Wednesday, October 21, 2015

Strangely selective criticisms of monetary policy

David Beckworth has a nice piece today pushing back against the idea that Fed open market operations monetize the national debt.

Here's one graph from that post that should push us even further against so many common ideas about recent monetary policy:

If this graph is the only thing I showed you about a country's economy, and I asked you, "At what point would you guess that this country had a liquidity crisis, a banking panic, and a subsequent deep negative shock in nominal incomes?"  would there be any doubt about what date you would pick?  Shouldn't that be the easiest argument you could imagine?  If you then found out that this particular country did have a large economic dislocation at exactly the point where the central bank's share of securities suddenly dropped by half, wouldn't you assume that a sharp deflationary monetary policy was at the center of the crisis?  Wouldn't you discount any other explanation unless it was backed by a large body of indisputable facts?


  1. I would read it as a sudden jump in private demand for safe assets that the Fed met by selling treasuries out of its portfolio. Demand for safe assets would jump because of the panic. It would signal the end of the Fed tightening.

    1. I would hope that the Fed isn't operating according to the real bills doctrine, but looking at a chart of the Fed Funds Rate compared to their treasury holdings, one could certainly get that impression.

  2. TravisV here. "Disappointing results have homebuilders sitting out rally"

    1. Yes. It's been disappointing how slow new mortgage growth has been. I've heard some whispers about non-bank mortgage markets starting to fill in where banks can't. Everybody is scared of private MBS, so I think it may be taking some other form, like some sort of REIT structure that holds the mortgages, but isn't technically a commercial bank. I don't have a lot of details on the market.

      There has been some talk of loosening punitive regulatory demands on the state, but it seems as though there has been some giving with the right hand while taking with the left on those matters. I keep hoping banks will start to expand real estate lending again, but until that happens, housing could get quite a bit worse.

      I had hoped to take a larger position in Hovnanian, who is positioned for a home run if housing has a positive surprise, but I'm not sure how long they can wait for a turnaround.

    2. oops. "state" should be "banks".

  3. Great graph!

    We may disagree on one point.

    I contend that QE is monetizing the debt, but of course the Fed's balance sheet has to permanently grow of that to be true.
    I have no problem monetizing debt if it leads to more real growth, while inflation is moderate or less.

    The Economist recently ran an article positing that when the globe's major central banks were accumulating reserves, especially China, they were essentially running QE. Now that they are not, they are running a contractionary policy.

    BTW, maybe Potash (POT) is a nice stock to own. Nearly a 7% yield, and I think upside.

    1. Hmm. I tend to be shy about commodity exposure. Why is the yield so high?

      I think that's probably right about QE. I expected inflation to hold a little better after the end of QE3, but I expected more momentum in credit creation from the mortgage market. Until that happens, it would be very difficult to create a policy that is too inflationary.

      I think we might be on the same page as far as "monetizing the debt" goes. It probably ends up being mostly a semantic distinction.

  4. On Potash: well, the stock is down two thirds from the 2011 peak. It offers a good yield because it's the kind of stock that was always a yield stock. They sell fertilizer, so I think it will be a steady business. It is an $18 billion market cap company, heavily researched, so I don't think there's any outlandish surprises ahead.

    They can cover their dividend easily, and they have been making heavy capital investments all along, which should bear fruit in coming years. Canadians, you know.

    Producers have high beta in relation to commodities. So if there is a run up in fertilizer prices, then Potash goes through the roof. At that time sell. Meanwhile you are paid to wait with a nice dividend.

    Do not turn up your nose at a fertilizer stock!