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Federal Reserve to shed $4.5 trillion in bonds

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  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Schmidt Wrote:

    New York Times, April 7, 2017: The Economy May Be Stuck in a Near-Zero World

    Carlitos -- While its hard to say what the overall effect the shedding of the bonds will have on the economy, there are some economists who are suggesting that the Fed's low interest rate policy during recessions may have run its course. If we have another recession while the nominal interest rate is still relatively low, then the Federal Reserve's ability to stimulate the economy with interest rates cuts has its limits...a zero interest rate.

    If monetary policy changes in interest rate cuts are ineffective, then we will be dependent on Congress to use fiscal policy to stimulate the economy. With the hard case fiscal conservatives in Congress, it is hard to see Congress acting in even a modest way like they did with the stimulus package of spending to halt the slide in the Great Recession. There is even talk of a government shutdown.

    So in a sense, I suppose raising interest rates slowly now gives the Fed some room to cut the rates in a recession, whenever that occurs. But shedding bonds from the last recession at the same time as interest rate hikes are occurring could have the wrong effect on the economy.

    Just thinking out loud....wondering what's going to happen in the next year with Trump, Congress and the Fed not always working in unison.

    Schmidt,

    Interest rates are a small component of the decision to invest, so monetary policy is always second fiddle to fiscal policy. So effects of interest changes are ambiguous depending on other specifics. Most often higher rates correspond to higher inflation and lower rates correspond with lower inflation, which is the exact opposite of what we are taught and led to believe.

    So fiscal policy is always what's most important.

    The economy is like an Olympic runner that runs very fast. But if you put a bag over their head that restricts their ability to breathe, they can't run that fast, and maybe not at all.

    We wouldn't call taking the bag off the runner's head 'stimulus.'

    Congress has put a bag over the economy's head in the form of a macro constraint on the economy.

    So we don't need 'stimulus'; we need to end overtaxation per size of government + the given credit expansion.

    We need to make sure the government is the proper size doing what it should be doing and then use taxes to regulate the temperature in the economy to make sure its hot and output is booming.

  • Liberal Democrat
    Democrat
    Colorado Springs, CO
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    Although we have the world's largest economy, we still cannot ignore what other countries are doing.

    MSN, Bloomberg, April 19, 2017: Markets start to ponder the $13 trillion gorilla in the room

    The central banks of the USA, Japan and Europe are now contemplating how they might all reverse the actions they took during quantitative easing and start shedding their QE bonds. The three combined balance sheets total $13 trillion.

    "You know what they say about mountaineering right? The descent is always more dangerous than the ascent," said Stephen Jen, London-based chief executive of hedge fund Eurizon SLJ Capital Ltd. "Shrinking the balance sheet will be the descent."

    Maybe nothing to worry about, since very few of us understand anything about what is going on at the central banks.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    Totally ignoring that the response of money contolled by an infantessimally small number of individuals does not respond to traditional macro reactions. The reactions now would be similar to pre 29 crash reactions. At what point I don't know but somebody should be getting brave enough to say okay, the big correction is about here. Another surge past 20000 without a reconciling GDP will be too late.
  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    Think about it. How can 20000 have any meaning without a corresponding GDP? My terms might be wrong because I am an ill read diesel mechanic but I'll bet the concept is dead on.
  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Schmidt Wrote:

    Although we have the world's largest economy, we still cannot ignore what other countries are doing.

    MSN, Bloomberg, April 19, 2017: Markets start to ponder the $13 trillion gorilla in the room

    The central banks of the USA, Japan and Europe are now contemplating how they might all reverse the actions they took during quantitative easing and start shedding their QE bonds. The three combined balance sheets total $13 trillion.

    "You know what they say about mountaineering right? The descent is always more dangerous than the ascent," said Stephen Jen, London-based chief executive of hedge fund Eurizon SLJ Capital Ltd. "Shrinking the balance sheet will be the descent."

    Maybe nothing to worry about, since very few of us understand anything about what is going on at the central banks.

    Reverse-QE will simply add interest income to the economy, which is a good thing all things considered.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    QE put money in the economy by buying government bonds, now reversing that project which normally shortens the money supply now "adds interest income". Adding interest income is a move only available when discretionary money is a huge surplus a "luxury". Stagnating more more money. When a move that normally shortens the money supply precipititates a move that is counter productive the economy is in big trouble. Economist don't know how to deal with a situation where a huge section of money is not responsive to traditional economic functions. Too much money is stagnated.

    It's not an economy any more.

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    "Reverse-QE will simply add interest income to the economy, which is a good thing all things considered."

    Why doesn't reverse QE shorten the money supply???

  • Strongly Liberal Democrat
    Democrat
    Dallas, TX
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    Chet,

    I'm going to refer you to MMT's free "Money and Banking" blog and book at New Economics Perspectives.

    neweconomicperspectives.org/money-banki...

  • Strongly Liberal Democrat
    Democrat
    Pensacola, FL
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    Carlitos Wrote:

    Chet,

    I'm going to refer you to MMT's free "Money and Banking" blog and book at New Economics Perspectives.

    neweconomicperspectives.org/money-banki...

    Tks. I'll study that before I comment again.