Bondage and Diss-da-fins

Mea cupla a bit. I got privately scolded for abusing a bond trader who had a chat with an MMT educator. It was ok to be scolded, since I did not think I was being abusive of character. I was for sure being abusive about the menaing of some strings of words coming at me from my audio speaker, which is not good. It’s nicer to make a point for the source of the words and leave people alone to ponder.

I could have been construed as behaving abusively in my writing. However, I have some more to say about that.

First is, which bond trader millionaire cares what I have to say about their character? How on earth are they ever going to make me feel less powerful and invisible and gaslit than I already am?

Second, their charatcer is unknown to me, but anyone with any moral recitutde knows trading the financial markets is parasitism. It’s not good for your soul. Rich men and eyes of needles and whatnot. So I think it is fair game to critique the thinking of financial traders. I would like them to be better people and support MMT. Not just merely support MMT.

Thirdly, his (no names today) thinking was for sure 𐝥ꗍꖡꗇ𐝥ꕒꗍꕒ. As in backwards. Not a slur on his character as a father, fair sportsnman, or grandfather or anything, he might be a thoroughly decent bloke (I just hihgly doubt it, just based on what wordws came out of his mouth (I was only listening to audio)).

There were more matter-of-fact issues at stake, and I’d like to mention two of them today,

• Does QE risk asset price inflation?
• Is the bond market a really good indicator of things macroeocnomic?

Does QE risk asset price inflation?

Answer is no.

You cannot force a bond trader to swap for cash. They won’t, unless they see a better investment vehicle. But then why were they trading or saving in bonds?

The cause of asset price inflation comes from other economic policy and structure. That cause is why the savers want to get out of bonds and into equities. They see a dip in the real-estate market, and a better real rate of return, so will swap bonds for cash, and then cash for the real estate (or any other equities or commodities). QE has nothing to do with it.

Investors go into and out of bonds all the time. Exercising their savings preferences. When the central bank “does a QE” do you think that matters at all? I don’t think it matters. If the bankers are the only ones cashing in the bonds then it matters even less, since it then has zero effect on their lending capacity, except at the accounting prudential requirement margins.

QE increases bank reserves (exchange settlement balances) but these have no effect whatsoever on the credit-worthiness of the bank customers. If anything, they reduce credit-worthiness in the macro since now the non-government sector has no juicy billions of dollars in interest-income each month as fuel.

In some countries the central bank may now pay interest on excess reserves, which can add to bank capital, but really, we should just not have bankers in the business of equity and asset investment. They do not belong in that space. But in any case, that is still not going to push up asset prices.

It is more often the case that government austerity pushes up asset prices. Why? Because being starved of the injections, the rentier sector will just raise their price, until the rent-payers scream. For the same reasons the effective bid auctions on other assets goes into high rise mode.

The relative price story is thus far more dynamical and complicated than just QE putting in more reserves into the payments clearing layer.

Also, it’s the rate of change in income that matters, not how much QE totalled. So after a QE event, nothing else happens unless there is a continued source of income. To a fairly significant extent that source is government interest payments on bonds. The opposite of QE.

You should instead analyze all assets and commodities separately, since they are often totally separate stories. In real-estate, it’s the cabal of property evaluators mixing with agents that help push up price. It’s the upper class snobs desires to have second homes, and speculation in the market thereupon. It’s the whole mindset of a house as an asset (it is not a real savings vehicle, since property depreciates in real terms — This is why real estate price booms are always ponzi.) You cannot stamp out the greed, especially not when government policy is forcing people to have insatiable savings desires (really for no good reason).

QE has nothing much at all to do with all this greed.

Meanwhile, Mary the plumber and Joe the hair-stylist are left just wanting a house to live in, but see ridiculous prices for this basic need, and it has nothing at all to do with QE. It has everything to do with greed.

Is the Bond Market Important?

Answer is no. Not even under fixed exchange rates.

The currency issuer does not need to set a non-zero interest rate. The commercial banks can be permitted by law to charge interest, or not. In Islamic Banking they do not, and nothing bad happens.

If you just love interest rates then go read Derek McDaniel at RateDisparity, he is a non-ZIRPer, and I disagree with his rationale, but if you want the case to be made no one I know will make it better.

My case is maybe more complicated for people to easily see, but once you see it then it’s simple.

First, under ZIRP the non-government sector gets starved of basic income for people who already have money. So this is a good thing, you do not want to give it up by having a positive interest rate policy unless you absolutely must.

A fixed exchange rate could be a reason, but is not an absolute must. Why not? It is because the degree of freedom that squirts out and “blows up” when exports cannot help stabilize import price ratios, is inflation.

But here “blow up” is emotive and really incorrect, so slap me on the wrist. What happens with a weak export economy is that import price rises can pass-through to inflate domestic goods, especially when energy and/or food is a big import needed for domestic fuel. There is thus a one-time upwards adjustment in the price level when imports undergo a jump. This is not inflation though, it is one-off adjustment, or re-gauging.

But psychologically to people it can appear like inflation, so is politically undesirable.

OK, but it cannot cause hyperinflation. Even hyperinflation is not a “blow up”, but that’s the metaphor people use, it is designed to scare. It induces austerity thinking, which crushes the working classes, always.

What can cause politically damaging inflation rises is when the government indexes certain payments to a backwards (as in yesterday) measure of the price levle change. This is a feedback effect whenever the government adopts a fixed exchange rate or commodity peg.

It is not a constraint when on a floating exchange rate, since the exchange rate adjustment is the first mover of preferences, and all a government then needs to do is make domestic policy adjustment to ensure full employment, so the pass-through effect of import prices should be irrelevant (it is not today irrelevant because the government policy is backwards, in the sense of having a fixed exchange rate model).

Now let’s go back to a fixed exchange rate regime. Even then the need for a positive interest rate is not a necessity. If the government has to withdraw demand they can raise taxes. But suppose they cannot find the will to do so, then they also have the option of offering savings bonds to withdraw demand temporarily. They have a third option which is to reduce spending (austerity). But this can become unstable, it can spiral down until mass unemployment cripples the real economy. In this case the government has allowed spreadsheet issues to bleed into the real economy.

In fixing the exchange rate the government is promising to deliver a currency it cannot create. Thus needs holding of the foreign currency, thus needs the exporters to get cracking. Because the government tend not to sell to foreign buyers, so tends to have to borrow foreign currency from banks. Relying on forex swaps to repay. If they cannot fundamentally repay thanks to strong exports then the forex swap puts pressure on the currency, and to maintain the fixed exchange rate the government will be “forced” to cut spending or reduce domestic demand in other ways: raise taxes, cause mass unemployment, promise a higher interest rate on their own currency. All these things most probably, if exports go south, or merely if exports fail to keep pace with import demand.

Such are the woes of fixed exchange rate regimes and commodity pegs. 𐝥ꗍꖡꗇ𐝥ꕒꗍꕒ policy woes. So why? Why be 𖦪𖠢𖢧𖧥𖦪𖦧𖠢𖦧? There’s no need.

One alternative, to avoid mass unemployment and austerity, is to just let the inflation rate be what it needs to be. Focus on full employment, since you can do no better. No one dies, everyone eats well, we can all go to the movies.

But…. people hate going to the movies and eating well when their wages go up too fast. They prefer their wages to be pretty constant, and starve. Go figure.

That’s only half sarcastic. People do of course prefer prices to remain stable. It’s just our psychology.

Heck, even I prefer knowing the price a year out will be about the same as today. It aids planning and stuff.

But what I do not like to see is unemployment, because that means people are suffering. To heck with my prices. I do not care about prices when people are suffering. If to eliminate the suffering we need wage inflation, then we should have wage inflation. Forever.

The full employment policy almost always increases the real wage anyway. Thus we would all be better off.

What is not cool though, is the preference most people have developed or culturally learned, to prefer seeing other people unemployed rather than their prices and wages go up. It’s a mental disease, with horrific consequences.

OK, but letting the inflation rate loose is good, but still mildly 🅁𝘦𝘵🄰🅁𝙙𝙚🅓. It means you — Mr and Mrs Politician letting the Keynesian economists run inflation hot, as they damn well should with a fixed exchange rate, to avoid the far worse horror of mass unemployment — likely loose the next election. Then the neolibs come in, then the fascists, on some sort of political cycle of ꕒꗍꖀ𐝥ꗍꘝꕯꖡꖹꕒꗍ. So… not good.

Admittedly, we may only see this neoliberal cycle exercised once in our lifetimes, right now it’s in the fascist mode. So there’s a good chance the cycle will play twice, and twice only (last time was mostly restricted to Germany, Italy and Japan in the 1930’s–40’s’). Roosevelt was able to prevent the USA going fash by some pretty decent socialist under-currents in the USA, which at the time were overwhelming the reich-wing currents. But if not for the huge majority of people supporting FDR it might have been a different history for the USA.

This is also why I doubt modern USA will go full fash. The USA reich-wing are trying very hard. But I think their dreams are delusional. Too many anarchists are getting off the Internet of pipe-dreams for a change. Too many normie libertarians are actually libertarians, never thought I’d say it, but “Thank goodness!”.

Final point, if we could Harry Potter whisk away the whole bond market, no one should care. The bond traders can get other jobs with their quant skills I presume. Which tells you the bond market is not a great indicator of “what is going on in the economy.” There is some information to be gleaned from the term structure, but you cannot predict anything concrete with it. Information from the bond market is useful for trading bonds. Not for much else.