Oct

7

The fed's quantitative easing policy per se is nothing but bad for banks.

1. QE forces the member banks to have excess reserves as assets on their balance sheet. These balances earn only .25% lowing the banking system's net interest margin, return on assets, and return on equity

2. To maintain high enough average net interest margins (that include the holding of excess reserves) to attract capital, banks tend to charge a bit more for loans to business and consumers, which causes more borrowers to go direct to credit markets and private lenders in general. In other words, qe tends to support disintermediation, as those who can avoid the banks.

3. QE lowers interest income paid by government to the economy, as per the $100 billion of fed profits turned over to treasury last year. Lower interest income makes the economy that much less credit worthy, thereby lowering its ability to borrow and service bank loans.

Bottom line: QE is a tax on the economy. And QE is functionally the same as the TSY not having issued the securities in the first place.

However I favor, for example, the TSY not issuing anything longer than 3 mo bills, which is functionally 'QE max'

Yes, it reduces aggregate demand.

But, for example, I'd rather get my aggregate demand, for a given size government, from lower taxes than from the TSY or Fed paying interest. But that's just me. 

Rudy Hauser writes: 

The fact that banks hold so much in excess reserves is because they apparently prefer the returns over those of equally short-term T bills. They appear to want to hold such safe short-term assets for whatever reason. One would expect them to want to earn higher returns at some point. Hence the concern as to whether such actions could lead to a drastic reduction in excess reserves and explosions in M1 and M2, with all its inflation risk. The Fed could try to offset this but whether the will to take necessary action will be there or the ability is somewhat questionable. But that does not appear to be a risk for the immediate future.

Aug

14

 A note and a chart today from Warren Mosler .

Funny how little attention, if any, is focused on how corporate profits are a function of federal deficit spending?

Ideological conflicts?

Nothing new about the idea that deficit spending and profits are related: [from Wikipedia]

"Kalecki's most famous contribution is his profit equation.     P_N=C_P+I+D_g+E_e-S_w

In this model total profits (net taxes this time) are the sum of capitalist consumption, investment, public deficit, net external surplus (exports minus imports) minus workers savings."

The above chart shows US Corporate Profits YOY change, quarterly (source: BEA).

In any case, without an increase in net exports or some kind of material increase in credit expansion the decline in the federal deficit is highly problematic.

Gary Rogan writes: 

But what if reducing deficit spending encourages "capitalist" investment? Kalecki's equation also assumes that all the "workers'" wages are spent. If all the money printing stopped and interest rates rose what would be the effect on savings by "the workers"? These types of equations are static identities with some simplifying assumptions and ignore various feedback loops. Seems pretty similar to the Keynesian assumption that government spending like crazy has exactly the same positive effect as companies and individuals making their own spending and investment decisions. It is well known that when consumers are aware of deficit spending they reduce their own spending in anticipation that they will eventually be taxed (and I assume inflated out of their money) to eventually pay for that deficit spending.

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