4 ms·

There is no infinite QE. It is dependent on confidence in the value of the currency, which has been decreasing by a number of metrics, although we can certainl

There is no infinite QE. It is dependent on confidence in the value of the currency, which has been decreasing by a number of metrics, although we can certainly argue about the rate of decline. Not a rebuttal to your overall point, but worth paying attention to.

howlgarnish 6y ago
As holders of Zimbabwean trillion-dollar notes will attest, governments can and will keep printing money even after complete loss of confidence, and in a hyperinflationary situation you're much better off holding shares than cash. (Of course, you're even better holding hard currency.) That said, by most measures the current crisis has to date been deflationary. I expect that to change at some point, but I'll also readily admit I did not foresee the current market rally, so who knows what the market will do tomorrow.
- neilwilson 6y ago
  "but I'll also readily admit I did not foresee the current market rally" Given you didn't see that, have you considered that your view of Zimbabwe might be wrong? Nothing to do with confidence and everything to do with a silly policy to redistribute land to people that can't farm. QE doesn't give money away for free does it. It is always an asset purchase. That is a qualitative difference. Similarly a bad pilot doesn't mean heavier than air flight is impossible. You just need a better pilot. More on what actually happened in Zimbabwe here: http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773
  - mantap 6y ago
    The fed can do what they are doing because the dollar has safe haven status. When things get bad globally, capital flows into the dollar not out of it. If any other country (except perhaps Japan) tried to do what the fed does they would probably end up like Zimbabwe no matter how good their pilot. Currencies have got in the shit for a lot less.
    - RobertoG 6y ago
      So, the fed can do it because is special. Japan can do it because is special, the Central European Bank can do it because it's special and the British can do it because they are special. Not only that, but they can do it all at the same time. At some point, a theory with more exceptions than the opposite should be considered useless. Specially when there is a clear alternative: inflation happens when the spending in the economy surpass the capacity of the economy. Than can happen because the government and the private sector spend too much (bubbles) or because the supply side collapse (hyperinflation in Zimbabwe).
      - mantap 6y ago
        The currencies you list are all considered major reserve currencies, USD, JPY, GBP, EUR. They have value outside of trade. There's over 100 currencies. Most central banks control currencies that are rather pedestrian like Thai Baht or South African Rand.
        neilwilson 6y ago
        And why is that an issue? The most that can happen is that there is no saving of the Baht or the Rand outside the taxation area of those currencies. Assuming they are fully floating. In which case the central bank will be doing nothing other than offsetting the domestic savings in the currency of issue. Because sector balances have to balance. The concept of "reserve" is utterly flawed. People hold balances of all sorts of currencies for very many reasons - largely working capital, but also for insurance and for prestige.
    - danbolt 6y ago
      Just curious, what makes Japan the exception? I know the Yen is also a notable reserve currency so I’d imagine that could affect things.
      - wazoox 6y ago
        Arguably as most Japan treasuries are owned by the Japanese themselves, and carry 0% interest, we can consider that the debt has already been repaid. That's apparently what Warren Buffet thinks.
  - deleted 6y ago
    [deleted]
  - howlgarnish 6y ago
    Hyperinflation in Zimbabwe happened because the government printed money that wasn't backed by anything meaningful. (What started the Zim economic crisis is a different question). But here's the trillion dollar question: if QE consists of printing money and buying hugely inflated tech stocks of dubious value, then is there really a qualitative difference?
    - imtringued 6y ago
      If hyperinflation ends up happening the central bank can just sell its stocks and thereby reduce the amount of money in circulation. It's entirely risk free.
      - neilwilson 6y ago
        What do you see as the difference between the central bank selling its stock and Treasury issuing an identical new one?
- wahern 6y ago
  Over the past 10 years or so Zimbabwean trillion dollar notes have outperformed the stock market with an annualized investment return of ~70%. They're so valuable that there's a huge counterfeit market.
  - howlgarnish 6y ago
    The Zim dollar ceased to be legal currency in 2009, they're purely collectible now and the value is rising because they're not making any more of them. (Maybe they should?)
- deleted 6y ago
  [deleted]
neilwilson 6y ago
"There is no infinite QE" There is. The central bank can offset all the excess saving in the economy from now until doomsday. As Japan has shown for decades. Once you close the mental model you'll see why. What does "confidence in the currency" mean in reality? It means that fewer people want to save in that denomination. When they don't save they have to spend (since that is the only alternative in aggregate), when they spend that generates asset inflation, production and, most importantly, more and more tax points - which reduces the need for bonds and "QE" in the first place. Always remember that an FX transaction is nothing more than a set of two contracts each of which transfer a currency to the other party no less than two days hence. Which means eventually somebody has to have the actual liquidity to settle the net flow. There is no liquidity provider of last resort.

howlgarnish 6y ago

As holders of Zimbabwean trillion-dollar notes will attest, governments can and will keep printing money even after complete loss of confidence, and in a hyperinflationary situation you're much better off holding shares than cash. (Of course, you're even better holding hard currency.) That said, by most measures the current crisis has to date been deflationary. I expect that to change at some point, but I'll also readily admit I did not foresee the current market rally, so who knows what the market will do tomorrow.

neilwilson 6y ago
"but I'll also readily admit I did not foresee the current market rally" Given you didn't see that, have you considered that your view of Zimbabwe might be wrong? Nothing to do with confidence and everything to do with a silly policy to redistribute land to people that can't farm. QE doesn't give money away for free does it. It is always an asset purchase. That is a qualitative difference. Similarly a bad pilot doesn't mean heavier than air flight is impossible. You just need a better pilot. More on what actually happened in Zimbabwe here: http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773
- mantap 6y ago
  The fed can do what they are doing because the dollar has safe haven status. When things get bad globally, capital flows into the dollar not out of it. If any other country (except perhaps Japan) tried to do what the fed does they would probably end up like Zimbabwe no matter how good their pilot. Currencies have got in the shit for a lot less.
  - RobertoG 6y ago
    So, the fed can do it because is special. Japan can do it because is special, the Central European Bank can do it because it's special and the British can do it because they are special. Not only that, but they can do it all at the same time. At some point, a theory with more exceptions than the opposite should be considered useless. Specially when there is a clear alternative: inflation happens when the spending in the economy surpass the capacity of the economy. Than can happen because the government and the private sector spend too much (bubbles) or because the supply side collapse (hyperinflation in Zimbabwe).
    - mantap 6y ago
      The currencies you list are all considered major reserve currencies, USD, JPY, GBP, EUR. They have value outside of trade. There's over 100 currencies. Most central banks control currencies that are rather pedestrian like Thai Baht or South African Rand.
      - neilwilson 6y ago
        And why is that an issue? The most that can happen is that there is no saving of the Baht or the Rand outside the taxation area of those currencies. Assuming they are fully floating. In which case the central bank will be doing nothing other than offsetting the domestic savings in the currency of issue. Because sector balances have to balance. The concept of "reserve" is utterly flawed. People hold balances of all sorts of currencies for very many reasons - largely working capital, but also for insurance and for prestige.
  - danbolt 6y ago
    Just curious, what makes Japan the exception? I know the Yen is also a notable reserve currency so I’d imagine that could affect things.
    - wazoox 6y ago
      Arguably as most Japan treasuries are owned by the Japanese themselves, and carry 0% interest, we can consider that the debt has already been repaid. That's apparently what Warren Buffet thinks.
- deleted 6y ago
  [deleted]
- howlgarnish 6y ago
  Hyperinflation in Zimbabwe happened because the government printed money that wasn't backed by anything meaningful. (What started the Zim economic crisis is a different question). But here's the trillion dollar question: if QE consists of printing money and buying hugely inflated tech stocks of dubious value, then is there really a qualitative difference?
  - imtringued 6y ago
    If hyperinflation ends up happening the central bank can just sell its stocks and thereby reduce the amount of money in circulation. It's entirely risk free.
    - neilwilson 6y ago
      What do you see as the difference between the central bank selling its stock and Treasury issuing an identical new one?
wahern 6y ago
Over the past 10 years or so Zimbabwean trillion dollar notes have outperformed the stock market with an annualized investment return of ~70%. They're so valuable that there's a huge counterfeit market.
- howlgarnish 6y ago
  The Zim dollar ceased to be legal currency in 2009, they're purely collectible now and the value is rising because they're not making any more of them. (Maybe they should?)
deleted 6y ago
[deleted]

neilwilson 6y ago

"There is no infinite QE" There is. The central bank can offset all the excess saving in the economy from now until doomsday. As Japan has shown for decades. Once you close the mental model you'll see why. What does "confidence in the currency" mean in reality? It means that fewer people want to save in that denomination. When they don't save they have to spend (since that is the only alternative in aggregate), when they spend that generates asset inflation, production and, most importantly, more and more tax points - which reduces the need for bonds and "QE" in the first place. Always remember that an FX transaction is nothing more than a set of two contracts each of which transfer a currency to the other party no less than two days hence. Which means eventually somebody has to have the actual liquidity to settle the net flow. There is no liquidity provider of last resort.