"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Tuesday, September 21, 2010

Really good links - Treasuries as money - FOMC - Monetary policy - The Fed - Inflation swaps

Gary Gorton and Andrew Metrick via Tyler Cowen - Treasuries as money - "It seems that U.S. Treasuries are extensively rehypothecated and should be viewed as money...This means that open market operations are exchanging one kind of money for another, rather than exchanging money for "bonds." "Quantitative easing" may well be the monetary policy of the future."

Gavyn Davies - FOMC - "At the last FOMC meeting on 10 August, the Fed worried the financial markets by sounding concerned about the economic outlook, while taking only a small step towards additional quantitative easing. Consequently, as the graph shows, all of the main risk assets fell quite sharply for a couple of weeks. This decline was only arrested when Ben Bernanke’s speech at Jackson Hole spelled out the Fed’s thinking on further monetary easing, after which “informed” financial opinion began to suggest that another big round of QE would begin before the end of the year. With US and Chinese economic data showing some improvement as well, risk assets rallied markedly."

Tyler Cowen - Why aren't we using monetary policy to stimulate aggregate demand? - "4. Maybe we are in a new political economy equilibrium where each government agency is given "one shot" at a problem. Treasury had its one shot with the stimulus plan. The Fed had its exotic monetary policy operations and deal-making during the crisis. Maybe in bad times voters aren't happy no matter what, and no one is allowed to try twice. We have not yet thought through the political economy of this scenario.
        5. If the Fed can't make the commitment today, when did it go wrong? Perhaps at the peak of the crisis, when it was operating with a high degree of discretion, and various radical actions were viewed as justified, it should have announced that, to complete recovery, the three percent price inflation commitment would commence after the dust had settled. That would have required Magnus Carlsen-like levels of foresight, however. If nothing else, Bernanke may not have realized that some version of #4 was operating."

David Beckworth - The Fed - "The Fed cannot solve all of our problems, but it can stabilize nominal expectations which would add a lot more certainty to our economic environment. Until it starts doing so all I can wonder is "Dude, where's my central bank?""

Nemo - Inflation swaps - "Suppose you and I enter into an inflation swap contract where you offer to pay me $1.10 five years from now, while I offer to pay you CPIthen / CPInow dollars. It is true that one of us is offering a fixed value known today, while the other is offering an unknown value based on future events. But which is which? <..> in my hypothetical inflation swap above, you are offering me 1.10 nominal 2015 dollars. But I am offering you one constant 2010 dollar. What we know today is the real, inflation-adjusted value of my future payment. What we do not know is what your $1.10 will be worth. Therefore I am the one offering the fixed payment; therefore I am the one entitled to the risk premium; and therefore the break-even rate on inflation swaps overstates the market’s true expectations for inflation."


  1. i think the first one to articulate the "treasuries as money" meme was andy harless, last december:


  2. rjs, here's Gary Gorton - May 2009:

  3. thanx 123...i hadnt seen that one...

  4. So, do I understand that right? By "money" we really do mean "money", i.e. medium of exchange?

    And so the recession was caused by a fall in the supply of money, not an increase in the demand for money?

    And so good old-fashioned monetarism is sort of right after all?

  5. im not sure what you're asking, nick, or even if you're addressing our exchange...there was nothing in what andy wrote that suggested a cause for the recession...here's my key takeaway, quoting andy:

    "Treasury bills are not just more like money than like other assets; from a portfolio point of view, on the margin of new issuance, Treasury bills are exactly like money. Holders of short-term Treasury bills are willing to hold them without receiving interest....
    Issuing more short-term Treasury bills will have exactly the same effect as issuing more money, since people are indifferent between the two. For practical purposes, as long as their interest rate remains at zero, short-term Treasury bills are part of the money stock. A Treasury bill is a million-dollar bill in the same sense that a Federal Reserve note with Abraham Lincoln on it is a five-dollar bill. Conventional monetary policy, which exchanges money for Treasury bills, is ineffective because it is no policy at all: it simply exchanges one form of money for another.

    To put it another way, since the Treasury can issue bills that are exactly like money, it is now the Treasury that is in charge of monetary policy."

  6. Nick - yes, money, as a medium of exchange. This money is not used in grocery transactions, it is used in financial transactions. But still this "money" should be a part of broad monetary aggregates. So, recession was caused by a fall in the supply of broad money, and this has caused increased demand for monetary base.


The Money Demand