As long as the no-overdraft rule stays in place Tsy will need to issue debt. And as long as the FED wants to keep near zero interest rates they will have to buy back a lot of these debts. So without much growth this picture will go on for a long time, call it QE or not.
By the way, The Netherlands, in a fundamentally different position of course, moved to issuing mainly very short debt to keep interest costs as low as possible since the start of the crisis, Lehman. Maybe an idea for Italy etc.
Especially given the ECB’s ~3-year guarantee. Though beyond lowering the int payments on new issues, all it would do is buy time–which now appears to have been the EMU’s agreed-upon objective?
@WARREN MOSLER, Warren , as far as I understand MMT prefers to cancel the govt debt issuing machine altogether.
How would you see that operationally?
a. cb and tsy remain separate and tsy runs overdraft at cb or
b. cb and tsy will be consolidated into one new organization
either way.
But this is not a net drain of financial assets. The Fed purchased those assets, and the income streams that go along with them. They exchanged up-front provisions of liquidity for staggered payment commitments. In aggregate its just an overall swap of a front-loaded payment schedule for a more extended payment schedule. Perhaps it doesn’t have much effect, but there must be some reason that the sellers of those assets will willing to make the exchange.
the way I understand – these numbers indicate the interest that Fed paid itself on securities that it holds, and that would have gone to private sector, if private sector held them.
I don’t think private sector got this income when they sold the securities to the Fed.
Before Congress and the White House go eyeball to eyeball again over the next ratcheting up in the debt ceiling debate, the $1.7 Trillion of Tsys held by the Fed which generated that interest income should be recognized as fictitious. This would pull the relevant political participants back from the brink and buy time to work out more rational solutions.
@Ed Rombach, That would definitely help I think in clarifying the actual picture for the public, I think. Although it is mediated by the private sector dealers, in actual functional effect a lot of Treasury debt is just “borrowing” from the Fed. Treasury’s expanding liabilities toward the Fed are rolled over and over, with rapidly compounding numbers on the books. But these big numbers are just pseudo-liabilities that will always be rolled over by more “borrowing” from the Fed and represent no commitment of future injections of money into the private sector. They bamboozle the public with the illusion of future debt burdens and inflationary pressures that don’t really exist. The entire functional effect of all of these intergovernmental operations could be accomplished much more directly by having the Fed simply credit the Treasury accounts with whatever amount of spending into the private sector is actually enabled via the intragovernmental debt issuance.
@Gary, Gary, the interest goes from the fed to the Treasury, not from the Fed to the Fed. But that’s not the important thing. We can consider it all as one big government sector.
The important thing is that to acquire these assets, the Fed had to buy them from someone in the private sector. Before the Fed purchases one of these assets, some private sector entity owns it, and it represents the delivery of a certain quantity of interest and principle payments to them on a pre-determined schedule. After the Fed buys the asset, that private sector entity will no longer receive that schedule of payments. But in order to buy the asset, the Fed had to give the seller money. So we’re not talking about a simple drain of money.
To oversimplify, if I have a government bond that is supposed to pay me $1, $1, and then $10 over a three month period, and the government buys that bond back from me for $11 in cash, we can indeed say that over a three month period the cash-for-bond swap represents a total diminution of $1 in government injection of dollars into the private sector. The government injects $11 now and then extracts $12 over the next three months. But time and schedules are always a factor in transactions, not just quantity. If I am indeed willing to swap the bond for $11 in cash, then presumably I have a somewhat rational business reason to do so.
@Dan Kervick, or the Fed could have bought it for 12$ and then later say it received 2$ in interests paid to itself and give it to the Tsy, in which case you can’t say interest income has been removed from the private sector?
yes you can
yes, you can say it, but it’s not correct given what most people understand by having interest income removed from the economy.
yes, on a risk adjusted basis you could say it was a fair trade at the time.
but a year later it looks like the Fed ‘won the bet’ and removed interest income that would have remained in the economy.
yes, if the fed had hiked right after it bought the securities it could have added the income back via interest paid on reserves, etc.
but it didn’t.
@WARREN MOSLER, True enough, Warren. I am curious about how QE looks from the two different sides of the transaction. From the Fed side, it looks like they might have been motivated by false monetarist theories about the impact of liquidity injections of reserves on bank lending.
But what about from the side of the buyers? Are the bankers confused about their own operations? Why did they want the additional reserves.
Was all the QE all just about continuing the bailout of bad banks under the guise of monetary policy? Did the banks need the additional reserves just to be able to make their payments?
the banks never want additional reserves. its the presence of additional reserves as per fed policy that alters the term structure of rates to indifference levels given the actual quantity of reserves.
I know this has been covered before here.
But is this a reasonable explanation:
(1) Dan sells a bond to the Fed at X
(2) The Fed collects coupon payments C as time passes
(3) The Fed gives C to Treasury
(4) The Fed sells the bond back to Dan for Y
At the beginning and end the Fed doesn’t have the bond or any extra cash. Dan has some extra cash X-Y, but it is not necessarily the case that X-Y >= C. It could be, if as Warren notes rates change. If all term rates are 0 then X-Y=C. But if you work through what X and Y are in typical rate environments you will find that generally X < Y. Mainly because that large principal payment is nearer when Dan buys than when he sells and increases the price of the bond.
Doesn’t the interest income go back to Treasury, which is then spent by Congress? Isn’t this more of a distributional effect than income drain?
again – the way I understand – is that Treasury spends whatever is budgeted by Congress, and it always can spend whatever is budgeted without regard if Fed returns the interest or not. So Fed returning interest does not make it possible for Treasury spend more or less.
@Gary, Except that we learned during the debt ceiling debate that this is not entirely true. There are in effect two layers to Congressional authorization of spending. There are the basic spending authorizations themselves, and then there are the tax revenue decisions and debt issuance restrictions that Congress imposes which apply aggregate legal constraints on Treasury disbursements. Since treasury is not permitted to overdraw its accounts at the Fed, then as a result of this two-layer process, Congress can end up cancelling via the second layer some amount of the aggregate spending authorization it issued in the first layer.
When the Fed purchases existing Treasury bonds, it loosens up the legislatively imposed debt ceiling cap just a bit, by effectively recapturing some of the interest payments treasury is required to pay on its existing debt issue and crediting that amount to the Treasury account as revenue.
@Gary, The Treasury is a disbursing agent. It pays for government obligations. Government obligations can be limited for discretionary spending (the 12 appropriation laws, which in 2012 is about $1 trillion) but not limited by mandatory spending (entitlements authorized by law for mostly medicare, medicaid, and interest payments, which in 2013 is about $2 trillion. The government spenting results from laws passed by Congress. Treasury must use tax and other revenue (like donations from the public and the Fed’s recent payment) to pay (liquidate) the obligations. If there isn’t sufficient revenue, the Treasury then borrows what is necessary to pay the bills. The Treasury used to “borrow” the cash flow from the Social Security Trust Fund, but that has dried up. Now they borrow from the Thrift Savings Funds as well as by issuing Treasury securities.
if you assume congress is spending more than otherwise due to interest income, yes.
but doesn’t seem like that’s the case. Congress seems to be heck bent on cutting and budget balancing and balanced budget amendments, etc.
Congress being heck bent on budget balancing does imply that it is spending more than otherwise (without the interest income), no?
seems they are spending as little as possible, thinking that in any case they need to cut $4trillion as per the president?
Would this not fit into the belief that this refunded interest income is new government “revenue”, thus lessening the political justification for other taxation, or similarly, does it not offset some deficit spending?
I think the question should be who originally held these securities? Certainly not those in the lower income brackets (with the exception of their stake in pension funds). Does the removal of this income not act as a voluntary tax on the rich and institution investment firms in some way?
“…what about from the side of the buyers? Are the bankers confused about their own operations? Why did they want the additional reserves”.
Good point. This is indeed a key question – seems like it’s not only the Fed and academic economists that are guilty of confusion and misunderstanding over the nature of QE.
I wonder how much profit a central bank could make if it were run like a “sovereign wealth fund”. Not only buying treasury bonds but also private investment. What would be the macro and distributional effects?
As long as the no-overdraft rule stays in place Tsy will need to issue debt. And as long as the FED wants to keep near zero interest rates they will have to buy back a lot of these debts. So without much growth this picture will go on for a long time, call it QE or not.
but the tsy could just issue nothing longer than 3 mo bills, which would act like qe does today re long rates.
@WARREN MOSLER,
I agree with you.
By the way, The Netherlands, in a fundamentally different position of course, moved to issuing mainly very short debt to keep interest costs as low as possible since the start of the crisis, Lehman. Maybe an idea for Italy etc.
@walter,
Especially given the ECB’s ~3-year guarantee. Though beyond lowering the int payments on new issues, all it would do is buy time–which now appears to have been the EMU’s agreed-upon objective?
@WARREN MOSLER, Warren , as far as I understand MMT prefers to cancel the govt debt issuing machine altogether.
How would you see that operationally?
a. cb and tsy remain separate and tsy runs overdraft at cb or
b. cb and tsy will be consolidated into one new organization
either way.
But this is not a net drain of financial assets. The Fed purchased those assets, and the income streams that go along with them. They exchanged up-front provisions of liquidity for staggered payment commitments. In aggregate its just an overall swap of a front-loaded payment schedule for a more extended payment schedule. Perhaps it doesn’t have much effect, but there must be some reason that the sellers of those assets will willing to make the exchange.
@Dan Kervick,
the way I understand – these numbers indicate the interest that Fed paid itself on securities that it holds, and that would have gone to private sector, if private sector held them.
I don’t think private sector got this income when they sold the securities to the Fed.
@Gary,
Before Congress and the White House go eyeball to eyeball again over the next ratcheting up in the debt ceiling debate, the $1.7 Trillion of Tsys held by the Fed which generated that interest income should be recognized as fictitious. This would pull the relevant political participants back from the brink and buy time to work out more rational solutions.
@Ed Rombach, That would definitely help I think in clarifying the actual picture for the public, I think. Although it is mediated by the private sector dealers, in actual functional effect a lot of Treasury debt is just “borrowing” from the Fed. Treasury’s expanding liabilities toward the Fed are rolled over and over, with rapidly compounding numbers on the books. But these big numbers are just pseudo-liabilities that will always be rolled over by more “borrowing” from the Fed and represent no commitment of future injections of money into the private sector. They bamboozle the public with the illusion of future debt burdens and inflationary pressures that don’t really exist. The entire functional effect of all of these intergovernmental operations could be accomplished much more directly by having the Fed simply credit the Treasury accounts with whatever amount of spending into the private sector is actually enabled via the intragovernmental debt issuance.
@Gary, Gary, the interest goes from the fed to the Treasury, not from the Fed to the Fed. But that’s not the important thing. We can consider it all as one big government sector.
The important thing is that to acquire these assets, the Fed had to buy them from someone in the private sector. Before the Fed purchases one of these assets, some private sector entity owns it, and it represents the delivery of a certain quantity of interest and principle payments to them on a pre-determined schedule. After the Fed buys the asset, that private sector entity will no longer receive that schedule of payments. But in order to buy the asset, the Fed had to give the seller money. So we’re not talking about a simple drain of money.
To oversimplify, if I have a government bond that is supposed to pay me $1, $1, and then $10 over a three month period, and the government buys that bond back from me for $11 in cash, we can indeed say that over a three month period the cash-for-bond swap represents a total diminution of $1 in government injection of dollars into the private sector. The government injects $11 now and then extracts $12 over the next three months. But time and schedules are always a factor in transactions, not just quantity. If I am indeed willing to swap the bond for $11 in cash, then presumably I have a somewhat rational business reason to do so.
@Dan Kervick, or the Fed could have bought it for 12$ and then later say it received 2$ in interests paid to itself and give it to the Tsy, in which case you can’t say interest income has been removed from the private sector?
yes you can
yes, you can say it, but it’s not correct given what most people understand by having interest income removed from the economy.
yes, on a risk adjusted basis you could say it was a fair trade at the time.
but a year later it looks like the Fed ‘won the bet’ and removed interest income that would have remained in the economy.
yes, if the fed had hiked right after it bought the securities it could have added the income back via interest paid on reserves, etc.
but it didn’t.
@WARREN MOSLER, True enough, Warren. I am curious about how QE looks from the two different sides of the transaction. From the Fed side, it looks like they might have been motivated by false monetarist theories about the impact of liquidity injections of reserves on bank lending.
But what about from the side of the buyers? Are the bankers confused about their own operations? Why did they want the additional reserves.
Was all the QE all just about continuing the bailout of bad banks under the guise of monetary policy? Did the banks need the additional reserves just to be able to make their payments?
the banks never want additional reserves. its the presence of additional reserves as per fed policy that alters the term structure of rates to indifference levels given the actual quantity of reserves.
@WARREN MOSLER,
I know this has been covered before here.
But is this a reasonable explanation:
(1) Dan sells a bond to the Fed at X
(2) The Fed collects coupon payments C as time passes
(3) The Fed gives C to Treasury
(4) The Fed sells the bond back to Dan for Y
At the beginning and end the Fed doesn’t have the bond or any extra cash. Dan has some extra cash X-Y, but it is not necessarily the case that X-Y >= C. It could be, if as Warren notes rates change. If all term rates are 0 then X-Y=C. But if you work through what X and Y are in typical rate environments you will find that generally X < Y. Mainly because that large principal payment is nearer when Dan buys than when he sells and increases the price of the bond.
Doesn’t the interest income go back to Treasury, which is then spent by Congress? Isn’t this more of a distributional effect than income drain?
@pebird,
again – the way I understand – is that Treasury spends whatever is budgeted by Congress, and it always can spend whatever is budgeted without regard if Fed returns the interest or not. So Fed returning interest does not make it possible for Treasury spend more or less.
@Gary, Except that we learned during the debt ceiling debate that this is not entirely true. There are in effect two layers to Congressional authorization of spending. There are the basic spending authorizations themselves, and then there are the tax revenue decisions and debt issuance restrictions that Congress imposes which apply aggregate legal constraints on Treasury disbursements. Since treasury is not permitted to overdraw its accounts at the Fed, then as a result of this two-layer process, Congress can end up cancelling via the second layer some amount of the aggregate spending authorization it issued in the first layer.
When the Fed purchases existing Treasury bonds, it loosens up the legislatively imposed debt ceiling cap just a bit, by effectively recapturing some of the interest payments treasury is required to pay on its existing debt issue and crediting that amount to the Treasury account as revenue.
@Gary, The Treasury is a disbursing agent. It pays for government obligations. Government obligations can be limited for discretionary spending (the 12 appropriation laws, which in 2012 is about $1 trillion) but not limited by mandatory spending (entitlements authorized by law for mostly medicare, medicaid, and interest payments, which in 2013 is about $2 trillion. The government spenting results from laws passed by Congress. Treasury must use tax and other revenue (like donations from the public and the Fed’s recent payment) to pay (liquidate) the obligations. If there isn’t sufficient revenue, the Treasury then borrows what is necessary to pay the bills. The Treasury used to “borrow” the cash flow from the Social Security Trust Fund, but that has dried up. Now they borrow from the Thrift Savings Funds as well as by issuing Treasury securities.
if you assume congress is spending more than otherwise due to interest income, yes.
but doesn’t seem like that’s the case. Congress seems to be heck bent on cutting and budget balancing and balanced budget amendments, etc.
Congress being heck bent on budget balancing does imply that it is spending more than otherwise (without the interest income), no?
seems they are spending as little as possible, thinking that in any case they need to cut $4trillion as per the president?
Would this not fit into the belief that this refunded interest income is new government “revenue”, thus lessening the political justification for other taxation, or similarly, does it not offset some deficit spending?
I think the question should be who originally held these securities? Certainly not those in the lower income brackets (with the exception of their stake in pension funds). Does the removal of this income not act as a voluntary tax on the rich and institution investment firms in some way?
@ Dan Kervick
“…what about from the side of the buyers? Are the bankers confused about their own operations? Why did they want the additional reserves”.
Good point. This is indeed a key question – seems like it’s not only the Fed and academic economists that are guilty of confusion and misunderstanding over the nature of QE.
Warren, what’s your take on this?
I wonder how much profit a central bank could make if it were run like a “sovereign wealth fund”. Not only buying treasury bonds but also private investment. What would be the macro and distributional effects?
what would the public purpose be?
Reduction and stabilization of risk premiums?
It’s .5% of GDP.
That’s a lot.