Monday, June 20, 2011

Edward Harrison sums up QE1, QE2, and QE3

Edward Harrison of Credit Writedowns explains QE1, QE2, and QE3 from the Fed's announced perspective and his own views, which is consistent with MMT.

What are the differences between, QE1, QE2, and QE3?

Ed thinks that should QE3 come, it will be after the Fed has firmly established the the overnight rate at zero, when it will shape the yield curve by setting price rather than quantity, reversing the strategy of QE2.

If this happens it will be completely in line with MMT's position that the government controls interest rates as it chooses, and the natural rate of interest (overnight rate) is zero.

While this is admittedly an emergency measure, it demonstrates what MMT has been claiming as a feature of the federal government's monopoly power as issuer of a nonconvertible floating rate currency.

13 comments:

traderscrucible said...

Hi Tom,

just an FYI- the Fed has set rates out the yield curve before.

http://traderscrucible.com/2011/01/19/perry-mehrling-fed-did-massive-qe-during-wwii/

Perry Merhling's post explains the details.

Tom Hickey said...

Yes, I saw that, but memory is short. This will be a reminder.

Moreover, somehow the WWII era has been erased, like the enormous deficits and debt followed by decades of economic boom.

beowulf said...

"Moreover, somehow the WWII era has been erased..."

If FDR's team was as half-assed as Obama's, America’s major export today would be Japanese army comfort women.

traderscrucible said...

No worries - so much out there, it's probably impossible to stay on top of it all.

The only reason I happened to remember is that I wrote a post about it.

Crake said...

A question about Ed Harrison. I have been reading his website, Credit Writedowns, for a few months. Maybe I have him confused with another poster, but I believe that he has written numerous times that he is more aligned to the Austrian school, yet everything I have read, by him, seems more attuned to MMT. What’s up with him?

Chaos said...

Crake, I think he started more as an 'austrian' but he looks like a rational guy, so started using sectoral balance analysis etc. I think he has said the current system may not be much to his liking but the operational framework is consistent with MMT, so it makes sense to use it to analyse the situation.

Also, as we know MMT can be used in progressive or conservative way, and as such is not inconsistent with small government etc.

I think Ed Harrison strongest view from austrian economics are about malinvestments and microeconomic structure. But in general I've seen him go towards less and less ideological position and more pragmatical one.

Crake said...

Chaos,

Thanks - those are good points and I see those themes, in his writing, also. I guess I am so used to seeing Austrians go berserk about MMT that I was a bit closed-minded and found it a strange combination but as you point out, his pragmatism causes him to entertain the fact “it is what it is.”

Ralph Musgrave said...

I think Messers Mosler and Forstater were the original MMTers advocating the “natural rate of interest is zero” point. See here.

http://pragcap.com/wp-content/uploads/2011/02/WP37-MoslerForstater.pdf

Their basic argument, if I’ve got it right, was that absent any attempt by govt / Fed to manipulate interest rates, the rate would be zero.

Their argument could be bolstered with a couple of other points. First, all the conventional arguments for government borrowing (bar one) are B.S., as I argued here:

http://mpra.ub.uni-muenchen.de/23785/

The one that does stand inspection is the need for govt to supply the private sector with enough money / bonds to satisfy savings desires. However, there is no reason why taxpayers should have to fund interest on such money. Thus the rate should be zero.

Tom Hickey said...

Ralph, Warren and Mat's point is that deficits are the norm since the tendency of the domestic private sector is to net save and a country providing the global reserve currency must run a CAD to accomodate the desire to save in the reserve currency. Therefore, with excess reserves, the interbank overnight rate falls to zero.

Moreover, the overnight rate of interest on risk-free assets is appropriately zero. Anything above that is pure rent that does not involve any sacrifice of liquidity.

IF the cb sets the overnight rate to zero and controls the yield curve, then the private sector determines the price of credit money in the market based on competition and credit assessment.

Some MMT'ers (Warren) would prefer that the government not issue securities of longer maturity than 3 mo bills.

beowulf said...

A. If you try to do this, the magnitude of deficit reduction we need--and we need about $4 to 5 trillion in deficit reduction over the next ten years--to try to do that only on spending cuts in parts of the budget would be irresponsible and really not achievable politically,” said Geithner.
http://www.cnsnews.com/news/article/geithner-calls-revenue-increases-through

B. From 2012-2021, the CBO estimates that the United States will pay out $5.45 TRILLION in total net interest outlays
http://www.davemanuel.com/2011/01/30/the-rising-cost-of-us-debt/

C. "Moreover, the overnight rate of interest on risk-free assets is appropriately zero. Anything above that is pure rent that does not involve any sacrifice of liquidity... Some MMT'ers (Warren) would prefer that the government not issue securities of longer maturity than 3 mo bills" (sez Tom)

So locking the overnight rate at 0 means cutting $5 trillion from the budget deficit from spending cuts alone (net interest is paid out per a permanent appropriation bill).
At this point, I'm starting to think Geithner isn't really an idiot, but is just putting on a persona for the sake of his performance art (like James Franco guest starring on General Hospital as a serial killer named "Franco").

Ralph Musgrave said...

Beowulf, If you’re saying that a big cut in interest payments to the private sector would be deflationary, I don’t agree. The money can be spent on something else, or the money can be left in the pockets of the taxpayers who funded the interest payments, and such money would tend to get spent. So the net result on the “stimulus / deflation” scale would be around zero.

And if the effect were not zero, no problem: every MMTer knows how to boost or damp down economic activity - and there may even be some non-MMTers who know how to do this :)

beowulf said...

Ralph, interest payments are paid out of Tsy General Fund under the "miscellaneous permanent appropriations" statute ("2. to pay interest on the public debt under laws authorizing payment".)
http://www.law.cornell.edu/uscode/31/usc_sec_31_00001305----000-.html

Since Congress authorizes Tsy to create Net Financial Assets to service the debt, net interest that's not paid is NFAs not created. Certainly, Congress SHOULD reallocate equivalent sums to new spending or lower taxes but that would require passage of either a new spending appropriation or amending the tax code.
So to clarify my point; unless Congress adjusts the fiscal stance, a big cut in net interest payments would be deflationary.

Tom Hickey said...

"So to clarify my point; unless Congress adjusts the fiscal stance, a big cut in net interest payments would be deflationary."

And instead of going to rent, the funds not spent could be allocated to public investment like infrastructure, basic research, education, health care, etc. that produces a public returnl.