The Trump Economy

[GG]

19 minutes ago, TPS said:

Yes and No.  As a share of total assets, "cash" went from <2% pre-crisis to to > 10% post.  Securities and Loans fell by 10% of TA (mostly loans).

So, yes, reserves increased, and No, the share of other assets fell.

 

 

 

Stick to your point, and don't give me percentages when the topic is about dollars.  Who cares about a percentage of TA, when TA went up by nearly 25%?  Don't cite total cash, but cash held at the central bank as your theory states.   

 

Using JP Morgan as the banking bellwether, cash held at central banks declined from 2010 to 2018.  That amount is tiny anyway at about $25 billion and has stayed in that band for 10 years.  Loans to Customers though went up by almost $300 billion over that time frame.  That's what QE did to the economy.  To say otherwise is [insert DC Tom]

 

[TPS]

1 hour ago, GG said:

 

Stick to your point, and don't give me percentages when the topic is about dollars.  Who cares about a percentage of TA, when TA went up by nearly 25%?  Don't cite total cash, but cash held at the central bank as your theory states.   

 

Using JP Morgan as the banking bellwether, cash held at central banks declined from 2010 to 2018.  That amount is tiny anyway at about $25 billion and has stayed in that band for 10 years.  Loans to Customers though went up by almost $300 billion over that time frame.  That's what QE did to the economy.  To say otherwise is [insert DC Tom]

 

It's not a theory; it's fact--Reserves of depository institutions increased from 2008 to 2014 during the crisis and QE policies.  Not sure why chose to start at 2010 when the crisis was over by then...? Besides, only part of JPM's BS reflects its depository banking business.  

 

Ok, $s. I responded to Foxx who said the FED created about $3.5 trillion "out of thin air."  Hopefully you understand how the FED does this....it "buys" an asset by "crediting bank reserves."  If it buys an asset directly from a bank, bank assets fall by an amount equal to the increase in its "reserve account  held at the FED;" if it buys from an individual, the person's DD is credited along with the bank's reserve position.  Either way, bank reserves increased.  Bank reserves on deposit with the FED went from near zero to a max of near $2.5 trillion in 2014. 

The following is a link to the FED with the data: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm  [just checked this, and you need to change it to "selected liabilities" of the FED].

 

The FED only requires reserves and holds reserves for deposit-taking institutions, so of course if you look at the consolidated BS of JPM it will be difficult to disentangle this effect--especially since you started in 2010, not pre-crisis.  When the FED required the Wall Street banks to become BHCs, it gave them access to the Discount Window, which is what kept them alive in the meltdown.  

 

Back to main point.  QE was enacted by the FED through buying assets via crediting reserves. The FED's balance sheet expanded from about $900K in 2007 to $4.5 trillion in 2014.  The reflection of this expansion was the increase in bank reserves by $2.5 trillion.  YES, this money is sitting under the FED's mattress so to speak, and (since 2009) the FED pays interest on the bank reserves they hold.  This is why I argued with so many here that that QE was not going to cause hyperinflation because reserves do not circulate in the economy.  This is the THEORY part.  Many people, here included, thought QE would cause significant inflation; it didn't because the funds used to buy the assets are sitting under the FED's mattress.  

Edited July 22, 2019 by TPS

[TPS]

Here's a nice short piece by some FED economists: https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2015-economic-trends/et-20150811-who-is-holding-all-the-excess-reserves.aspx

Quote

Since December 2008, the Federal Reserve has paid banks interest on their reserves, while simultaneously engaging in accommodative monetary policy that has kept economy-wide interest rates low. In this environment, the interest that banks can receive from originating loans (the opportunity cost of holding reserves) is much lower, and keeping reserves at the Federal Reserve offers a much less risky return. Consequently, banks have taken the large injections of liquidity from the Federal Reserve and held them as interest-bearing excess reserves, which are the reserves held by banks over the required amount.

 

[KRC]

Just now, TPS said:

Here's a nice short piece by some FED economists: https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2015-economic-trends/et-20150811-who-is-holding-all-the-excess-reserves.aspx

 

 

That is what I was wondering. I know that banks kept a bunch of the reserves after QE, but was not sure how much. Usually, long-term after QE, interest rates will bounce back higher than they were before QE. Is that why they are not expecting as much inflation this time?

[TPS]

2 minutes ago, KRC said:

 

That is what I was wondering. I know that banks kept a bunch of the reserves after QE, but was not sure how much. Usually, long-term after QE, interest rates will bounce back higher than they were before QE. Is that why they are not expecting as much inflation this time?

Yes, the reason we NEVER really experienced inflation above the FED's target is that reserves simply represent "potential" lending power, not money in circulation. QE did stimulate speculation in other assets and commodities as I argued here back then...

[GG]

33 minutes ago, TPS said:

It's not a theory; it's fact--Reserves of depository institutions increased from 2008 to 2014 during the crisis and QE policies.  Not sure why chose to start at 2010 when the crisis was over by then...? Besides, only part of JPM's BS reflects its depository banking business.  

 

Ok, $s. I responded to Foxx who said the FED created about $3.5 trillion "out of thin air."  Hopefully you understand how the FED does this....it "buys" an asset by "crediting bank reserves."  If it buys an asset directly from a bank, bank assets fall by an amount equal to the increase in its "reserve account  held at the FED;" if it buys from an individual, the person's DD is credited along with the bank's reserve position.  Either way, bank reserves increased.  Bank reserves on deposit with the FED went from near zero to a max of near $2.5 trillion in 2014. 

The following is a link to the FED with the data: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm  [just checked this, and you need to change it to "selected liabilities" of the FED].

 

The FED only requires reserves and holds reserves for deposit-taking institutions, so of course if you look at the consolidated BS of JPM it will be difficult to disentangle this effect--especially since you started in 2010, not pre-crisis.  When the FED required the Wall Street banks to become BHCs, it gave them access to the Discount Window, which is what kept them alive in the meltdown.  

 

Back to main point.  QE was enacted by the FED through buying assets via crediting reserves. The FED's balance sheet expanded from about $900K in 2007 to $4.5 trillion in 2014.  The reflection of this expansion was the increase in bank reserves by $2.5 trillion.  YES, this money is sitting under the FED's mattress so to speak, and (since 2009) the FED pays interest on the bank reserves they hold.  This is why I argued with so many here that that QE was not going to cause hyperinflation because reserves do not circulate in the economy.  This is the THEORY part.  Many people, here included, thought QE would cause significant inflation; it didn't because the funds used to buy the assets are sitting under the FED's mattress.  

 

As always, you ignore the effect of fiscal policies on the financial statements of corporations.  Said another way, your statistics are at least 2 steps removed from what finance execs care about when making major capital decisions.   You said that the QE had no effect on the economy, then proceeded to argue that the banks did nothing with the liquidity but hold it in the Fed reserves.  Again demonstrates how little economists understand the businesses they are opining on. 

 

I started in 2010 because that was the first year of financial statements after the crisis.  If compare 2008 or 2009 to 2018, the evidence is even more striking of how JPM used newfound liquidity to juice its loan book.   Its depository banking business has nothing to do with the cash it keeps with the Fed or how it uses liquidity provided by the Fed to stimulate its lending and the downstream effect on the economy.   

 

Central banks aren't the primary credit providers to the financial system - the inter-bank market is much larger.  But the Fed's infusion of liquidity into the overall banking system in 2010 reopened bank lending because it offered market confidence that wasn't present in the inter-bank market at the time. 

 

Nobody argued that QE was the wrong move in the immediate post-crisis.  The argument among adults was why was it still necessary 5 years after the crisis when the economy wasn't growing as expected.

 

Technically QE is manufacturing assets out of thin air because the Fed needs cash or credit to buy the Treasuries and MBS that sit on its balance sheet.  The assets don't just appear (at least if you apply any reasonable accounting principles)on the balance sheet out of thin air.

 

The answer to why QE hasn't led to runaway inflation is because .....   Trump

 

Seriously, the answer is because the US is afforded a lot more financial flexibility than any nation on Earth for all the reasons that have been previously discussed (largest economy, biggest market, reserve currency, etc).   Essentially it's a race of time for the QE wind down before the next downturn hits (2 years or so).  The current pace is about $50-$60/month, so it will take some time.

 

I've never been a big deficit hawk because vibrant economies can perpetually run deficits in the 2%/GDP range for a long time.  The cause of deficits also matter.  I'm much more concerned about spending growing exponentially than revenues fluctuating from year to year.

 

 

[TPS]

4 minutes ago, GG said:

 

As always, you ignore the effect of fiscal policies on the financial statements of corporations.  Said another way, your statistics are at least 2 steps removed from what finance execs care about when making major capital decisions.   You said that the QE had no effect on the economy, then proceeded to argue that the banks did nothing with the liquidity but hold it in the Fed reserves.  Again demonstrates how little economists understand the businesses they are opining on. 

Hahaha, funny stuff!  I ignore fiscal policy's impact....  How many times do I have to tell you that the federal government's deficit creates a private sector surplus (yes, corps)? Yes, a little extreme to say "NO effect," but very little. I'm not arguing they held it in reserves, it's a fact as shown by the data.  

 

I started in 2010 because that was the first year of financial statements after the crisis.  If compare 2008 or 2009 to 2018, the evidence is even more striking of how JPM used newfound liquidity to juice its loan book.   Its depository banking business has nothing to do with the cash it keeps with the Fed or how it uses liquidity provided by the Fed to stimulate its lending and the downstream effect on the economy.   

Interesting.  So now you're saying the Obama economy was excellent because of QE?  QE helped keep interest rates low--though they didn't need much help, which kept the cost of bank funds low. Yes, I have no doubt that Wall Street banks took advantage of 0% money to juice their books....

That last sentence, are you saying JPM's depository banking is NOT required to maintain reserves against its demand deposits?

 

Central banks aren't the primary credit providers to the financial system - the inter-bank market is much larger.  But the Fed's infusion of liquidity into the overall banking system in 2010 reopened bank lending because it offered market confidence that wasn't present in the inter-bank market at the time. 

The FED's role is to provide liquidity that private banks use to create credit.  The FED's policy target is the interest rate in the inter-bank market and it provides all of the liquidity necessary to meet its target. There is no doubt that it took a long time for the vultures on wall street to trust each other again....though the Fed signaled early on they would provide any liquidity necessary to keep markets functioning.

 

Nobody argued that QE was the wrong move in the immediate post-crisis.  The argument among adults was why was it still necessary 5 years after the crisis when the economy wasn't growing as expected.

No disagreement here.  We disagree on its impact.  The FED can create liquidity and keep interest rates low, but they can't induce corporations and households to borrow.

 

Technically QE is manufacturing assets out of thin air because the Fed needs cash or credit to buy the Treasuries and MBS that sit on its balance sheet.  The assets don't just appear (at least if you apply any reasonable accounting principles)on the balance sheet out of thin air.

Ok, now it appears you don't understand how the Fed funds its operations.  The FED has an unlimited purse.  It buys TReasuries and MBS by crediting the reserve account of the bank it bought the asset from (or the bank of the investor).  Where do you think the $2.5 trillion in reserves came from?  On the FED's BS, if it buys $100 billion in MBS from JPM (just as an example), the FED's assets go up by that amount and JPM's bank reserves (the liability) go up by same.    On JPM's BS, their MBS decline by $100b  and their reserves go up by same.  The only hocus pocus is the FED owns the infinite reserve creating machine it uses to buy assets from the private sector.

 

The answer to why QE hasn't led to runaway inflation is because .....   Trump

I didn't realize he's been in office since 2008....

Inflation is mostly caused by too much demand relative to supply (sometimes there are cost shocks).  The reason we did not see (and still do not see inflation) is that QE never really added much to the demand for goods by households and consequently equipment by businesses.  

 

Seriously, the answer is because the US is afforded a lot more financial flexibility than any nation on Earth for all the reasons that have been previously discussed (largest economy, biggest market, reserve currency, etc).   Essentially it's a race of time for the QE wind down before the next downturn hits (2 years or so).  The current pace is about $50-$60/month, so it will take some time.

As I've said before, there is NO economic reason the FED needs to unwind its BS.  There may be an irrational psychological reason....

 

I've never been a big deficit hawk because vibrant economies can perpetually run deficits in the 2%/GDP range for a long time.  The cause of deficits also matter.  I'm much more concerned about spending growing exponentially than revenues fluctuating from year to year.

I'm glad you finally have come around on this...?

 

 

When I say QE had no or little effect, I'm focused on the real economy--producing things (GDP). You're right, banks certainly took advantage of borrowing at 0%, but much of the lending went to asset speculation (including M&A). If it was so successful, then we would've seen stronger economic growth (maybe this is where you're going to bring your deficit argument???).  

 

The FED can't make households and businesses borrow to fund expenditures, and QE2 and 3 show this.  You can provide all of the liquidity you want and keep interest rates at 0 for as long as you want, but it don't mean beans unless it stimulates spending by HHs and Firms.

 

Finally, I do get the inter-bank markets. Given the level of excess reserves in the banking system now, the FED Funds market (where the FED sets its target) is not so relevant any more.  The repo markets are where the action is now, and any other markets that require the use of treasuries as collateral........

[GG]

9 minutes ago, TPS said:

When I say QE had no or little effect, I'm focused on the real economy--producing things (GDP). You're right, banks certainly took advantage of borrowing at 0%, but much of the lending went to asset speculation (including M&A). If it was so successful, then we would've seen stronger economic growth (maybe this is where you're going to bring your deficit argument???).  

 

The FED can't make households and businesses borrow to fund expenditures, and QE2 and 3 show this.  You can provide all of the liquidity you want and keep interest rates at 0 for as long as you want, but it don't mean beans unless it stimulates spending by HHs and Firms.

 

Finally, I do get the inter-bank markets. Given the level of excess reserves in the banking system now, the FED Funds market (where the FED sets its target) is not so relevant any more.  The repo markets are where the action is now, and any other markets that require the use of treasuries as collateral........

 

It's as if you missed the differences between the Obama & Trump approaches towards private enterprise?  Shall we revisit the original thesis of the OP?

 

I'll respond to the other items shortly.  Yet it astounds me how you continue to speak in textbook economics when the talk is about corporate finance. 

[TPS]

34 minutes ago, GG said:

 

It's as if you missed the differences between the Obama & Trump approaches towards private enterprise?  Shall we revisit the original thesis of the OP?

 

I'll respond to the other items shortly.  Yet it astounds me how you continue to speak in textbook economics when the talk is about corporate finance. 

Oh, I understand full well that you think Trump has unleashed a business boom because of the tax cuts and deregulation; whereas I see the economy being boosted by expanded deficits.  I think the latter is more important than the former, in the current situation.

 

I guess I'll counter with I'm astounded that you don't seem to grasp how the FED operates, which has nothing to do with a textbook...

[GG]

39 minutes ago, TPS said:

Oh, I understand full well that you think Trump has unleashed a business boom because of the tax cuts and deregulation; whereas I see the economy being boosted by expanded deficits.  I think the latter is more important than the former, in the current situation.

 

I guess I'll counter with I'm astounded that you don't seem to grasp how the FED operates, which has nothing to do with a textbook...

 

It's also clear that you don't understand motivations for private investment.    There were deficits in Obama's tenure and there are deficits in Trump's tenure.  Why didn't the economy grow at more than 3% when it should have been close to 4% given the big fall and unprecedented government intervention?    What other data do you need to finally see that Keynes was monumentally wrong?

 

[Broken Record /ON]
Government deficits do not cause private wealth creation

Government deficits do not cause private wealth creation

Government deficits do not cause private wealth creation

[Broken Record /OFF]

[BeginnersMind]

Ah yes, the buildup to an election, that time of year when our politicians increase the debt and set future fiscal restrictions they will reset in 2 years. 

 

From the Ds, it’s who they are and they are unabashed about it. 

 

From the spineless Rs, it’s who they are, but say they are not. 

 

Dont just stand there Congress, spend something. 

[TPS]

7 minutes ago, GG said:

 

It's also clear that you don't understand motivations for private investment.    There were deficits in Obama's tenure and there are deficits in Trump's tenure.  Why didn't the economy grow at more than 3% when it should have been close to 4% given the big fall and unprecedented government intervention?    What other data do you need to finally see that Keynes was monumentally wrong?

 

[Broken Record /ON]
Government deficits do not cause private wealth creation

Government deficits do not cause private wealth creation

Government deficits do not cause private wealth creation

[Broken Record /OFF]

It's disingenuous to talk about deficits in isolation from the other sectors of the economy, as there are 4 components of demand.  Is it that hard to understand that injecting $1 trillion of demand into an economy when business and household spending is declining will have a different impact than when they are both expanding? 

 

That was the point of Keynes, when the private sector won't spend, and unemployment is high, the government should deficit spend and put people back to work.  Guess what happens when those people spend money from their government jobs funded by deficit spending?   

[GG]

9 minutes ago, TPS said:

It's disingenuous to talk about deficits in isolation from the other sectors of the economy, as there are 4 components of demand.  Is it that hard to understand that injecting $1 trillion of demand into an economy when business and household spending is declining will have a different impact than when they are both expanding? 

 

That was the point of Keynes, when the private sector won't spend, and unemployment is high, the government should deficit spend and put people back to work.  Guess what happens when those people spend money from their government jobs funded by deficit spending?   

 

Deficits don't occur, they are caused.  Deficit spending is the stupidest term ever invented.

 

Keynesian policies only work in preventing economic depressions by providing a spending floor.  They totally fail when economic growth is needed, as we have witnessed again and again during the 6 Summers of Recovery™️©️

[Buffalo_Gal]

 

 

[BeginnersMind]

10 minutes ago, Buffalo_Gal said:

 

 

 

We spend almost 40% of the world’s defense spending and nearly 3x of China, who is number 2. Blow me. 

[Buffalo_Gal]

Just now, BeginnersMind said:

 

We spend almost 40% of the world’s defense spending and nearly 3x of China, who is number 2. Blow me. 

Er, no thanks.   ?

[RochesterRob]

2 minutes ago, BeginnersMind said:

 

We spend almost 40% of the world’s defense spending and nearly 3x of China, who is number 2. Blow me. 

  So what do you propose?  Spend nothing and assume humanity has evolved beyond the point of open aggression towards others?

[/dev/null]

Just now, BeginnersMind said:

 

We spend almost 40% of the world’s defense spending and nearly 3x of China, who is number 2. Blow me. 

 

And do you wonder why nobody has seriously provoked the United States at sea or in the skies for the last 75 years?

[TPS]

2 hours ago, GG said:

 

Deficits don't occur, they are caused.  Deficit spending is the stupidest term ever invented.

 

Keynesian policies only work in preventing economic depressions by providing a spending floor.  They totally fail when economic growth is needed, as we have witnessed again and again during the 6 Summers of Recovery™️©️

It simply means that government spends more $s into the economy than it takes out in taxes. 

[3rdnlng]

19 minutes ago, Buffalo_Gal said:

Er, no thanks.   ?

Don't worry, you're not his type.