) and keep them on their balance sheet, rolling over forever and so effectively loaning the money to the treasury at zero interest forever. So that's just the same thing but with extra steps.
On QE unwind, I think it is more a political pressure and damage control to the economy than convenience.
(It sounds harsh but I'm genuinely interested in your response)
But insolvency means the value of your equity is negative, ie your debt exceeds your assets. At this stage a private company would automatically be declared bankrupt, it’s not clear what would happen to the fed. Printing money won’t solve the solvency (you create as many assets as liabilities), but it’s not going to run out of cash either because it can print more.
It's a very simple concept but can have psychological hurdle to overcome, given the simplicity of it and implications once internalised.
Analogy .. BoE has root admin access to the database of £. Government does not, has read only access.
If the spending is financed via taxation it can still cause inflation if it doesn't produce any real resources.
Taxation does create room for non-inflationary spending. That being said, if a government used QE to finance spending that was productive in real resource terms then it would not be inflationary.
[1]https://www.ons.gov.uk/economy/governmentpublicsectorandtaxe... [2] https://tradingeconomics.com/united-kingdom/government-debt-... [3] https://www.theguardian.com/business/2022/sep/04/now-britain...
Some media and politicians love to make a big deal about this, but they are either misinformed or disingenuous (or both).
When they go bankrupt economists like to use the term "Hyper Inflation".
This means that the currency they produce becomes worthless.
- Hyperinflation
- Great reset
Likely effects may include
- Revolution
- War
- Famine
Here is a nice BBC article how hyperinflation has been solved in the past
https://www.bbc.com/news/business-45523636
Usually there is a period, or permanent, “dollarisation” of the economy https://en.wikipedia.org/wiki/Hyperinflation#Aftermath but not sure if this is an option for the something of the scale of the UK or the EU.
If the GBP hyperinflates, you won't need to dollarise something of the scale of today's UK. Their economy will be worth a lot less. If it lasts for long enough, Scotland, Northern Ireland and perhaps even Wales will organise different problems for themselves. There would also be a humanitarian crisis and a migration/refugee crisis to help reduce the scale. On the other hand, the dominance of English, traditional respect for UK education, and the capacity of services to be delivered remotely would encourage an early dollarisation: all sorts of law firms and programmers will be asking for salaries in the currency of the source country. So I suspect the UK would dollarise more quickly and more successfully that other similar disasters.
The eurozone is somewhat uniquely placed in the context of a hyperinflation, because there are many separate countries who would, in that context, be enthusiastic to reintroduce national currencies. Whether that staves off the problems in the whole zone or what happens I don't know, but it might break it down into bite-sized chunks.
I struggle to understand what they might have meant by it in that kind of generic use.
(In addition to treasuries, the money is spent subsidizing home loan interest rates below market).
Plus, in general hyper inflation means people in debt get relief, its the lenders who lose the purchasing power of the money they lent.
There are at least two, the legal definition of “under administration under bankruptcy laws“, and the less formal but still common “insolvent”.
With a representational commodity currency (e.g., silver certificates) rather than fiat currency, insolvency (the inability of the issuer to redeem outstanding currency at face value) is at least reasonably connected to the risk of hyperinflation.
OTOH, neither definition even applies to fiat currency issuers, who literally cannot be insolvent in their own currency, and usually aren’t subject to bankruptcy law.
They can find that they are unable to use their own currency to do anything. This is practically equivalent to being insolvent, even if you give it a different name.
That's not what hyperinflation means.
Hyperinflation is not the same thing as inflation, it's not just a monetary phenomenon. It happens when a population rejects a currency. It has historically always involved at least one of: losing a war, regime change or foreign-denominated debt - some kind of exogenous event. [1]
Hyperinflation is the collapse of an economic system in which one of the symptoms is dramatic decrease in purchasing power.
[1] https://www.pragcap.com/hyperinflation-its-more-than-just-a-...
My understanding is small community banks sold by the FDIC to larger banks or their depositors paid out directly. [0] Larger banks - WaMu for instance - were put under the purview of the Office of Thrift Supervision (OTS) and their customers assets and certain liabilities sold. In WaMu's case it was to JPMorgan. [1]
[0] https://www.fdic.gov/consumers/banking/facts/payment.html
[1] https://en.wikipedia.org/wiki/Office_of_Thrift_Supervision
I've been occasionally watching the Turkish Lira this past year. The rates against the USD are still sinking. Against the EUR it's pretty stable. Yet allegedly they have something like 80-150% inflation in Turkey, while the EUR-zone has 10%. How does this work, why isn't the Lira becoming "worthless" with that amount of inflation?
If TRY against EUR will stay stable until January 2023, I expect that we will talk about TRY having roughly the same inflation as EUR.
so i also wonder what they're doing to curb the spiral
https://www.bbc.com/news/business-45523636
The problem is that Erdogan is not doing any of this. His controversial politics are taking Turkey further down in the pit. Because Turkey’s political system is somehow broken, it is not clear if any election can replace Erdogan.
When governments produce a lot of money, their dollar becomes substantially less. This causes them to need to produce even more money (because money which used to be enough is no longer), creating a cycle and a desperate attempt to produce something out of nothing, where eventually what used to cost one dollar literally costs trillions of dollars - hyperinflation.
Banks manage a lot of money, so if they go bankrupt the government needs to bail them out by printing a lot of money, causing massive inflation. And if the government needs to pay off foreign creditors (they do), and tries to address the resulting poverty caused by the inflation, it leads to printing more money and hyperinflation.
EDIT: Relating to the Turkish Lira and why that isn’t hyperinflating: I don’t know where exactly the line is where “high inflation” triggers the cycle and becomes hyperinflation. I suppose they still have resources, so their currency still has some worth. Just, either they don’t have as many resources as before, or the government is printing money which it spends on itself in order to drain money from the average person without explicit taxation.
Personally, in February I was concerned about loss of lives, mostly Ukrainian, political repressions and Russian economy, today the economy looks okeyish, but with all the Western help to the Ukraine, it looks like it's only the question of time when Putin turns to tactical nukes.
[0] https://www.levada.ru/2022/09/29/konflikt-s-ukrainoj-sentyab...
Hopefully other Russian leaders are aware of the risk though, and would actively disobey Putin if he gave the call to use nukes
Which is why I think it is incredibly unlikely. Lots of threats, but they won't do it. Even chemical weapons would be a stretch.
It's actually the opposite, everyone should be hoping that someone delivers a devastating strike against the Russians for using any size of nuke in Ukraine. Unless you want to live in a world where every country is actively trying to get nuclear weapons you should as well.
Any lacklustre response to a use of a nuke will lead to nuclear proliferation going wild as every country in the world looks to actively acquire nuclear weapons for defence.
https://www.huffpost.com/entry/if-gaddafi-had-the-bomb_b_846...
A very good article.
Russian war in Ukraine is about regaining control of former colony. They lost lot of them in eastern Europe but still have some in Asia.
This is an oversimplification... How many countries have built nuclear power plants and missile assembly lines in their colonies?
The USSR certainly didn't plan to lose Ukraine.
Half of Novorossiya (New Russia) was taken from Turkey and Crimean Khanate by Russian soldiers and later that almost unpopulated land was settled by many ethnicities, but mostly by Ukrainians and Russians. [0]
When Russian Empire collapsed in 1917 this territory became Ukrainian on the basis of predominantly Ukrainian population even though the city population was mostly Russian and Jewish. [1]
[0] https://en.wikipedia.org/wiki/Novorossiya
[1] https://en.wikipedia.org/wiki/Third_Universal_of_the_Ukraini...
- For the US central bank, it seems like the story is just as described. They are taking lumps now as interest rates rise, but the dollar has only grown in strength (relatively) and losses will more than likely be offset (arguably have been already by decades of profitability).
- I would assume the UK case is entirely different. They are finally seeing the other shoe drop on Brexit. The last foreign Pounds have all been cashed out as a result of the war and there is no demand for them. So all their assets have permanently been devalued.
Losses on paper are irrelevant because they don't effect the position of the bank or the amount of cash in circulation. The same applies for gains on paper. The bank just holds the bond until it expires at parity.
Defaults or selling the bond for less than the real value is much more serious. This is because it leaves money in circulation.
So if the central bank prints 100USD/Euro etc, holds the bond and then get's it's 100 back and burns it, then no currency has been created over all (just for a while between printing and burning). So there is no inflationary effect etc. If the price of the bond goes up or down, that's irrelevant as long as the bank never sells and just collects the 100 back.
But if the bank prints 100 and buys a bond. Then sells it for 70. Then it can only burn the 70 it has, and then other 30 remains in circulation and there is a lasting increase is the money supply. Similarly if they sold the bond for 130 and burnt that, they would be actively reducing the supply to less than it was before (deflation)
I don't think any central bank is SELLING bonds (other than at face value) right?
So there is no issue here.
Also, as the bonds come closer to their maturity date, their price will tend towards the face value. So this "issue" will disappear on paper too...
Central planning of food production has created famines with no equal in history.
Central planning of housing created those lovely soviet style "housing" block developments while the beautiful inner cities of eastern europe rotted away.
Central planning of car production gave you cars like the Trabant which you literally had to queue 18 years for.
I am sure there is nothing that could go wrong with central planning the money supply but just in case economic live feels harder than it ought to maybe it's because of certain institutions continuously inflating away the value of your currency.
Decentralized attempts to tackle climate change have resulted in run away global warming.
Decentralized negotiations led to companies exploiting workers, often to death, on a massive-scale during the industrial revolution and even today in many places.
That doesn’t say anything about whether centralization or decentralization will lead somewhere in general. There’s a lot of good and bad in both, it isn’t black and white
Yeah exactly. We "need" global communism to fight Climate change, right? I'll pass. If there is a solution it's going to be a bottom up technological innovation.
There was no time and place except under mostly decentralized capitalism when workers where not exploited. Whatever that word even means to you. Normal socialists seem think every transaction is "exploitation".
It's pretty black and white. Centralization only allows for one solution and smothers all others. If the central plan fails, like central banking does right now, it fails for everyone all at once and there is no escape.
I can’t talk about the other points but as an East European I’d take those blocks any day vs the unregulated apartments being built today with 0 green space and where you hear your neighbors taking a dump 3 floors away from you.
What's happening now is that most central bank have been stimulating the economy by lending at rates under the "natural" rate and they are now stopping.
Withdraw QE = either sell bonds or let them mature, reducing the size of the fed balance sheet. Which drains liquidity from the market (new treasury issuances have to be absorbed by the market).
The Farm Bill in the US (right now) centrally plans food, and subsidizes some crops to below the cost of production. Individuals in the US spend less of their paychecks on food than any other country in the world, and in fact, so much so, that 40% of food in the US is wasted each year and individuals still spend less than anyone else in the world on food. Central planning created a food surplus in the US with no equal in history. [1]
> Central planning of housing created those lovely soviet style "housing" block developments while the beautiful inner cities of eastern europe rotted away.
Central planning of housing in Singapore, the HDB, single-handedly changed the landscape of Singapore. 81% of Singaporeans live in HDB flats to this day. It is widely regarded as an overwhelming success. It transformed the city-state from, basically, slums to a modern metropolis in a few short decades. [2]
> Central planning of car production gave you cars like the Trabant which you literally had to queue 18 years for.
On the other hand, central planning gave Europe rail travel, while the same central planning of transit in America gave us traffic jams and the highest road mortality rate in any developed country.
For every example you have, I can find a counter-example. I don't even believe in half of these things but it's obvious that this discussion is far from black and white as you made it out to be.
[edit] And since we're on the topic of money, decentralized currency issuance in 1800s gave us wildcat banks that went under and took everyone's value with them. [3]
You get what you put in, and it's easy to ignore the successes while focusing solely on the failures. Any system, centralized or decentralized, can fail spectacularly and history is littered with examples of massive successes and massive failures of both.
[1] https://www.weforum.org/agenda/2016/12/this-map-shows-how-mu...
[2] https://thefield.asla.org/2018/09/06/from-slums-to-sky-garde...
Yes, well now we have crypto currencies to take care of this function.
> Are central banks going bankrupt?
> No, but there are some interesting issues surrounding their QE P&L
Love seeing Betteridge validated so quickly.
If you live in Europe, and specially US, you are already part of the shareholders and will profit from it (on average). More or less than other actors in the country, but definitely more than those ones not being under these central banks policies.
I swear people have no clue how banking works.
No amount of annual profit returned to the Treasury has ever outweighed the negative effect of Fed induced business cycles and bailouts.
Money is there to be used for transactions. Using money to save is literally the opposite how you are supposed to use it.
If anything, people witholding the medium of exchange against interest are what is causing business cycles and bailouts.
Ain't no one going to buy a T-bill from you ever again once you do that.
I am skeptical of the infinite money thing though. Sure - theoretically people will buy up bonds at 1000% interest rates. But would they really though?
A central bank (that issues a sovereign fiat currency) can definitionally not go bankrupt, since its liability is the issued currency itself.
States regularly remain in existence (i.e. are not overthrown) even after their currencies have stopped being used for everyday transactions and as regular stores of value. It is one of many examples of governments playing catchup with the economy.
That was easy
For the record, Im about as far from being a central bank apologist as it is possible to be.
Central banks don't/can't prevent economic problems, and we all know that. Their purpose is to "flatten the curve" so that we have a more predictable economy that doesn't scare people away from investing.
The big question right now is whether central banks can soften the blow from so many shocks happening at the same time.
https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headline...
This is not true, at least in the US. The Treasury issues currency.
What the Federal Reserve can do (and has done under QE) is perform an asset swap. An asset held by a bank (such as a treasury bond) is purchased by the Fed and held on its balance sheet. In exchange, the Fed credits the bank with a reserve asset. This reserve asset can not be spent in the real economy. It is locked in the banking system and can only be used within it.
Reserve assets are not money. They're much more like a utility token. Therefore, the US Federal Reserve does not print money under QE.
But there's the fact and then there's perception. Many are either unaware of how QE actually works, or think the distinction between currency and reserve assets doesn't matter. So they behave accordingly.
> Reserve assets are financial assets denominated in foreign currencies and held by central banks that are primarily used to balance payments.
https://www.investopedia.com/terms/r/reserve-assets.asp
The OECD seems to define it consistently with Investopedia: https://stats.oecd.org/glossary/detail.asp?ID=167
Could we perhaps have a source for the definition you're using here?
> Printing money is the job of the Federal Reserve, but only figuratively speaking. When the Fed decides to stimulate the economy by pouring more money into the system, it electronically transfers additional credits to the deposits of its member banks. The banks lend that money out to consumers and businesses at a profit, putting the money into general circulation.
If the currency was gold backed, the right hand would be tied until the treasury deposited gold; now they can do it whenever the left hand looks empty.
Reserve assets always have a separate source of value. Usually this means other currencies. And often it can even be gold reserves!
Without the reserve assets, other banks wouldn't do business with your account, and you couldn't pay for that vacation.
For a reasonable definition of money (something you use to buy stuff) they are in fact creating money out of thin air. "Money" isn't a term that has an agreed upon definition.
Commercial banks sell their treasuries to buy other treasuries? Really?? And where is the money to buy groceries and cause inflation supposed to come from?
Come on the answer is so simple you don't need to act stupid.
Commercial banks issue deposits against the treasuries and buy more treasuries which they then sell to gain reserves which then lets them issue more deposits to buy treasuries. This is definitely a loop but it has nothing to do with the central bank. The commercial bank could have done the same thing by creating deposits against illiquid treasuries without central bank help but it would endanger the banking system via bank runs.
QE basically just turns illiquid treasuries into liquid treasuries, it is basically a duration transformation provided by the central bank so individual banks do not need to take that risk. This by itself can't cause inflation because the type asset changed but not the quantity. You need the government to actually issue more treasuries for inflation to occur and the commercial bank to play along.
It's unclear what the point of this comment is. As mentioned, banks use their central bank account balance for more than just buying/selling treasuries. It's used to settle payments between banks for example.
Banks don't tend to buy groceries, but if they did they wouldn't use a treasury as a form of payment. They could use a central bank balance though, if you think about the payment system (US).
Isn't this only half-true though? While they are not physically printing money, in a fractional reserve banking system they can certainly add to the money supply by exchanging illiquid assets for liquid ones.
Agreed though that this is not infinite nor out of thin air.
If anything QE sucks liquid money out of the economy, elevating the price of that money (somewhat, according to central banks) in the process.
> Reserve assets are not very liquid at all.
??? Just stop confusing people. This statement has no meaning. Treasuries and gold are both incredibly liquid and are both among thr most common reserve assets. Feel free to google gold market liquidty depth and verify that assumption yourself
While I agree it's not printing money out of thin air. It definitely seems to be making money more widely available, and in the end the outcome is the same. However, I think what you are alluding to is there isn't some chaos machine that dump money in the economy with no levers to pull it back.
Anytime someone borrows money from a bank new money is created. It's supposedly not a problem because when the debt is paid back the money is destroyed again. In reality, though, debt is never paid back, especially by governments. Instead it's refinanced be taking on ever more debt. The amount of debt is only ever growing and so is the money supply.
It is done that way to prevent out of control money printing. This process has stopped the concept of money printing since 1970 and it ensured there is less inflation. The central bank is doing its inflation fighting job right now. The difficulty of creating more money is being increased. At some point the deflationary forces of paying back money will arrive and inflation won't continue. It takes time.
>In reality, though, debt is never paid back, especially by governments. Instead it's refinanced be taking on ever more debt. The amount of debt is only ever growing and so is the money supply.
This is actually orthogonal to how money is created. The gold standard wasn't safe from a permanently expanding money supply even though digging gold is very expensive.
If you want to stop debt expansion you would need to read up on Silvio Gesell. Essentially the argument goes that money is both a medium of exchange and a store of value. Those two functions contradict each other. Saved money cannot be used to buy things. As a country becomes more prosperous the medium of exchange becomes scarce because people are saving and delaying consumption. There are still some people who have the need to transact and they need money. They could borrow money but that would make the debt problem worse because they would have to pay interest. They could issue more money but that would make the money supply problem worse. How is this supposed to be resolved? That saved money is like a blocked road, if a road is used as a parking lot, it cannot be used for its intended function, driving. We fine people for illegal parking and they will get their cars off the road and pay for private parking. What is a parking fee on money? It is effectively a negative interest rate or a demurrage fee. It encourages people to save in non money assets and give money to people who still have transaction needs.
This is completely orthogonal to what kind of money you have whether it has to be dug out, is printed by the government directly or you have a credit money system. All of them must have what amounts to a parking fee when debt is being paid off.
Or just call it borrowing money because debt is the real problem.
Printing is rhetorical framing that people use to say the government is stealing from you through inflation.
The problem is that paying off debt cripples the economy because people aren't using money as a medium of exchange, they save in liquid money when they should be saving via CDs.
No net money is created.
Interesting that you're separating the responsibility of money creation to "banks within the banking system", and not the Fed, despite the Fed being the only power here who can buy unlimited assets.
The impact of QE is an increase in money supply.
Bank A sends the central bank a real asset worth $1 million (say, a 10 year government bond). The central bank says "you have a balance with us of $1 million now", and updates their SQL database.
"Everyone" agrees the balance with the central bank has real value. Everyone = creditors of the bank, regulators of the bank, accounting standards bodies, auditors, the SEC, trade partners, and probably 10 other groups I can't think of.
They can also use it to buy securities from the Fed, to buy securities from other banks, to settle derivatives contracts and margin calls around them.