There Is Something In This More Than Natural - Epilogue
Following up on There Is Something In This More Than Natural - Part 4...
Summary
Summary
- An epilogue examining the misunderstanding of money creation.
- Fed asset purchases under QE is not "money printing" in the traditional sense (via a printing press), but it is money creation.
- Under a prolonged ZIRP environment, Fed asset purchases under QE have had many unnatural side effects.
- These side effects have caused a witches brew of malinvestment or a perversion of capital (misallocation) from productive investment to financial engineering and passive uses.
- There is a synergism between these unnatural side effects and the gradual morphing of our economic base which have formed what some describe as "secular" stagnation.
On September 16, 2014 Bill Fleckenstein got into a startling shouting match with CNBC anchor Jackie DeAngelis. Futures Now host Jackie DeAngelis came out swinging, asking Fleck right at the top: "At what point are you willing to concede that you've misunderstood monetary policy?"
Fleck later reiterates: "I knew [the Fed] would print money, I knew it would be hard to be short [in 2009]. I never expected they would end up printing $3 trillion and that the markets would triple as a consequence, but I knew better than to fight them. That doesn't mean that this will end well."
Business Insider reported here and Fleck addressed the shouting match in a new interview with King World News.
Seeking Alpha contributor Shareholders Unite opines Bill Fleckenstein Does Misunderstand Monetary Policy.
"We think CNBC's Futures Now host Jackie DeAngelis asked a few poignant questions, questions which Fleckenstein hasn't really answered.
Yet the predicted mayhem has not materialized, at least not yet, and we're going to explain that Fleckenstein indeed misunderstands monetary policy. What the Fed has done, buying assets, under the diverse QE programs, isn't money printing.
It's as simple as that. The Fed is mostly pushing on a string, stuffing the banking system with reserves, but since credit demand is rather tepid, most of these reserves just sit there, in the accounts of the commercial banks at the Fed. The quantity of money (a rather elusive concept anyway), isn't under direct control of the Fed.
The simple truth is that money enters the economy mostly via credit from the commercial banks. If banks give a customer credit, the credit his account, and since the customer can now buy stuff new money is created in this act.
Now, it's probable that some of the QE money has entered the financial markets, and we know QE has lowered bond yields, albeit to a moderate extent. We actually agree to a certain degree with Fleckenstein that the markets are expensive, overvalued perhaps.
But Fleckenstein has berated the Fed for years for the "money printing", in no uncertain terms ("idiots at the Fed" "Zimbabwe" etc.).
We might very well live in a situation in which desired savings and investment can only be equated at negative rates, due to a combination of a world savings glut and a secular decline in investment...
Add the deleverage after the financial crisis, and you have very low rates all by themselves, without much help from any central bank."The Nattering One muses... we started our Connecting the Dots series with some astute observations from Shareholder's Unite re: Secular Stagnation.
Although we agree on many things, this observation of Clarice Starling comes to mind, "You use Evian skin cream, and sometimes wear L'Air du Temps, but not today."
We beg to disagree on the semantics being used to flog Mr. Fleckenstein, whose theme might be coined from the Nina Simone song "Don't Let Me Be Misunderstood".
Shareholder's Unite's comments in italics, our answers below.
1. Questions which Fleckenstein hasn't really answered. True, in his rebuttal he did not address those questions.
2. Fleckenstein has berated the Fed for years for the "money printing", in no uncertain terms. True, for years Fleck has been a Fed critic and perma bear.
2. The quantity of money isn't under direct control of The Fed. True, but their policies can greatly effect it. IMO, an overstatement from a recent study by the BOE: "Monetary policy acts as the ultimate limit on money creation."
3. It's probable that some of the QE money has entered financial markets, and we know QE has lowered bond yields. QE is predominately an asset swap with CB counter parties which has had the side effect of lower bond yields.
From Connecting the Dots Part 1: QE does NOT increase the quantity of savings when the Fed trades a bond for a deposit. (This is a pure asset swap.) The quantity of net assets stays the same, but asset composition changes. This reduction in the quantity of treasury bonds is equivalent to the Fed taking that bond out of circulation and a bank receiving the deposit.
In addition, the bond supply or bond asset float is reduced. i.e. with the Fed holding 50% of an issuance, they can greatly influence pricing levels, making the price signaling mechanism unreliable and honest price discovery quite difficult.
4. What the Fed has done, buying assets, under the diverse QE programs, isn't money printing. True and false, its semantics.
SOMA (System Open Market Account) holdings as defined by the Fed:
- Collateral for U.S. currency in circulation and other reserve factors that show up as liabilities on the Federal Reserve System's balance sheet.
- A tool for the Fed’s management of reserve balances.
- A store of liquidity in the event an emergency need for liquidity arises.
The new money swells the size of bank reserves in the economy by the quantity of assets purchased...The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank."
On November 11, 2010 a 30-year old real estate manager named Omid Malekan spent a couple hours with a script and XTranormal's free cartoon editing program to create a 6-minute explanation of what the Fed was trying to do with quantitative easing.
Below this wonderful animation titled Quantitative Easing Explained. Link to Mr. Malekan's Slate interview.
An interrogatory much like in the above video: Did the money to purchase the assets come from the existing stock of money? No. Was the money printed? Technically, No. Was the money created electronically? Yes. So this money did not exist before? No. Therefore, the money was created? Yes.
Shareholders Unite stated: "The simple truth is that money enters the economy mostly via credit from the commercial banks. If banks give a customer credit, they credit his account, and since the customer can now buy stuff new money is created in this act."
Therefore, the Fed asset purchases under QE is not "money printing" in the traditional sense (via a printing press). The majority of this manufactured "liquidity" has been used to transmogrify or launder toxic debt, and is arbed for profit by the banking system.
Thus, the credit issued by the Fed under QE is newly created and "money like" (but not in the traditional sense, of a different nature) which has many side effects under a ZIRP environment:
A. A large and growing difference between the issuance of debt instruments and their float (the real quantity in play in the market).
B. Real supply and liquidity of the market is effectively reduced.
C. Yield, price and their market mechanisms no longer reflect real world conditions, i.e. actual value, potential inflation.
D. Support for lower interest rates, flattening of yield curves and financialism as opposed to real economic investment.
E. Decreased supply of lower risk assets leads to yield chasing with higher risk assets and financial alchemy (derivative, synthetic).
F. Increased demand for higher risk assets, leads to artificial inflation of other cash flow generating assets (curve inversions, negative yields).
G. Increased corporate (i.e. low interest buy back and dividend), household and government debt.
5. We might very well live in a situation in which desired savings and investment can only be equated at negative rates, due to a combination of a world savings glut and a secular decline in investment... and you have very low rates all by themselves, without much help from any central bank.
We do not wish to confuse cause and effect. The side effects listed in item #4 were to a large extent, aided, abetted and caused by CB policies of QE and prolonged ZIRP.
This has led to increased malinvestment or a perversion of capital (misallocation) which is the anathema of an accumulation of productive capital. "Gravity" has been defeated as capital gravitation has been reversed...
to leveraged borrowing of easy money to chase speculative yield (buy backs) and to lay fallow in the form of bonds (for the purchase of low risk government debt), rather than productive uses such as investing in the future (RandD, CAPEX, lending for organic economic expansion).
Had normal market forces been at work, we would not be seeing these "unnatural" occurrence's. There is a synergism between these unnatural side effects and the gradual morphing of our economic base (manufacturing base outsourcing) which have formed what so called experts mistakenly describe as "secular" stagnation.
The distortions and false positives of our condition cause misdiagnosis, this is one of the problems at the crux of our economic malaise. One toe of ZIRP, two pinches of QE, three feathers of morphing (manufacturing base outsourcing), a smidgen of secular stagnation; to form a Witch's Brew in which "There Is Something In This More Than Natural".
At the end of the day, semantics, the Fed didn't print money, they "created" something money like. In any event, Fleck has the right to congratulate or berate them accordingly. Just like an asshole, everyone has an opinion.
We complete this six year circle of life in Atla's Shrugged Unnaturally, stay tuned, no flippin
Recommended reading:
Atlas Shrugged or Let Nature Take It's Course?
There is Something In This More Than Natural
There Is Something In This More Than Natural - Part 2
There Is Something In This More Than Natural - Part 3
There Is Something In This More Than Natural - Part 4
There Is Something In This More Than Natural - Epilogue
Atla's Shrugged Unnaturally
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