Modern Monetary Theory

June 15, 2020

There is a saying, “The more things change, the more they stay the same.” Yes, I know, it is an oxymoron, but it makes a good point about the hubris (or perhaps stupidity) of human beings.

There is a “new” economic theory called MMT or Modern Monetary Theory. There is nothing new about it. In a nutshell MMT holds that whatever the government decides is needed, it can simply print money, “spend” it and get whatever is “needed.” Here is a little more:

“There is nothing new in Kelton’s introduction. MMT’ers have understood these concepts for more than a decade.

But we always must remind ourselves, as traders and investors, what’s important is to discount how the public perceives those ideas. Remember the whole Keynesian beauty contest concept (probably not the most politically correct analogy, but let’s remember that Keynes lived in a different era. In fact, I suspect if Keynes were alive today, he would be more politically correct than some of his most vocal opponents –Niall Ferguson apologizes for remarks).

Keynes rightfully understood that investors discount what the crowd will perceive as the most likely outcome as opposed to the best choice.

Which brings me to my main point. And I know some of you might think this is nuts. But I don’t care.

I have been watching for signs that the concept of “governments are not financially restrained” taking hold within the non-financial community.”

We don’t need to go any further with this. This idea is not new and it doesn’t work. It might “work” (will depend on your perspective) temporarily and that is the problem. People quickly forget and then lose sight of the cause of their misery. All this will do is change the group that prints the “money”. We already have this system with an intermediary called the Federal Reserve. The government already basically “prints” all the “money” that it needs. It is just done indirectly through the Fed. MMT would remove the Fed and have the government do this directly. As you can see, the only change is the bosses. The MMT folks will also tell you there will be no interest paid. Who will save in that environment? To keep such a system together, the government will have to forbid trading for other substances such as gold and silver, bitcoin, etc. Slavery anyone?

If you want real change, eliminate the monopoly the state holds on “money” production. Allow anyone that wants to issue “money” to issue it. The market place will sort the sound “money” from the unsound “money”. Currently, the government does not allow this sorting to take place.

Fed Buying Ever Riskier Assets

May 25, 2020
2 Sivan 5780

Our government is driving us into deep bankruptcy.

After the “crisis” of 2008 all sorts of debt increased. The increase is attributable to Fed “monetary policy”. Interest rates were low and it was easy to get “money” from the corporate paper market. I am very curious to know who owns all that corporate paper. I guess there is a lot in ETF’s, but that does not tell us who really owns this garbage. As a result of all that easy Fed credit we now have a “liquidity” problem (aka falling prices. Liquidity means you can buy and sell your “assets” and not disturb “market prices”). Here is the Fed’s response to this:

‘“This came two days after Powell defended the Fed’s program to buy junk bonds during his testimony before the Senate Banking Committee, which asked how purchases of junk bonds is “helping folks on Main Street.” Powell flagged that the Fed allowed for buying bonds from so-called “fallen angels” to ensure there is “no cliff” between the two lending markets (even though as we pointed out previously, a clear cliff has formed), saying “we don’t want to have a cliff there to where investment grade markets are working well, but the leveraged markets are not, non-investment grade markets are not.”
He then added that “we made a very limited, narrow set of actions to support market function in these markets, including buying ETFs, and that’s had an effect to improve market function there.”
Powell concluded by saying “we’re not buying junk bonds generally across the board at all,” which of course is correct: he is merely buying ETFs that have junk bond constituents.
And this is where the Fed’s first major test of directly manipulating and intervening in market functioning is about to take place.
While the Fed’s H.4.1 statement does not breakdown how much of the $1.8 billion in ETF holdings is allocated to investment grade and how much is junk, it is safe to say that at least $1 dollar of that amount has been allocated to purchases of Junk ETFs.
That will be a problem for Powell, because a quick scan of the holdings of both HYG and JNK reveals that these junk bonds ETFs own, among the hudnreds of other securities, several bonds from the just defaulted rental giant, Hertz.’
Here are HYG’s holdings of HTZ bonds: they amount to just over $50MM in face value across 4 bonds (out of a total of $23.3BN in holdings across just over 1,000 bonds).”

This problem is well illustrated by the Fed’s balance sheet. On 8/28/19 its “assets” were 3.8 trillion dollars and now its “assets” are 7 trillion dollars.

This the result of the Fed trying to maintain “liquidity”. It is another way of saying that Fed pets found themselves holding bags of excrement and they needed a place to unload it and the Fed is that place.

You might think the Fed is not all that smart, but that is not the case. Here is why this is YOUR problem and not the Fed’s problem:

“Is U.S. currency still backed by gold?

Federal Reserve notes are not redeemable in gold, silver, or any other commodity. Federal Reserve notes have not been redeemable in gold since January 30, 1934, when the Congress amended Section 16 of the Federal Reserve Act to read: “The said [Federal Reserve] notes shall be obligations of the United States….They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.” Federal Reserve notes have not been redeemable in silver since the 1960s.

The Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts in to circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.”

If you read the above carefully, you noted that Federal Reserve notes are the obligation of the United States. As seen above, the Fed has nearly doubled its balance sheet and it is “buying” ever MOAR risky “assets” with those Federal Reserve “notes” that “we the people” back. In other words as the Fed adds to its balance sheet, the liabilities of “we the people” increase. Who do you think will pick up the tab when those “assets” tank completely? If you said, “We the people”, go to the head of the class! “We the people” are the bag holders and there is no gold in that bag!

Here is some information regarding the “bag” from the ZH article above:

“To be sure, we can only extrapolate but it is safe to say that the Fed’s holdings of both these ETFs are modest for the time being, and we assume that the bulk of ETF purchases have targeted the investment grade, LQD ETF; still the fact is that as of this moment, the Fed is a holder, via BlackRock and via HYG and JNK, of bonds which are in default, and which make the Fed a part of the Hertz post-petition equity once it emerges from bankruptcy!”

You can hear and view a brief history of the Fed here and see a hypothetical balance sheet that illustrates what is happening (2:58 – 12:50).

A very interesting thing about the Fed history is how it has gradually taken on assets of poorer and poorer quality. Up until 1932 the “currency” issued by the Fed was backed by 40% gold and 60% commercial paper. In 1932 the backing was 40% gold and 60% Treasuries. Then in 1935 the gold backing was removed and the only backing was by Treasuries. Then in 2008 the Fed added Mortgage Backed Securities into the backing mix. Now it is adding “commercial paper” back into the mix and some of that “commercial paper” is junk.

Remember, always privatize your profits and socialize your losses!

Fed Repo’s – Free Market?

April 2, 2020

Here is Yahoo with an article from Bloomberg:

(Bloomberg) — The Federal Reserve is trying to call time on a fire sale of Treasuries by foreign governments and central banks.

Foreign official holders of Treasuries dumped more than $100 billion in the three weeks to March 25, on course for the biggest monthly drop on record, according to weekly Fed custody data that captures much of the pandemic-fueled turmoil.

Countries reliant on oil exports and smaller Asian economies have been selling U.S. debt, and central banks have been primarily offloading older, less-liquid Treasuries, according to traders and market makers familiar with the transactions.

The Fed on Tuesday rolled out its latest effort to restore functioning in markets, on top of moves to ramp up debt purchases and backstop several sectors. It introduced a temporary repurchase agreement facility that let other central banks swap Treasuries for dollars.

I wonder who they think they are fooling? Maybe we did something to piss off the Saudis and the Saudis understood how to bring on a dollar squeeze that would force this selling.

Some might call this providing “liquidity”. This is code for “market manipulation.”

Here is a good quote:

The new repo facility “effectively backstops foreign central banks from forced liquidation of their Treasury holdings into dysfunctional markets,” Jonathan Cohn, a rates strategist at Credit Suisse, said in a note.

Perhaps if prices go down, we have “dysfunctional markets”.

End The Shutdown

April 1, 2020

As everyone knows, we are in the midst of a “crisis” because of a Corona virus. The government response has been a shutdown of many businesses. This shutdown is being imposed from the top down. In other words government has imposed shutdowns. Obviously this has reduced income and made people poorer. The government did this, allegedly, in the name of protecting us, but there is a huge problem with this. This is from Mises:

There is no conflict between humanitarian and economic concerns; in fact they are flipsides of the same coin. A poorer America will be a much less healthy America, one more vulnerable to future illness and disease. Technology, modern medicine, and market actors can address a virus; already we see entrepreneurs producing cheaper ventilators and doctors using cheap generic drugs with very promising results.

This local, bottom-up approach is the only effective way to confront the virus. The federal government, as we see now and have in the past, is comically incapable of competence in times of crisis.

On a fundamental level, freedom really is more important than security—or, in this case, an illusion of security. We all demonstrate this in our personal lives every day, from flying to driving to riding bicycles, to consuming unhealthy food and drink simply because we like it. Security has never been the sole or even primary goal for a country born in rebellion.

Government cannot decide what aspects of our lives are essential or nonessential. The American people cannot simply sit at home and wait for government checks written on funds that government does not have.

I have added the emphasis regarding a “poorer America”. This is not theoretical! See this story today:

Alteon Health, a staffing company backed by private-equity firm Frazier Healthcare Partners, will cut salaries, time off and retirement benefits for providers, citing lost revenue. Several hospital operators announced similar cuts.

Emergency room doctors and nurses many of whom are dealing with an onslaught of coronavirus patients and shortages of protective equipment — are now finding out that their compensation is getting cut.

Most ER providers in the U.S. work for staffing companies that have contracts with hospitals. Those staffing companies are losing revenue as hospitals postpone elective procedures and non-coronavirus patients avoid emergency rooms. Health insurers are processing claims more slowly as they adapt to a remote workforce.

Granted, the delay in the revenue producing procedures may have been self-imposed, but this clearly illustrates that, “A poorer America will be a much less healthy America, one more vulnerable to future illness and disease.

Many have used the metaphor of war to describe the response to this “pandemic”, but I think they have forgotten the response to WWII (I am sure that is the war they referenced). That response was massive work. The United States basically, out manufactured its enemies. That is how it won WWII.

What happened to our can do attitude? What happened to the “land of the free”? The strength of a nation or any corporate body lies in its diversity, or in other words in the freedom of its individuals to create solutions to problems. Maybe this “crisis” will backfire on those in power and the grassroots will realize who really holds the power in our land.

One last thing. The Fed cannot print its way out. Spouting counterfeit currency does not get tests done, does not get masks made, does not feed the doctors and nurses who are working so hard to help people. It is work that produces these vital goods and services. The only thing the Fed “printing” can do is support banks’ mark-to-fantasy (there is no “market”) valuation of their assets, so they can maintain the illusion they have “capital”.

Money Printing – Will it Help?

March 25, 2020

What are prices? A price is simply the ratio of one good to another. Usually a trade can take place when the ratio is met. For example a TV may “cost” $300.00. The ratio of dollars to TV’s is 300 to 1. What determines this ratio is generally the amount of dollars available versus the number of TV’s available. This is usually expressed as “supply and demand”. If MOAR dollars become available for trading for TV’s, the ratio of dollars to TV’s may go up. For example if the number of dollars available doubles, but the amount of TV’s remains the same, we would expect the ratio to be come 600/1 and the price of a TV would be $600.00.

History teaches that increasing the supply of money does not bring greater “wealth”, it brings higher prices. An example comes from the 1400’s to 1800’s when Spain began to bring gold and silver from the New World:

The Price Revolution, sometimes known as the Spanish Price Revolution, was a series of economic events that occurred between the second half of the 15th century and the first half of the 17th century, and most specifically linked to the high rate of inflation that occurred during this period across Western Europe. Prices rose on average roughly sixfold over 150 years. This level of inflation amounts to 1–1.5% per year, a relatively low inflation rate for modern-day standards, but rather high given the monetary policy in place in the 16th century.[1]

We are currently in a panic about a Corona virus. Much of the world’s economic output and trade has been shut down by this panic. This is called a “supply shock”. This means the number of “TV’s” (representing all goods), has gone down drastically. As far as we know the number of dollars available for purchasing “TV’s” has not gone down. This means the ratio of dollars to “TV’s” will go up. It has to do so. If it does not, then no one is buying.

How do you think the Federal Reserve has responded to these circumstances? If you guessed “create MOAR currency”, go to the head of the class! (Thank you Walter Williams). Here is Zero Hedge on Fed actions:

As part of the Fed’s ongoing nationalization bailout of the entire market, yesterday we pointed out that in a dramatic reversal away from years in which the Fed would not intervene in the corporate market, the US central bank would now buy Investment Grade corporate bonds, and would even intervene in equities, by purchasing the LQD investment grade debt ETF.

Will this encourage production? I doubt it. I am waiting for my helicopter money. How about you?

“Our” Congress does not want to be left out:

We have a deal, folks!

It appears on early Wednesday morning, the White House and Republican and Democratic Senate leaders reached a deal to keep the American economy humming during the virus crisis and hopefully avoid depression in the second and third quarters.

The new Senate proposal will inject $2 trillion into the US economy, just like a shot of heroin, providing tax rebates, four months expanded unemployment benefits, and several business tax-relief provisions aimed at supporting individuals, families, and businesses, reported The Hill.

There is MOAR:

The deal includes $500 billion for a major corporate liquidity program through the Federal Reserve, $367 billion for a small business loan program, $100 billion for hospitals and $150 billion for state and local governments.

It will also give a one-time check of $1,200 to Americans who make up to $75,000. Individuals with no or little tax liability would receive the same amount, unlike the initial GOP proposal that would have given them a minimum of $600. – The Hill

Have you ever wondered why businesses in this country become fewer and fewer and larger and larger? I think you just got your answer above.

So what do the Fed actions and the Congressional actions achieve (spoiler alert – increase some people’s popularity and not much else):

Oh, sure, handing out billions of dollars via various spending boondoggles ostensibly targeted at those hit hard by the decline in national income may give the impression of having avoided the cost. Ditto for having the Federal Reserve System flood the economy with new money.

No matter how you slice it, however, the pie is still smaller. That won’t change until production facilities reopen and people are allowed to move around. At best, the boondoggles and new money redistribute claims over the now smaller economic pie. They don’t avoid the cost of lost production.

The boondoggles do provide political cover for those enacting them. An electorate unschooled in economics falls for their hook, line, and sinker—seemingly every time. So it is with our government’s attempt to offset the consequences of shutting down economic activity. Lots of pomp and circumstance signifying nothing save the creation of yet more spending constituencies feeding at the public trough.

MOAR Liberty.

QE Resumed!

After the 2008 financial “crisis” the Federal reserve did what was called Quantitative Easing. Basically this meant the Fed created money/credit and gave it to the Big Banks in exchange for other assets. This took those assets off the Bank’s books and put “reserves” on them. This continued off and on until 2014. Now, only six years later, the Fed is resuming its “money printing”:

The Desk will conduct purchases in each of five maturity sectors below at the times indicated, subject to reasonable prices.

20 to 30 year sector at 10:30 – 10:45 am and 2:15 to 2:45 pm for around $4 billion each
7 to 20 year sector at 11:15 – 11:30 am for around $5 billion
4.5 to 7 year sector at 12:00 – 12:15 pm for around $8 billion
2.25 to 4.5 year sector at 12:45 – 1:00 pm for around $8 billion
0 to 2.25 year sector at 1:30 – 1:45 pm for around $8 billion

These purchases are intended to address highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak. These purchases are part of the $80 billion of planned monthly purchases, including both $60 billion of reserve management purchases and $20 billion of reinvestments of principal payments received from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities.

Unfortunately, I think at this point everyone can see what is really happening. It is so blatantly obvious that the “money” is fake, that no one will be able to ignore it this time and just pretend that everything will be fine somewhere down the road.

How Fractional Reserve Lending Makes Money Disappear

Mr. Shostak described capital consumption in his excellent article. The mechanism he described here, counterfeiting, leads people away from producing real goods and into financial “services” (aka counterfeiting). I think everyone would agree that post World War II, this country was very productive and was producing a huge amount of real wealth. Over the years, we have lost productive industries and our “economy” has become financialized. Our big industries are known as FIRE or Finance, Insurance, and Real Estate. This is where counterfeiting leads – capital consumption. FIRES burn everything up and leave you with nothing. Here is Mr. Shostak:

The existence of the system of fractional reserve banking permits commercial banks to generate credit not backed by real savings, i.e., the generation of credit out of “thin air.”
For instance, let’s say that farmer Joe sells his saved kilogram of potatoes for ten dollars. He then deposits this money with the Bank A. The ten dollars are fully backed by the saved kilogram of potatoes.

Now let us say that Bank A “lends” $5 to Bob by taking $5 from Joe’s deposit. The money hasn’t really been lent, because Joe still uses his $10 as if it it hadn’t been lent out at all. This means that whenever he deems it necessary he is entitled to take the $10 out of deposit. No additional real savings have been accumulated to back the $5 loaned to Bob.

Once Bob, the borrower of the $5, uses the borrowed money, he has in fact engaged in an exchange of nothing for something, the reason being that the $5 are not backed by any real savings—it is empty money.

What we have here is $15 that are only backed by $10 proper. The $10 are fully backed by one kilogram of potatoes—real wealth that has been saved.

As you can see, printing money/credit is much easier than growing potatoes or another crop.

One of the posters made a very interesting point, assuming freedom to issue notes:

The point is that outside of knowing what a single bank has issued, there is no concern about some national aggregate of currencies. Without currency aggregates, inflation is also rendered meaningless. If prices in two currencies go up and in three they go down, what’s the inflation rate?

I think the post made an error in its use of the word “inflation” and I think the post meant this to mean a measure of the general rise in prices. That being said, the post imagined a nation with multiple currencies. Multiple currencies would render the government’s statistic collection irrelevant and it would no longer be able to set economic policy for the nation as a whole. A world/country with multiple currencies would have much MOAR liberty and the government would have much less control.

Come to think of it, it is a shame that we ever had a Bretton Woods agreement in the first place.

MOAR liberty!

Who Controls All Our Money?

This video is good, but I question the accuracy of some of the quotes. The video is correct that “money” is “created” by commercial banks out of nothing, every time someone borrows “money” and if there was no debt, there would be no money. This tells us we will never be free of debt.