6 ms·

On a related note, since mid-April, the Fed has withdrawn –$140B of liquidity from the financial system: https://news.ycombinator.com/item?id=32929454 https://

by cs702 4y ago

On a related note, since mid-April, the Fed has withdrawn –$140B of liquidity from the financial system: https://news.ycombinator.com/item?id=32929454 https://news.ycombinator.com/item?id=32929454 and earlier this year announced that it plans to continue withdrawing liquidity from the financial system at the rate of $90B/month for the foreseeable future. The innocuous term for these withdrawals is "quantitative tightening." There are no historical precedents for quantitative tightening of this magnitude. It's the first time any central bank has tried it at this scale in a modern monetary regime.

slaw 4y ago
at $90B/month it will take 89 months to unload.
- cs702 4y ago
  $90B/month = $1.1T/year in withdrawals of liquidity from the financial system. A trillion here and trillion there, and pretty soon we'll be talking about real money.
- JumpCrisscross 4y ago
  > $90B/month it will take 89 months to unload The optimal Fed balance sheet is estimated to be around $4tn [1]. A Fed with a ballooning balance sheet distorts financial markets. A Fed with no assets must do weird stuff to fight inflation, which distorts financial markets. (In a non-reserve case, a central bank with no reserves goes bust.) [1] https://advisors.vanguard.com/insights/article/thefedsplantoshrinkitsbalancesheetquickly https://advisors.vanguard.com/insights/article/thefedsplanto...
  - slaw 4y ago
    Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0
    - JumpCrisscross 4y ago
      > Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0 Inflation has multiple causes. Fixed-money economies experienced inflation and deflation throughout antiquity.
      - slaw 4y ago
        Still, Fed is responsible for 90% of inflation.
        deleted 4y ago
        [deleted]
        JumpCrisscross 4y ago
        > Fed is responsible for 90% of inflation You're really jumping straight from proposing a zero-reserve central bank to theorizing the source of inflation?
  - nine_zeros 4y ago
    Very interesting. So historically, it appears that the FED balance sheet reserves is 25% of GDP. I wonder what it is for other countries. Especially rapidly developing ones.
    - JumpCrisscross 4y ago
      > wonder what it is for other countries It varies pretty widely. I don't think there is good macroeconomic theory for its correct value, or even if there is a correct value. https://tradingeconomics.com/country-list/central-bank-assets-to-gdp-wb-data.html https://tradingeconomics.com/country-list/central-bank-asset...
      - nine_zeros 4y ago
        It doesn't seem 100% accurate (see: UK balance sheet). But the pattern is evident. The older/more developed an economy, the larger the central bank balance sheet. Which also seems like a correct line of thinking to me. In younger developing countries, more money is created by individuals/businesses via credit. Central banks don't need a large balance sheet to encourage more lending, banks already have a high demand for loans and have very high interest rates for credit. In older/developed countries, less money is created by individuals/businesses via credit. So central banks are forced to increase the size of their balance sheet which allows banks to offer more money for lending by reducing the interest rates because without low interest rates, there will be no credit growth.
wbsss4412 4y ago
Note that many people on this and other forums have been talking about how the fed just prints money forever and is out of control. This is them destroying money. It might not be enough for you personally, but let’s not pretend that money printing only goes in one direction. Note: as a base expectation, you want to be printing a small amount of money unless circumstances dictate otherwise. In a growing economy, if the growth in the money supply doesn’t keep up with growth, you’ll eventually see deflation. This is explained by the following identity (where the velocity of money is typically observed to be fairly constant): [Price] * [output] = [velocity of money] * [money supply]
- MrStonedOne 4y ago
curiousllama 4y ago
To be fair, wasn't this preceded by 'quantitative easing' which itself had 'no historical precedents?' Like, it's in proportion to the last big thing we did, albeit in the other direction. I'd argue that's pretty close to precedent.
- cs702 4y ago
  There's at least one other historical precedent for insane levels of quantitative easing, Japan: https://fred.stlouisfed.org/series/JPNASSETS https://fred.stlouisfed.org/series/JPNASSETS Japan has been at it for a long time: https://research.stlouisfed.org/publications/economic-synopses/2014/01/10/quantitative-easing-in-japan-past-and-present/ https://research.stlouisfed.org/publications/economic-synops... But AFAIK there's no historical precedent for persistently going in the other direction at such an insane scale.
collegeburner 4y ago
oh c'mon. there wasn't really precedent for QE before '08 and they did it anyway. there sure ash wasn't precedent for buying corp debt ETFs as a even more radical form of QE in '20. the fed did those anyway but now that they're trying to wind it down that's somehow radical and needs a "innocuous term"?? $90B/month isn't even making much of a dent in the balance sheet.
willturman 4y ago
Here is the historical (since 2004) time series and data: https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL

by cs702 4y ago

slaw 4y ago

at $90B/month it will take 89 months to unload.

cs702 4y ago
$90B/month = $1.1T/year in withdrawals of liquidity from the financial system. A trillion here and trillion there, and pretty soon we'll be talking about real money.
JumpCrisscross 4y ago
> $90B/month it will take 89 months to unload The optimal Fed balance sheet is estimated to be around $4tn [1]. A Fed with a ballooning balance sheet distorts financial markets. A Fed with no assets must do weird stuff to fight inflation, which distorts financial markets. (In a non-reserve case, a central bank with no reserves goes bust.) [1] https://advisors.vanguard.com/insights/article/thefedsplantoshrinkitsbalancesheetquickly https://advisors.vanguard.com/insights/article/thefedsplanto...
- slaw 4y ago
  Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0
  - JumpCrisscross 4y ago
    > Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0 Inflation has multiple causes. Fixed-money economies experienced inflation and deflation throughout antiquity.
    - slaw 4y ago
      Still, Fed is responsible for 90% of inflation.
      - deleted 4y ago
        [deleted]
      - JumpCrisscross 4y ago
        > Fed is responsible for 90% of inflation You're really jumping straight from proposing a zero-reserve central bank to theorizing the source of inflation?
- nine_zeros 4y ago
  Very interesting. So historically, it appears that the FED balance sheet reserves is 25% of GDP. I wonder what it is for other countries. Especially rapidly developing ones.
  - JumpCrisscross 4y ago
    > wonder what it is for other countries It varies pretty widely. I don't think there is good macroeconomic theory for its correct value, or even if there is a correct value. https://tradingeconomics.com/country-list/central-bank-assets-to-gdp-wb-data.html https://tradingeconomics.com/country-list/central-bank-asset...
    - nine_zeros 4y ago
      It doesn't seem 100% accurate (see: UK balance sheet). But the pattern is evident. The older/more developed an economy, the larger the central bank balance sheet. Which also seems like a correct line of thinking to me. In younger developing countries, more money is created by individuals/businesses via credit. Central banks don't need a large balance sheet to encourage more lending, banks already have a high demand for loans and have very high interest rates for credit. In older/developed countries, less money is created by individuals/businesses via credit. So central banks are forced to increase the size of their balance sheet which allows banks to offer more money for lending by reducing the interest rates because without low interest rates, there will be no credit growth.

wbsss4412 4y ago

Note that many people on this and other forums have been talking about how the fed just prints money forever and is out of control. This is them destroying money. It might not be enough for you personally, but let’s not pretend that money printing only goes in one direction. Note: as a base expectation, you want to be printing a small amount of money unless circumstances dictate otherwise. In a growing economy, if the growth in the money supply doesn’t keep up with growth, you’ll eventually see deflation. This is explained by the following identity (where the velocity of money is typically observed to be fairly constant): [Price] * [output] = [velocity of money] * [money supply]

MrStonedOne 4y ago

curiousllama 4y ago

To be fair, wasn't this preceded by 'quantitative easing' which itself had 'no historical precedents?' Like, it's in proportion to the last big thing we did, albeit in the other direction. I'd argue that's pretty close to precedent.

cs702 4y ago
There's at least one other historical precedent for insane levels of quantitative easing, Japan: https://fred.stlouisfed.org/series/JPNASSETS https://fred.stlouisfed.org/series/JPNASSETS Japan has been at it for a long time: https://research.stlouisfed.org/publications/economic-synopses/2014/01/10/quantitative-easing-in-japan-past-and-present/ https://research.stlouisfed.org/publications/economic-synops... But AFAIK there's no historical precedent for persistently going in the other direction at such an insane scale.

collegeburner 4y ago

oh c'mon. there wasn't really precedent for QE before '08 and they did it anyway. there sure ash wasn't precedent for buying corp debt ETFs as a even more radical form of QE in '20. the fed did those anyway but now that they're trying to wind it down that's somehow radical and needs a "innocuous term"?? $90B/month isn't even making much of a dent in the balance sheet.

willturman 4y ago

Here is the historical (since 2004) time series and data: https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL