Has The Bank Of Japan Started Another Round Of Central Bank Wargames?

"Never pick a fight with a central bank. The only one who gets hurt is you. Unless, of course, you are another central bank."

"So it is not quite true that a currency-issuing central bank has no opponents. No-one in the private sector will oppose it, unless they have a deathwish. But other currency-issuing central banks might, if they perceive its actions as threatening to their own economies. "

http://www.forbes.com/sites/francescoppola/2014/11/01/has-the-bank-of-japan-started-another-round-of-central-bank-wargames/

Draghi's Jackson Hole speech has been misunderstood

 "Mario Draghi's speech at Jackson Hole on August 22nd caused a considerable stir. For the first time, he admitted that the absence of a central bank backstop for government borrowing means both higher borrowing costs for governments and a greater likelihood of market punishment for profligate governments (...)."

"And the consequences of this shocking waste of human capital could be serious. Highly-indebted governments in the Eurozone depend on high tax revenues in the future to reduce their debt burdens: while even less heavily indebted governments such as Germany will also need high tax revenues in the future to support their increasing proportion of elderly. The future fiscal sustainability of the Eurozone depends on the young people whose futures are currently being systematically destroyed by unemployment. THIS is what Draghi's speech is about."

http://www.pieria.co.uk/articles/draghis_jackson_hole_speech_has_been_misunderstood

Is It Time for the Fed to Contract Its Balance Sheet?

"The Federal Reserve can keep their balance sheet at the current size (and keep the risk asset party going) or it can position itself to be able to hike rates — but it cannot do both."

"It’s often mentioned that the Fed buys bonds in asset swaps. This is true. Where many people get confused is that it is not an asset swap for the banks. When the Fed buys bonds, they typically buy them from non-banks. The bonds are removed from circulation and put on the Fed’s balance sheet, while the Fed pays for these bonds with newly created reserves. Now these reserves must be deposited at a bank, so they will show up at a bank as new deposits."

http://blogs.cfainstitute.org/investor/2014/06/26/can-the-fed-raise-rates-without-throwing-cold-water-on-risk-assets/

Saving, lending and tapering combine in a perfect storm

"By tapering its QE purchases, the Fed is reacting to a decline in the banking system's demand for bank reserves, because the growth of savings deposits has been decelerating for the past two years. In fact, in the past three months savings deposits at U.S. banks have only grown at a mere 1.4% annualized pace, and they have not grown at all since the Fed started tapering its QE purchases in early January. For most of the past several years, the Fed's QE bond purchases served mainly to accommodate the public's seemingly insatiable demand for safe, short-term savings deposits. That's changed significantly in the past few months, however. The private sector is no longer so risk-averse, and banks are apparently also less risk-averse; that would explain why loan volume is expanding and savings deposit inflows have come to a virtual halt. The slowdown in deposit growth and the increase in bank lending are both signs of a return of confidence. The return of confidence is the Fed's worst nightmare."

http://scottgrannis.blogspot.com/2014/03/saving-lending-and-tapering-combine-in.html

The Fed’s Actions in 2008: What the Transcripts Reveal

"On Friday, the Federal Reserve released the transcripts of the 2008 meetings of its Federal Open Market Committee, which sets monetary policy. The transcripts provide a detailed account of some of the Fed's key decisions during that crisis year. Here is a look at the fuller picture that the documents have provided."

"Federal Reserve officials are unaware in January 2008 that the economy has already entered a recession. But the Fed's chairman, Ben S. Bernanke, and his closest advisers are feeling nervous. They worry that the Fed's actions at the end of 2007 have been insufficient, and that tumbling stock prices represent the start of a broader pullback in investment."

http://www.nytimes.com/interactive/2014/02/21/business/federal-reserve-2008-transcripts.html

When Will the Fed End Its Zero Rate Policy?

"U.S. Treasury yields and other interest rates increased in the months leading up to the Federal Reserve’s December 2013 decision to cut back its large-scale bond purchases. This increase in rates probably at least partly reflected changes in what bond investors expected regarding future monetary policy. Recent research on this episode tentatively suggests that investors moved earlier the date when they believed the Fed would exit its zero interest rate policy, even though Fed policymakers made few changes in their projections of appropriate monetary policy."

http://www.frbsf.org/economic-research/publications/economic-letter/2014/february/zero-interest-rate-investor-expectations-liftoff-monetary-policy/

Everything You Need to Know About the Emerging-Market Currency Collapse

"First, money poured into emerging markets when it looked like they offered juicy returns. Then it poured out after they didn't. Currencies are collapsing. Stock markets are falling. And central banks are sacrificing the real economy to save the exchange rate.

We've seen this movie before. It was called the East Asian financial crisis, back in 1997. But, for once, the sequel won't be worse than the original. Emerging markets don't have enough foreign-money debt this time around to make their falling currencies much of a concern. What is a concern is whether their central bankers realize this. They might overreact—they might already be—and raise rates to prop up their currencies, when they should be lowering them to prop up their economies.

Now, emerging market currencies have been in a world of pain since last May. That's when Ben Bernanke first hinted that the Fed would soon draw down—or "taper"—its bond purchases. If that meant the Fed would start raising rates sooner too, as markets assumed it did, there wouldn't be any need to park money overseas to get a decent return. You could do that in the U.S. So investors pulled their money out just as quickly as they had moved it in—and emerging market currencies fell."

http://www.theatlantic.com/business/archive/2014/02/everything-you-need-to-know-about-the-emerging-market-currency-collapse/283590/

Monetary Tectonics: 50 Slides Illustrating The Tug Of War Between Inflation And Deflation

Polecam przeglądnąć opracowanie od Incrementum AG o obecnej polityce monetarnej (w szczególności inflacji i deflacji oraz ich czynnikach i konsekwencjach). Sporo wykresów i komentarzy.

http://www.incrementum.li/wp-content/uploads/2014/01/Monetary-Tectonics-Inflation-vs-Deflation-Incrementum-Chartbook-2.pdf

Why the US is not at risk of a Japan-style deflation

"Concerns about the risk of a "Japan-style deflation" in the U.S. are once again heating up, as the Fed prepares to taper its bond purchases, something that's very likely to happen either this month or next. The worry—echoed in a front-page article in today's WSJ—is that tapering and eventually ending QE at a time when inflation is unusually low runs the risk of producing even lower or negative inflation (i.e., deflation), which in turn could doom the U.S. economy to very weak or even negative growth for the foreseeable future, much like the problems that have plagued the Japanese economy for many years. Without ongoing QE support, the thinking goes, the U.S. economy could fall into a sort of deflationary quicksand and/or lose all forward momentum. But is deflation really so dangerous, and has growth really been so dependent on QE?"

http://scottgrannis.blogspot.com/2013/12/why-us-is-not-at-risk-of-japan-style.html

Bernanke – lepszy Friedman

"Ben Bernanke to chyba jedyny ekonomista, który swoją wypracowaną teorię i badania empiryczne miał okazję sam sprawdzić w praktyce na tak wielką skalę. Dlaczego nazwałem go lepszym Miltonem Friedmanem? Bo był w pewnym sensie jest uczniem Friedmana – propagował jego koncepcję przyczyn Wielkiej Depresji, przyznawał polityce pieniężnej stabilizacyjną rolę itd. Ale jednocześnie brak mu ideologicznego ferworu, nie jest rycerzem walki z państwem wszędzie i za każdą cenę, co pozwoliło mu posunąć myślenie dotyczące polityki pieniężnej znacznie na przód. (...)"

http://highbookvalue.com/2013/12/19/470/

QE and ultra-low interest rates: Distributional effects and risks

Polecam przeglądnąć kompleksowy raport od McKinsey (pdf w pełnej wersji do ściągnięcia w linku).

"A new report from the McKinsey Global Institute examines the distributional effects of these ultra-low rates. It finds that there have been significant effects on different sectors in the economy in terms of income interest and expense. From 2007 to 2012, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks (exhibit). Nonfinancial corporations—large borrowers such as governments—benefited by $710 billion as the interest rates on debt fell. Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5 percent in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards. Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income."

http://www.mckinsey.com/insights/economic_studies/qe_and_ultra_low_interest_rates_distributional_effects_and_risks

Andrew Huszar: Confessions of a Quantitative Easer

"I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time."

"My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed's trading floor? The job: managing what was at the heart of QE's bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history."

http://online.wsj.com/news/articles/SB10001424052702303763804579183680751473884

The Fed's objective is to destroy the demand for cash

"Within the next several months, the Fed is likely to announce the tapering of QE. That's not a big surprise, but this time there is an interesting twist: in order to offset the risk that tapering might cause interest rates to move higher—which could slow the still-weak housing market and the still-weak economy—the Fed will also announce a lowering of the unemployment rate threshold that would prompt them to begin raising interest rates. By doing this the Fed would be removing some of the unwinding risk that continued tapering creates, while at the same time keeping bond yields from increasing, since a lower unemployment rate threshold would significantly extend the period during which the Fed would keep short-term interest at or near zero."

Criticism by Architect of Japanese Quantitative Easing of Fed Policy

"Many top economists have said that quantitative easing doesn’t help the economy. But many argue that – without QE – the economy would be much worse. How do we reconcile those opinions?

One of the main architects of Japan’s QE program – Richard Koo – Chief Economist at the Nomura Research Institute – explains that QE helps in the short-run … but hurts the economy in the long run (via Business Insider):

Initially, long-term interest rates fall much more than they would in a country without such a policy, which means the subsequent economic recovery comes sooner (t1). But as the economy picks up, long-term rates rise sharply as local bond market participants fear the central bank will have to mop up all the excess reserves by unloading its holdings of long-term bonds.
Demand then falls in interest rate sensitive sectors such as automobiles and housing, causing the economy to slow and forcing the central bank to relax its policy stance. The economy heads towards recovery again, but as market participants refocus on the possibility of the central bank absorbing excess reserves, long-term rates surge in a repetitive cycle I have dubbed the QE “trap.”

http://www.ritholtz.com/blog/2013/10/criticism-by-architect-of-japanese-quantitative-easing-of-fed-policy/

The Ultimate "What Would Janet Yellen Do?" Cheatsheet

"Pulling from an extensive record of public speeches and FOMC meeting transcripts, Goldman Sachs reviews Fed Chair-nominee Janet Yellen's views on a number of policy-relevant issues. Probably the most differentiating feature of Yellen's public communications relative to other Fed officials has been her focus on "optimal control" considerations in illustrating potential future paths for the fed funds rate, which generally suggest a more accommodative path than current consensus expectations.

Yellen has expressed confidence in the benefits of QE in the past, and has generally not suggested that the costs of QE are substantial enough to warrant any changes to the stance of policy.

She believes that most of the increase in unemployment since the crisis has been cyclical rather than structural in nature, and will be looking for a broad-based improvement in labor market indicators before deciding that a "substantial" improvement has occurred.

FOMC meeting transcripts show that Yellen generally erred on the side of preferring more accommodation during 2006 and 2007 (detailed transcripts are delayed 5 years), but expressed significant concern about inflation during the mid-1990s.

Via Goldman Sachs, (...)"

http://www.zerohedge.com/news/2013-10-11/ultimate-what-would-janet-yellen-do-cheatsheet

Why QE was a successful failure

"Taken at face value, the most massive expansion of a major central bank's balance sheet in history, in which almost $2.5 trillion was added to the U.S. monetary base for the purpose of artificially lowering long-term interest rates in order to stimulate the economy, was a failure. Why? Because 10-yr Treasury yields are no lower today than they were when QE1 was first announced in late November, 2008, and 30-yr Treasury yields are actually a bit higher, and because real GDP has grown at a 1.6% annualized pace over the same period, making this the weakest recovery on record. These facts say that the Fed was incapable of bringing down interest rates, and did absolutely nothing to boost the economy."

http://scottgrannis.blogspot.com/2013/08/why-qe-was-successful-failure.html

Wycofanie QE – czego nie dostrzegają panikujący inwestorzy

"Prawie cały świat jest przekonany, że wycofanie luzowania ilościowego w USA może skutkować wyraźnym zacieśnieniem globalnych warunków monetarnych – czyli wyższym oprocentowaniem szerokich klas aktywów. Ale może wcale tak nie jest? Oto kilka argumentów wskazujących, że wycofanie QE nie musi odbywać się w sposób trzęsący rynkami jak workiem kartofli."

http://highbookvalue.com/2013/08/27/wycofanie-qe-czego-nie-dostrzegaja-panikujacy-inwestorzy/

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves

Polecam przeczytać całość dokumentu. :)

"John Maynard Keynes famously wrote that: "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."  A modern example of that dictum, relevant to the economy, policy, and markets, is the widespread view that banks can "lend out" their reserves (deposits) at the central bank, as if bank reserves represented a pool of money that is just waiting to "flow into" bank lending. Because such a thing cannot occur and therefore has not occurred, the point is usually made in reverse: banks currently are not "lending out" their reserves--rather they are "parking" their reserves at the central bank or leaving them "idle." But that they might lend them out in the future is a lurking risk and a reason to be cautious about the central bank engaging in aggressive quantitative easing (QE)."

"• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directly to commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, bu tthe mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them."

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf

Why Didn’t QE Cause High Inflation?

"First of all, I think QE did cause some inflation. Contrary to popular mythology, I don’t say QE does nothing. It’s more that I just think it’s inadequate. And when we analyze the current environment and impact of QE we have to consider the counter-factual world without having had any QE. If the Fed hadn’t stepped in in 2008 to bolster the banking system we likely would have had a depression in the USA."

"The problem with QE is that it doesn’t have a transmission mechanism to substantially increase aggregate demand. When the Fed buys bonds from a bank they simply swap reserves for t-bonds. The bank has the same net worth (roughly, depending on any capital gains and as mentioned previously QE1, 2 and 3 have had diminishing returns here) and the reserves sit in the interbank market (and no, they don’t get “lent out”, that’s not how banking works). The bank might feel inclined to shift its portfolio holdings and replace lost T-bond income so it might go buy stocks or bonds of other types, but this doesn’t guarantee sustainable capital gains because there has been nothing directly attached to this balance sheet change that necessarily justifies an increase in share prices."

http://pragcap.com/why-didnt-qe-cause-high-inflation

Why QE has not been stimulative

"The Fed's Quantitative Easing program—which so far has consisted of the purchase of some $2.3 trillion worth of Treasury, MBS, and Agency bonds, thereby more than tripling the size of the Fed's balance sheet—has been so gigantic as to have been inconceivable before it started, yet it has not done anything to stimulate economic growth or push up the inflation rate. The economy is still mired in the Weakest Recovery Ever, and inflation has dipped to its lowest point since the early 1960s. How to explain this?

Perhaps the Fed should have done more?

Or perhaps it's because QE was never designed to be stimulative in the first place."

http://scottgrannis.blogspot.com/2013/07/why-qe-has-not-been-stimulative.html