Tag Archive for Quantitative Easing

Dumb and Dumber – From Negative Interest Rates to Helicopter Money

We’ve all run into someone who thinks that all it take to bring about prosperity is to give everyone a million dollars. If everyone is a millionaire, we’ll all be rich and be able to afford anything we want, or so the thinking goes. Any sound economist knows that wouldn’t be the case, however. If everyone were given a million dollars the increased amount of money chasing the existing stock of goods would merely result in a massive rise in prices. No one would be better off, at least not once prices were once again equilibrated. The concept of giving everyone a million dollars is so absurd that no one takes it seriously. That is, they don’t take it seriously when a million dollars is the proposed amount. When the amount is smaller, all of a sudden it becomes a viable and increasingly-discussed policy proposal: helicopter money.

What the Federal Reserve Could Do

The financial media is abuzz with speculation about what the Fed will do next, and whether it will decide to hike the federal funds rate target at its April Federal Open Market Committee (FOMC) meeting. There is a lot of speculation too as to what the Fed might do in the event of another recession or financial crisis. Some recent articles at the Brookings Institution delve into that possibility. And what is the first potential policy action discussed? Negative interest rates.

The European Central Bank Has Gone Full Retard

ECB Full Retard
Just when you thought central banks couldn’t get any nuttier, the European Central Bank (ECB) has gone and done it. One of the ECB’s new programs may actually pay banks to borrow from it. Take away all the accounting sleights of hands and the net result would be an outright payment to those banks. It’s a direct subsidy, so why all the subterfuge? Just set up a direct pay-for-loan system, the more the banks loan the more the ECB pays them. That’s what most likely will happen eventually. It would be much simpler and much more honest, which is probably why they’re not doing it right now.

Central Banks Running Amok: More Money Printing on the Way

As if the world weren’t already awash in trillions of dollars, euros, and yen conjured up out of thin air, central bankers and politicians around the world are gearing up for yet another round of monetary expansion. It didn’t work before, it won’t work now, but don’t get these guys confused with the facts. They have to look important and make it seem as though they’re doing something, so they’re resorting to the only thing they know how to do: create more money. Here’s a roundup of what’s in store.

Swiss Starting to Hoard Cash Too?

On top of the news of increased cash hoarding in Japan comes news that the Swiss are starting to hoard cash too, as circulation of the 1,000 CHF note has increased. In all likelihood this is a response to the Swiss National Bank’s introduction of negative interest rates. This pattern has repeated itself everywhere negative interest rates have been introduced. Making it more expensive for banks to offer bank accounts and for depositors to hold cash in banks will lead to cash withdrawals from banks and increased hoarding of cash.

Moral Hazard: The Federal Reserve And Financial Markets

One of the problems with central banks acting as a lender of last resort is that of moral hazard. With the cost of bailouts spread out across society and benefits concentrated to a few large firms, the temptation to engage in excessively risky behavior is ever-present. Financial firms have become so used to getting their way from the government that they assume the Fed will bail them out of every difficult spot that comes along. The Federal Reserve’s monetary policy of the past eight years has been one huge bailout, funneling trillions of dollars of easy money to Wall Street, boosting stock prices, and creating bubbles throughout the economy. This loose monetary policy has led to such malinvestment that the economy will definitely fall into a recession or depression once the Fed takes away the punch bowl. Stock markets realize that the economy’s fundamentals are unsound, that firms are reliant on cheap central bank money for their continued performance, so the specter of Federal Reserve rate hikes and monetary policy normalization is leading to panic.

Will Monetary Policy Ever Return to Normal?

If you hoped that monetary policy would ever return to normal, you’re in for some disappointment. It appears as though central banks are hell-bent on doubling down on their mistakes. The past century has demonstrated time and again (Germany, Yugoslavia, Zimbabwe) the destructiveness of creating money out of thin air. Yet central banks continue with their money printing, going to greater and greater lengths and unveiling new tools and policies to try to stimulate their economies. It’s been so long now since monetary policy was “normal” that we’re into a new normal: permanent easing.

A Crack in the Central Bankers’ Armor?

The years during and after the financial crisis saw a consensus of monetary easing among central bankers around the world. The Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan all engaged in loosening their monetary policy, creating trillions of dollars worth of new money in an attempt to boost their economies. None of them wanted to be the only one not easing monetary policy, and none of them wanted to the first to return to “tighter” monetary policy. But are we beginning to see this easing consensus breaking down?

The Fed’s $97.7 Billion Transfer

The Federal Reserve last week announced that it transferred $97.7 billion of its estimated 2015 net income to the US Treasury department, a new record. There are undoubtedly some people out there who see this as a great thing and wonder why we want to end the Federal Reserve System when the Fed gives the government so much money. You have to dig a little deeper and understand where that money is coming from to figure out what its effects are and why this is problematic.

How Bloated Is the Fed’s Balance Sheet?

While the Fed may have raised its target federal funds rate today, it continues to add to its already-bloated balance sheet.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

At $4.5 trillion, the Fed’s balance sheet is equivalent to about 27% of US GDP, over one quarter of the entire economic output of the United States. But it’s one thing to say that and read about it and another thing to put it into perspective.