Take the eurodollar strip, please!

Draft — I do indeed avoid sticking my neck out here. Do this for hobby.

Take the eurodollar futures strip.

Please. Be doom boom.

Screen Shot 2017-04-22 at 11.32.50 AM

Some interpret it as showing that the “terminal” libor rate might be around 3%, implying a peak in the funds rate of about 2 ¾%.  Maybe that would go with inflation at 1 ¾% and a short real rate of 1%.

But that is not really what the futures strip implies, as the peak rate on the futures strip is certainly not the expected peak of the interest rate cycle.

Let’s ignore the probably-small risk premium for simplicity. The reason the strip understates the expected peak of the rates cycle is that the date of that peak is unknown to investors, who must price the mean of the probability distribution for rates, which has to include the idea that rates will fall after they peak.

To see this simplify radically and assume that the peak funds rate is known to be 4% and that beyond 4 years, the only possible alternative is a return to zero.  Looking 5 years ahead, if we figured the funds rate were peaking with 75% confidence, then the forward funds rate would be 3%.  The curve peaks at 3% even though we (for sake of illustration) know the peak is 4%.  Not knowing the date of the peak matters a lot.

This simple point occurred to me while thinking about the fact that credit growth appears recently to have slowed, which seems mostly a lagging indicator of the fact that pent-up demand for durable goods has finally been exhausted and some technical issues, like the bust in the energy patch and the inventory correction.

Looking forward, credit growth should tend to reaccelerate above the pace of durable goods demand growth, following the automatic re-leveraging thesis set out by Jason Benderly.  In brief, Benderly shows that the gap between credit growth and growth in the spending it finances is itself cyclical, favoring spending growth early cycle and credit late in the cycle.  Just look it up.

The problem, though, is that this is actually a negative for spending growth, because the expansion now has less pent-up demand and is more dependent on credit expansion. FWIW, this does not have me in a “panic,” but it represents the disappearance of what had been a comforting positive.

Which brings me to a point Larry Summers has made – or a point that seems analogous to one Larry Summers has made. Summers claims that real interest rates were held aloft by during the mid-2000s by bubble dynamics in housing. From this he infers that his secular stagnation thesis actually applies to before the crisis.

Screen Shot 2017-04-22 at 11.16.04 AM

Summers argues that this differentiates his take from that of, say, Reinhart and Rogoff, as set out in This Time is Different (NOT Growth in a Time of Debt).  R&R claim that economic weakness is enduring but ultimately transitory, where Summers sees it as secular, barring a major policy change.

Applying an analogy to today, I would say that the pent-up demands are largely exhausted, at least outside housing, and that wealth effects have probably also peaked.  I am not sure why the equilibrium funds rate would surge from here.

People expecting the actual funds rate to surge may see it otherwise. I would guess, though, that a big part of the case for higher interest rates is just the continued influence of Taylor Rule type reasoning. As the labor market tightens, it is natural for the real interest rate to rise. But I don’t think we are in an environment where Taylor can work, for reasons I wrote down here quite a while ago.

This does not make me want to go out and buy a bunch of bonds, even assuming I had the dough. I still view bonds as offering return free risk.

Mostly it just reinforces my take that interest rate “renormalization” remains an extremely misleading model of the rates environment. Also it would probably be good for the Fed to allow inflation and expectations of it to rise a bit before risking putting a cap on the cycle.

These thoughts are in the Summer lecture I linked to above, but I have been pushing them a while independently.

Sheer weight of the balance sheet may be undone

Oldie, but maybe relevant now.  I had no idea what a genius Tversky was, although I once met Kahneman, who seemed that way too. I saw from dashboard some guy had looked this up. Oh, yeah, I wrote this.


Michael Lewis’s The Undoing Project is a great book with a lot of keeper passages.  Here is one, describing Amos Tversky’s ability to relate intelligently to a wide range of audiences:

Amos seemed able to walk into any problem, however alien to him, and make the people dealing with it feel as if he grasped its essence better than they did.  The University of Illinois flew him to a conference about metaphorical thinking, for instance, only to have Amos argue that a metaphor was actually a substitute for thinking.  “Because metaphors are vivid and memorable, and because they are not readily subjected to critical analysis, they can have considerable impact on human judgment even when they are inappropriate, useless, or misleading,” said Amos.  “They replace genuine uncertainty about the world with semantic ambiguity. A metaphor is a cover-up.”

I do not know if Tversky demonstrated those claims, but I don’t need any convincing, given our experience in macro over the past decade.  At least half the reason people were so wrong about the Fed – in one direction and for an entire decade in a row – seems to be that they fell for metaphors.  This is apocryphal:

The Fed printed $3 trillion of liquidity that had to go somewhere. It ended up rigging every asset price on the planet to the ceiling.  Meanwhile, the Fed pushed interest rates down to an unnatural level, which created a tremendous stretch for yield and pushed investors out the risk curve.  This set up a house of cards, which was bound to collapse as soon as the Fed lifted off zero and pulled away the punch bowl, because as that point the economy would have to stand on its own two feet.

I was reminded of the Lewis passage and of how damaging metaphors have been in this episode, when I turned on the computer this AM and saw this from Bloomberg (screen shot):


There are a lot of metaphors there. By far, the most damaging to the understanding of a very simple point is the image of the Fed’s balance sheet as a weight sitting on the long end of the yield curve.

Let’s skip the metaphor and think of what actually happened in the Treasury market from a supply and demand perspective after the crisis.  Using very round numbers, the Treasuring issued $5 trillion of government securities and the Fed bought $3 trillion. So there was a net supply of $2 trillion, which was actually fairly “heavy” by historical standards, even when normalized to the size of the economy.

Larry Summers worked with Greenwood, Hanson and Rudolph to do the numbers more precisely, and here is his summary of that work presented on his own blog.

On the issue of QE Greenwood, Hanson, Rudolph and I show that the contrary to much of the discussion during the QE period the stock of longer term public debt that the market has to absorb went up not down.  The amount of longer term Federal debt that markets have to absorb is now as high as it has been in the last 50 years and long rates are extraordinarily low, as are term spreads.  This calls into question the idea that price pressures caused by changing relative supplies are likely to have large impacts at times like the present when markets are functioning.

Clearly, bond yields did not fall and remain low during the crisis simply because the public sector manipulated duration supply. If that force had been dominant, then bond yields would have gone up.  There is also the issue of rates signaling, forgive the metaphor, etc. etc. etc.

I am not going to get into the QE debate yet again.  But the point is that these issues are best considered directly, not through metaphor. In my opinion, Tversky is absolutely right about metaphors, and with high practical importance. So the next time you hear somebody trying to snow you with metaphors, you will be forearmed!

With the balance sheet set possibly to be reduced, I guess we have to have an opinion on what effect that might have on bond yields. Beyond the rates signaling and short-term announcement effects, I would not expect much enduring from balance sheet policy per se.  If yields get to the wrong level, then real-economy forces will bring them back. (I realize that would be true as well if QE were a potent policy tool.) But there is not much value in pounding the table emphasizing that take, given that bonds still look like seem to offer return-free risk here.

Thank god for Cass Sunstein paleosplaining freedom of expression

I guess I kind of agree with Cass Sunstein that students shouldn’t hound racist jerkoffs from speaking on their campuses.  We need to stand up for principles, in this case that of freedom of expression, etc. etc. etc. Such arguments please me in the same way that hearing the Senators are up against the Bruins. Good, I guess. Yay?

But I can’t help thinking that this milquetoast liberal commitment to “principles” misses what is actually going on right now and that the youth may actually have a better bead on what the priorities are.

Have you noticed that the principles have a way of changing with the seasons and with the interests of those in power?  We used to be so concerned about the respecting the Constitution until Trump came along. And now we need to be flexible and “respect” those who disagree. It would be elitist and condescending otherwise, apparently.

Remember free trade? Majority rule? The validity of the electoral college, as a deliberative body? Opposition to prior restraint?  Universal human rights? Fiscal sustainability? Free markets? Limited government? Emoluments? Self-dealing? Blind justice?

The list of principles that benefited those already in power and have since been jettisoned in favor of those newly in power is getting a bit long, and the youth may be having trouble sustaining their suspension of disbelief that this is about principles. I would not blame them. Um, it is seldom about principles.

Here is another possible interpretation of what motivates the young left, not willing to lay down and think of America. The other side is in it to win it in a game that might well not be repeat round.

Ridiculous faith in American exceptionalism sometimes makes even game theorists forget that the game itself is at stake. Think about Lincoln, the guy at the west end of the Mall.  He did not pussyfoot around with tender principles during the crisis. He did what it took, and is now widely considered the greatest president in American history.

Similarly, the youth can passively accept the paleosplaining why they need to just sit there and take it, or they might decide that they have a longer time left here than these old guys, that they don’t need to accept their “principles” and that they mean to protect their future.

Cass Sunstein clearly disagrees, insisting, as if it were self-evident, that:

It should go without saying that at colleges and universities, free speech is indispensable, and interferences with it are deplorable.

Really? It is great to see the principled defender of free enquiry let us know what goes without saying!  But another take might be that I (and my parents) invested quite a bit to come here to study in peace. I don’t need hate mongers roaming around the campus telling people I am a second class citizen and thereby threatening me.  I don’t think it necessarily goes without saying that this is an unacceptable position to have or to act upon.

Also, why should universities be privileged as bastions of free expression? They now resemble businesses like a newspaper or bank, so why so special? Have you noticed that university professors seem most inclined to assert their specialness?  This must be because university professors are so uniquely smart and principled.

Apparently, they know how self-evidently stupid the students at Pomona are:

In a subsequent letter, students from the adjoining Pomona College explained that Mac Donald “is a fascist, a white supremacist, a warhawk, a transphobe, a queerphobe, a classist, and ignorant of interlocking systems of domination that produce the lethal conditions under which oppressed peoples are forced to live.”

Oh my God! That sounds so sophomoric and self-aggrandizing, just as you would expect from privileged little brats at an overpriced liberal arts school.  It almost reminds me of this group of privileged brats advocating violence:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Fine words signed by* mostly privileged mostly-old white guys, so they are probably right.

* The actual author was a young slave holder.


Strategic trade query

I had an exchange on Twitter with a fellow with whom I ultimately agreed, although he had to correct me on a simple premise.  And in that exchange the following issue came up.

Imagine there is a small country, call it Britain, that suddenly finds itself facing tariffs from – for the sake of simplicity – ALL its trading partners.

We assume that such a country will levy retaliatory or offsetting (no need to be normative) tariffs against its trading partners.  The purpose of this post is actually to challenge that assumption, but bear with me.

There are two reasons Britain might raise tariffs in this context. The received view, I think, is that she does so to gain “leverage” against the trading partners, so that she might win in negotiations to get them to drop their tariffs, after which she will gladly drop hers. Gladly is key. Please internalize that.

In other words, Britain levies tariffs even though she realizes that doing so hurts her, up until the point where her trading partners respond and do the right thing.  This is the free trader’s case for strategic trade policy.

The second reason is that policy makers in Britain, responding to whatever incentives you might imagine, make the judgment that even without strategic considerations, they would prefer to have tariffs, particularly if the other country does. This distinction may seem nuanced.  The point is that the purpose of the tariffs is to achieve something presumed desirable and not just influence the trading partners.

I want to throw on the wall the idea that the second reason is the real reason. The first reason might apply to a big consequential country that has leverage to bring to bear. But for a small economy with little leverage, it seems the less likely argument.

And if that won’t stick, then I want to ask, why are people so confident that the world of small countries is actually governed by the first reason?

I mention this imaginary scenario because the British Tories are implying that upon Brexit they may have to go with high tariffs against the EU.  Apparently, WTO rules require this, unless Britain reduces tariffs against everybody. So then, why don’t they just unilaterally disarm? And why do they pretend they have no choice, when they clearly do?

The more general point here is the world is not actually governed by countries desperately wanting to eliminate tariffs and retaining them only to encourage other countries ultimately to join them.  Rather, policy makers (like people generally) don’t actually buy the simple (ex-strategic-consideration) case for unilateral trade disarmament.

With low confidence, I would guess they should buy that case, because it is probably correct.  But before you can have the debate, I think you would have to recognize that that is actually the issue.



I’ll take the over

Screen Shot 2017-04-20 at 4.25.35 PM.png

Eric Garland, who is great, claims that combined IQ of the people in this photo is a “solid 147.”

I don’t think anybody has a negative IQ and I know only 4 of these people.  (This excludes the women on Ted Nugent’s right and Kid Rock’s right. )  So I will focus on those 4.

Ted Nugent is a rock star.

Kid Rock is a rock star.

Sarah Palin was elected governor of Alaska and got on McCain’s ticket to be VP.

Donald Trump was elected president of … … I cannot say it.

Collectively they have an IQ above 400. And I would be willing to bet that not one of them is below 100.

I cannot stand any of them, for whatever it is worth. But the average person is way dumber than you may at first assume, I would argue.

I once applied this to a bet that Ryan Lochte had an IQ above 100. We were never actually able to resolve that decisively. But I bailed and paid up when I could not get a single person to agree with me and my wife asked a guy who worked with him who just laughed. I like to be in the minority, but alone probably means you are wrong.

Summers on QE

I have referenced Summers before on this issue, because I think his point is both important, perhaps to the point of being dispositive, and widely overlooked by the studiously indifferent.   But here is his latest blog post anyway.

Screen Shot 2017-04-20 at 4.06.58 PM

Summers et al very usefully quantified this point back in 2014. I really wish they would update that work, because it is very helpful.  I would wager that 90% of people opining on the importance of QE are not aware of point 4 above.  Bond yields fell despite an acceleration of net default-free rates duration supply.

Update on April 21:

I  repeat myself out of monomania and enduring amazement at stubborn consensus, but here are two fun facts:

If Summers is right about the primacy of signaling, as I believe he is, then it is quite important, because the Fed demonstrated ahead of — and upon — the taper that it was fully capable  of separating the signal from portfolio balance effect.  This reflects, I believe, that there is not actually any requirement to put their money where their mouth is.  Words are enough.  If QE were about backing up signaling with purchases, then the Twist operation would have made no sense. The Fed might signal at a five-year horizon, but never at a 30.

Ben Bernanke actually accepts this point, as applied to the taper tantrum, even though the tantrum remains — wrongly — exhibit A in the QE enthusiast’s case.  (When the Fed threatened to taper, yields went up. Right?)  For Bernanke the tantrum was much more about signaling than about portfolio balance.  That Bernanke believes this is not evidence that it is so, obviously. Bernanke has said a lot of things in the past, including about QE, that I would say are flat wrong.  Still, I find it interesting that Bernanke holds this view, despite having strong prior reasons not to, and that this point is so narrowly commented upon.

You are just as benighted as those other wrong guys

Strident MMT pioneer and enthusiast, Bill Mitchell, has an interesting (to me) post on how to interpret MMT.   Hat tip Brian Romanchuk.

Mitchell complains that too many analysts view MMT purely as an exhortation to regime change. They fail to recognize the insights it brings to understanding  the world as it actually works today.

Thinking that MMT constitutes a regime change is incorrect and steers one away from the core issues. In this blog, I reflect on that syndrome and some other aspects of the development of ideas, which I hope will provide readers with a clearer picture of what the core (early) MMT developers (Mosler, Bell/Kelton, Wray, Mitchell, Tcherneva, Fullwiler) had in mind when we set out in the early 1990s to construct a better way of doing macroeconomics. The point is that while MMT constitutes a regime change in economic thinking within the academy it does not constitute a regime change in the way the monetary system operates. We need to separate the operational principles exposed by MMT academics from their ideological values to really come to terms with the fact that MMT is what is, not what might be.

I like the distinction he draws between normative and positive considerations and his concession (elsewhere) that even a strident right-winger might embrace MMT.  I think Mitchell should take his own advice, apply its converse, and retract his claim that Paul Krugman “hasn’t a progressive macroeconomic bone in his body.” What is good for the goose is good for the Krugthulu.

Link here and screen shot of relevant passage at bottom of this post.

That aside, Mitchell emphasizes in particular that MMT offers a superior understanding of how the payments system works, which has served MMT well in forecasting.  I am not in the MMT camp, obviously, but I find it hard to disagree with that point.

Conventional macroeconomists often fail to look into the plumbing, which can make them too afraid of – for example – auctions failing.  I would say this same issue also explains why people got so far offside on H money, which is implausible in the US, but I don’t want to put words in Mitchell’s mouth on that issue.

Related, I do think it is to the credit of the MMT school that they seem to have been loudly right about the stupidity of fiscal austerity during the early teens and in countries with floating currencies. Some conventional Keynesians got to the same view, and in part by recognizing the importance of fiat money.  (And, some of the conventional Keynesians have become more comfortable with fiscal drag, as liquidity trap has tentatively dissipated.)

As one of those guys, I would say the correct argument was that the risk of the self-fulfilling prophecy was lower than the austerians feared, which is slightly different from the MMT view.  But to MMT’s great credit, they were louder, more confident and more unified on this issue than Keynesians were.  Well done.

Where Mitchell goes seriously astray in this post is in relating the refusal of mainstream macro to embrace MMT to vignettes in the history of science.   He talks about dissenting voices in neurology, pharmacology and archaeology being suppressed by the mainstream, even though they ended up being right.

To me, that seems self-serving, arrogant and all too typical of the MMT crowd’s approach to engaging with those who disagree, at some risk of generalizing unfairly

It is at least possible that conventional macroeconomists – deeply imperfect as they are – might disagree with MMT, even though they do not fail to understand the payments system and are not actually benighted.

There was once a guy who was dead wrong. And in this context, you are that guy.  Not really convincing.

MMT embraces a lot of issues and I concede I have not read all the sacred texts. But it seems to me that a central claim of MMT is that government spending (or “purchasing” for the semantically pure) can be divorced from government taxation, so long as inflation is well behaved, and in the ideal regime.

In all my efforts to get MMT guys to accept or reject this claim, it seems they have invariably demurred, including today.  But the offer is still open. Guys, correct me if I am wrong. And then own it.

The problem with that claim is that it fails to recognize a pretty simple application of transitivity.  Running spending far ahead of taxation, with the gap financed by reserves creation, would at some point cause a large inflation, the cure for which would involve getting spending back in line with taxation.  The underlying problem there would ultimately have been the attempt to evade the public sector budget constraint.  To call this (just?) an inflation issue is deeply misleading semantics.

Consider the picture below. Sorry that the two scales are not the same: I just clipped these images off the internet.

Screen Shot 2017-04-20 at 9.17.12 AM

But between the 19th century and the late 20th century, government spending went up by about 17 percentage points of GDP and revenue went up by about 15.

The resulting chronic deficit has not been an issue for financial stability or solvency or whatever because the US has had more fiscal capacity than the austerians implied.  Still, the rough correspondence between spending and revenue is not a coincidence.  It reflects that there actually is a public sector budget constraint, although estimating precisely where it binds is tough. And to repeat, MMT guys have been right to insist, not near here!

I can imagine that the MMT response to this might be, well the history before 1971 is irrelevant because MMT is meant to apply under fiat money.  Fair point, which does weaken the importance of the data I show above.

But by the same token, the reality of today is that deficits are financed with debt, not money. And when thinking about the government budget constraint – or its irrelevance, per MMT – you have to take that on board as a fact. (Let’s leave aside the debate about whether excess reserves are debt or money. At the end of the day, QE will not have been an enduring form of deficit finance.)

Let me conclude with some amateur psychobabble of my own, reading others’ motives just as Bill Mitchell finds himself at such liberty to do.  I think there are two related reasons that MMT’s crazy approach to government finance is assigned any credibility at all.

First, the austerians who relied on conventional notions of government finance radically overstated their case, fear mongered, and discredited themselves.  What are you gonna do? Some others who oppose MMT say dumb things. As Sean Spicer might say, even Hitler used arithmetic.

Second, and related, because the US fiscal capacity is higher than consensus originally assumed, we do not now experience the tensions that would arise inevitably if the US government actually attempted to divorce taxation from spending.

If the debt were actually high enough to cause fear of default, on bonds or base money (as has happened), then the idea that this is all just about “inflation” would be recognized as the evasion it is.

But the US seems still to be well within the safe zone.   So there is no pressing need to think through the MMT craziness.  In other words, the reason MMT is viewed in some quarters as plausible is that it has not been tried, at least around here, recently. *

* The US has some experience with wartime finance, including during the Revolution.  I am not sure how MMT guys would treat that, if they would lean on it. As I mentioned, I have not read all the texts.  I focus on what I take to be a central claim of MMT, that revenue need not be lined up with spending, except as inflation developments might dictate.

Mitchell’s attack on Krugman

Screen Shot 2017-04-20 at 9.59.54 AM

Freedom of expression

Racist jerk off and non-producer Richard Spencer is apparently free to speak at Aburn, which is probably a southern school anyway.

Screen Shot 2017-04-19 at 5.09.33 PM

And prospective students along with any parents paying the bills are free to scratch that place off their list of safety schools.

Nobody is morally obliged to listen to low-end hate mongering.  It is great to be “challenged” at university, but one must ration one’s time and ability to tolerate irritation.

Believers might expose themselves to atheists.  Collectivists might want to hear the case for free markets.  Beatles fans might want to hang out with Stones fans, at great risk of dating myself.  But this guy is just fecal matter and doesn’t really rank on the whole need-to-consider spectrum.

Still, somebody down there booked this turd, so it is on them. Seems fair. Liberalism demands we pass judgment on this zero privately um I mean without restraining him once invited.

Some pictures of the term premium

I am going to leave the deep thinking on the term premium to my friend, Brian Romanchuk.  I share — and actually defer to — his view that the term premium is difficult to measure and that we need to take the various efforts with a grain of salt.  But I am also going to work with what we have.

I realize that investors in the bond and (by extension) equity markets are interested in bond yields per se and not necessarily in the academic exercise of separating them into components representing the expected path of short rates and presumed compensation for duration risk.

Still, my interest, as often, is in assessing the importance of the portfolio balance channel of QE (and its going away), which is meant to operate on the term premium.  My thesis, which seems to be playing out, is that QE operated mostly through rates signaling (and, in equities, behavioral channels) and that the portfolio balance channel was radically overstated by QE enthusiasts. And I am going to need a measure of the term premium to continue pushing that take.

One thing I think we do know is that the Kim-Wright term premium is pretty much useless in the QE era and probably recently as well.  The problem with Kim-Wright is that it infers the term premium in large part from the gap between bond yields and the presumed risk-free yield that would occur if market participants shared the view of professional forecasters responding to surveys asking them to project the path of short rates.Screen Shot 2017-04-18 at 10.31.10 AM

The Kim-Wright term premium is currently available only to the end of 2016. Note the tight correlation and unit beta between it and just the 5-year note yield during the entire QE era, which overlapped with explicit rates guidance.

Very obviously, those survey responses became anchored, probably to Fed rates guidance, whose prominence was contemporaneous with QE, after 2008.  You can see this in the totally bizarre relationship between just the 5-year note yield and the term-premium estimated for the 10-year maturity.

Not only is the correlation very tight, but the two concepts have the same range expressed in basis points.  This is what one might expect if the survey respondents were anchoring AND markets were ignoring those professional forecasters.  So I am going to just dispense with Kim-Wright. I am not confident I know exactly why that relationship is so tight, but it does seem disqualifying.

The failure of Kim-Wright may explain why Fed types have (seemingly recently, not sure) begun to emphasize the ACM measure of the term premium.  For example, see former Fed Chairman Bernanke, here.)  The ACM measure of term premium allows no role for surveys of short rate forecasts and instead infers the term premium by relating historical principal components of the term structure to historical excess returns.

Screen Shot 2017-04-18 at 10.31.21 AM

The ACM term premium is shown at a monthly frequency with the last observation being  April 17.  QE dates are also shown at monthly frequency, which makes for some minor slippage. I define the QE era as starting with QE1, when the Fed broadened it purchases to include Treasuries and thus popularized the term “monetization”, although misleadingly.  The Fed’s initial purchase of mortgages and Agencies in late 2008 is not generally seen as having been the beginning of QE, which is why I call it QE0.  This is ironic because what I call QE0 hit a dysfunctional and particularly segmented bond market and seems to have “worked” as intended, even to my skeptical eyes.    In Bernanke’s ” The Courage to Act”, the former Fed Chairman follows what I describe as convention in claiming that QE really began with QE 1. See page 420.

Leaving aside for now the question of whether such an approach is valid, the history of the ACM term premium is interesting.  At first glance of a long history of the ACM premium,  it looks to have fallen during the QE era.  See left panel of chart below for that first glance.

But if you zoom in on the QE era itself, you see that the term premium on balance rose between 2006 and the end of the entire QE era and that it tended – on balance – to rise while applications of QE were ongoing.  Moreover, it fell to a record low after QE ended and has barely responded to recent news of the Fed planning to sell assets more quickly than previously expected.  The spike in late 2016 looks to have been about Trump, not QE-related sales. QE enthusiasts will say yes, but you are not doing the counterfactual. Whatever, bros.  That can’t be your answer to all of these repeated failures of your basic thesis.

One bit of evidence that appears still to support the QE story still told by most Fed officials is that the ACM term premium (like the 10-year yield itself) rose steeply during the taper tantrum.  Bernanke, along with the ACM authors themselves, attributes that to a rise of interest rate volatility.

Interestingly (to me), Bernanke is very clear that that had little to do with the portfolio balance channel or thus really to the taper itself. Bernnake (now?) shares my take that the market was responding to a more general turn towards hawkishness, including on rates, during that period.  I find that interesting because it fits much more closely with a view I have been pushing and much less closely with Bernanke’s take on QE while in the Chairman’s seat at the Fed.

In contrast, the ACM authors themselves attribute the rise of volatility to QE and do not draw the distinction Bernanke now does.  I may have more on that later, focusing in particular on the relationship between QE and vol.  (Basically, don’t confuse being contemporaneous with causal.) In this post, I just wanted to show some pictures.

One final caveat.  In my view, these pictures are very hard on the official QE story often told by Fed officials. I am aware that there are alternative interpretations of how QE worked.  For example, Nick Rowe claims that QE worked through the liability side of the balance sheet and (I assume) signaling of future inflation intentions associated with that. I am not in that camp, but in fairness the pictures I show here are neither here nor there as regards it. I am leaning — as often — into the official and until recently consensus take on QE.

This has no meaning

Also, WTF? She already sent the letter and the country will REMAIN divided.  This is just a power grab, cuz Labour sucks so badly.

Separately, what is wrong with having an Opposition in parliament.  That is kind of the point of parliament, no?

Screen Shot 2017-04-18 at 7.36.56 AM


I am not getting suckered again.

Screen Shot 2017-04-18 at 7.09.40 AM

Go Abs Go.

Fed Vice Chair Fischer on QE

He says that balance sheet contraction will be no big deal. QE itself was a big deal (very stimulative), but its going away will be pretty much irrelevant.  It is asymmetrical that way, as magical things are. And we all know QE works mostly through magic. Bernanke covers his tracks, just like our lord and savior does.

Fischer is particularly clear that the balance sheet contraction will not be so bad as the taper tantrum, which is pretty hilarious.  During the tantrum, the forward stock of assets on the Fed’s balance sheet was actually risingbecause Fed signaling was reducing the expected pace of ultimate asset sales to greater effect than it was dragging forward the date of the slowdown of purchases  Hardly anybody mentions this because it wrecks the whole QE / tantrum story, which is aloof from any need for — you know — evidence.

But Ben Bernanke alluded obliquely to this when he said, correctly, that the taper tantrum was not about the size of the balance sheet. It was instead about the Fed being clear that it had turned hawkish and markets drawing an inference for the path of RATES. Not that things are so because Bernanke says they are, but I find it piquant that a big advocate for QE, like Bernanke, would so readily surrender such an important pro-QE argument. Good for him! Objective, if only safely in hindsight.

Again, this is not something mentioned in polite company.  And now here comes Fischer to assure us that the tantrum will not happen again.  The balance sheet contracting will have much less effect than its forward size slowing its rate of assent.

How could that possibly be? Umm, because the balance sheet never mattered much. But the willingness of academia, Wall Street and the media to swallow uncritically anything the Fed says is a sight to behold. I betcha few will even note any logical inconsistency in what Fischer says, although I would guess his most recent assertion is the right one.

Screen Shot 2017-04-17 at 7.04.34 PM

Academic, media and Wall Street analysts of QE

That some of this crew would also believe in the supposed heroic skepticism and independent thinking of the so-called bond vigilante is richer still. Not so much mounted gun slingers as sheep. Baaaah Baaaah.