5 ms·

Only the wealthiest Americans (and foreigners for that matter) own the assets the Fed is bidding on. It is not neutral.

by natrius 13y ago

tedsanders 13y ago
Could you please explain why the money going to wealthy people is a problem? I think it's fine for $100 million to go wealthy people if the wealthy people lose $100 million of treasuries at the same time. It only becomes a problem if the Fed overpays for the assets. Which is why it's so important to pick giant liquid asset markets like US treasuries. Giant liquid markets are the least likely to be distorted by Fed action.
- natrius 13y ago
  I don't think it's a problem per se, but it's not neutral. When the Fed purchases $100 million of treasuries with new money, it makes wealthy people as a class $100 million richer.
  - tedsanders 13y ago
    Could you please explain how it makes them $100 million richer? They have $100 million more in money, but $100 million less in assets. Their net worth is unchanged. They are not richer, even when considered as a class. (I think your comments could be improved if you made some of your thinking more explicit. I have difficulty following your lines of reasoning. Brevity has value, but also cost.)
    - natrius 13y ago
      "$100 million richer" is wrong, but increasing the demand for treasuries makes them worth more, which makes their holders more wealthy.
      - tedsanders 13y ago
        Consider the following. I am the Fed. (1) I announce that my general policy will be to buy treasuries when I want to spur inflation (2) I announce that next week I am going to buy $100 million of treasuries. (3) I actually buy the treasuries. A very interesting question is: At which point (1, 2, or 3) was demand increased? (I would argue that if Fed purchases are expected, they do not change the price and treasury owners do not benefit.)
        dllthomas 13y ago
        Assuming they don't execute in sufficient quantity for there to be liquidity issues, at each point the price will change to incorporate the market's guess as to how much they'll be buying relative to how much various parties want to sell - which will be entirely accurate after (3), and fairly accurate after (2). Whether it goes up or down for 2 and 3 depends on whether the market has over- or underestimated just prior, but it will certainly be up at each point over the Fed holding a different policy. Since the Fed's policy is what we're discussing (rather than whether we should be long or short T-bills just prior to each event), the distinctions you're making aren't terribly important.
- NateDad 13y ago
  By definition, anything you're selling is something you value less than the money you're getting paid for it. Otherwise you wouldn't sell it, right? Also, things like land and real estate tend to be bought at steep discounts and then sold for huge profits. Finally, having a $3m house is not the same as having $3m in cash.
- sheetjs 13y ago
  > It only becomes a problem if the Fed overpays for the assets. Which is precisely what happened. Many of the toxic assets that are now on the fed balance sheet would have been close to worthless (if not completely worthless)
  - tedsanders 13y ago
    Could you please clarify which assets you're talking about? Is it the Fed's MBS portfolio? So far your worry has not borne out. The Fed has been earning about $80 billion per year, and its MBS portfolio is worth about $1 trillion. http://www.economist.com/news/finance-and-economics/21570753-what-happens-when-fed-starts-losing-money-other-side-qe http://www.economist.com/news/finance-and-economics/21570753...
    - deleted 13y ago
      [deleted]
  - dredmorbius 13y ago
    I actually had the opportunity to ask this question of a regional FR Bank president a year or so back. Specifically: how does the Fed assess the value of the assets its buying? The answer was: they don't. They're bidding at auction, so to that extent, the value is market-based (banks with assets they think are valued over what the Fed is paying will withhold those assets), but to the extent that it's pretty much the Fed creating this market of and by itself, there's not much competition. The interest of the Fed isn't in buying valuable assets. It's in injecting liquidity, that is, cash, dollars, into the financial system. I've kicked myself for not having asked another question (how is the banking system supposed to work and lend when real returns on financial capital are negative), but the one I did ask and the answer I got were informative and illuminating to me. The question I didn't ask, it turns out, has been asked by others (though I need to track down specific instances). The declining real returns of investment is something that's been specifically noted, see Deloitte's Shift Index: http://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/ http://www.forbes.com/sites/stevedenning/2012/01/25/shift-in... http://www.reddit.com/r/dredmorbius/comments/1y3z3n/the_shift_index_declining_roic_1965_2009_forbes/ http://www.reddit.com/r/dredmorbius/comments/1y3z3n/the_shif...
- warfangle 13y ago
  The difference is, distributing $100 million to the already-wealthy does not incur increases in aggregate demand (it might, in fact, decrease it), as the wealthy tend to lock up their funds in financial instruments (from bonds to stocks). And invest in a company (stocks) all you want, if there's no demand for what it's selling.... why are you investing?
  - tedsanders 13y ago
    I think your answer is a bit self-contradictory. The only way for the $100 million not to enter the money supply is for the wealthy to hold $100 million more in cash. If they invest it in bonds and stocks, then now the previous holders of those bonds and stocks hold the cash. The point of distributing the money is so that money is worth less and prices become effectively lower, causing people to buy more stuff and businesses to make more stuff (i.e., monetary stimulus of aggregate demand). Here is a blog post on the hot potato effect: http://www.themoneyillusion.com/?p=23314 http://www.themoneyillusion.com/?p=23314
    - warfangle 13y ago
      Yet the previous owners of those bonds and stocks who now hold the cash are likely members of the same elite investment class, and immediately ... reinvest it in bonds and stocks, instead of spending it on goods and services. (unless they are the recipients of, say, social security -- the biggest single investor in government bonds) edit: replied without reading the HPE post. My point, I guess, is that this helicopter drop of cash, if evenly distributed (e.g., every US citizen received 3.19488818e-9 of it), would disproportionally be distributed to those who would spend it immediately, increasing aggregate demand - compared to those few percent who would just add it to their investment portfolio.
nerfhammer 13y ago
Who owns treasury bonds? * Foreign - $5.724 trillion (national breakdown: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt http://www.treasury.gov/resource-center/data-chart-center/ti... or http://www.gao.gov/special.pubs/longterm/images/countries_largest_holdings_tres_sec_2012.png http://www.gao.gov/special.pubs/longterm/images/countries_la...) * Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.764 trillion * Federal Reserve - $1.794 trillion * Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) - $1.497 trillion. * Mutual Funds - $946.4 billion * Office of Personnel Management (Federal Employees Retirement, Life Insurance, Hospital Insurance Trust Funds, Postal Service Retiree Contributions) - $826.8 billion * State and Local Government, including their pension funds - $703.5 billion * Private Pension Funds - $457.7 billion * Military Retirement Fund - $419.5 billion * Banks - $341.4 billion * Insurance Companies - $263.3 billion * Dept. of Health and Human Services (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) - $260 billion * Other Federal Programs and Funds - $260 billion * Uniformed Services Retiree Health Care Fund - $189 billion * U.S. Savings Bonds - $181.7 billion * Department of Energy - $54.8 billion. * Federal Deposit Insurance Corporation - $33 billion * Department of Labor (Unemployment Trust Fund) - $30 billion * Department of the Treasury (Exchange Stabilization Fund) - $26 billion
- tedsanders 13y ago
  Thanks for bringing some facts into the discussion. One thing I'd like to point out from your list above is that Social Security is the largest owner of treasury bonds. If the Fed buys treasury bonds from Social Security, that is essentially distributing money to lots of people directly - exactly the suggestion of this thread's article! :) (Though it's not really the same, since they buy treasury bonds in an open market, not directly from Social Security. The amount of bond-buying has nothing to do with the amount of Social Security checks going out, which is a good thing, in my opinion.)
- natrius 13y ago
  This doesn't refute my claim that buying treasuries disproportionately benefits the wealthy.

Only the wealthiest Americans (and foreigners for that matter) own the assets the Fed is bidding on. It is not neutral.

by natrius 13y ago

Only the wealthiest Americans (and foreigners for that matter) own the assets the Fed is bidding on. It is not neutral.

Could you please explain why the money going to wealthy people is a problem? I think it's fine for $100 million to go wealthy people if the wealthy people lose $100 million of treasuries at the same time. It only becomes a problem if the Fed overpays for the assets. Which is why it's so important to pick giant liquid asset markets like US treasuries. Giant liquid markets are the least likely to be distorted by Fed action.

natrius 13y ago
I don't think it's a problem per se, but it's not neutral. When the Fed purchases $100 million of treasuries with new money, it makes wealthy people as a class $100 million richer.
- tedsanders 13y ago
  Could you please explain how it makes them $100 million richer? They have $100 million more in money, but $100 million less in assets. Their net worth is unchanged. They are not richer, even when considered as a class. (I think your comments could be improved if you made some of your thinking more explicit. I have difficulty following your lines of reasoning. Brevity has value, but also cost.)
  - natrius 13y ago
    "$100 million richer" is wrong, but increasing the demand for treasuries makes them worth more, which makes their holders more wealthy.
    - tedsanders 13y ago
      Consider the following. I am the Fed. (1) I announce that my general policy will be to buy treasuries when I want to spur inflation (2) I announce that next week I am going to buy $100 million of treasuries. (3) I actually buy the treasuries. A very interesting question is: At which point (1, 2, or 3) was demand increased? (I would argue that if Fed purchases are expected, they do not change the price and treasury owners do not benefit.)
      - dllthomas 13y ago
        Assuming they don't execute in sufficient quantity for there to be liquidity issues, at each point the price will change to incorporate the market's guess as to how much they'll be buying relative to how much various parties want to sell - which will be entirely accurate after (3), and fairly accurate after (2). Whether it goes up or down for 2 and 3 depends on whether the market has over- or underestimated just prior, but it will certainly be up at each point over the Fed holding a different policy. Since the Fed's policy is what we're discussing (rather than whether we should be long or short T-bills just prior to each event), the distinctions you're making aren't terribly important.
NateDad 13y ago
By definition, anything you're selling is something you value less than the money you're getting paid for it. Otherwise you wouldn't sell it, right? Also, things like land and real estate tend to be bought at steep discounts and then sold for huge profits. Finally, having a $3m house is not the same as having $3m in cash.
sheetjs 13y ago
> It only becomes a problem if the Fed overpays for the assets. Which is precisely what happened. Many of the toxic assets that are now on the fed balance sheet would have been close to worthless (if not completely worthless)
- tedsanders 13y ago
  Could you please clarify which assets you're talking about? Is it the Fed's MBS portfolio? So far your worry has not borne out. The Fed has been earning about $80 billion per year, and its MBS portfolio is worth about $1 trillion. http://www.economist.com/news/finance-and-economics/21570753-what-happens-when-fed-starts-losing-money-other-side-qe http://www.economist.com/news/finance-and-economics/21570753...
  - deleted 13y ago
    [deleted]
- dredmorbius 13y ago
  I actually had the opportunity to ask this question of a regional FR Bank president a year or so back. Specifically: how does the Fed assess the value of the assets its buying? The answer was: they don't. They're bidding at auction, so to that extent, the value is market-based (banks with assets they think are valued over what the Fed is paying will withhold those assets), but to the extent that it's pretty much the Fed creating this market of and by itself, there's not much competition. The interest of the Fed isn't in buying valuable assets. It's in injecting liquidity, that is, cash, dollars, into the financial system. I've kicked myself for not having asked another question (how is the banking system supposed to work and lend when real returns on financial capital are negative), but the one I did ask and the answer I got were informative and illuminating to me. The question I didn't ask, it turns out, has been asked by others (though I need to track down specific instances). The declining real returns of investment is something that's been specifically noted, see Deloitte's Shift Index: http://www.forbes.com/sites/stevedenning/2012/01/25/shift-index-2011-the-most-important-business-study-ever/ http://www.forbes.com/sites/stevedenning/2012/01/25/shift-in... http://www.reddit.com/r/dredmorbius/comments/1y3z3n/the_shift_index_declining_roic_1965_2009_forbes/ http://www.reddit.com/r/dredmorbius/comments/1y3z3n/the_shif...
warfangle 13y ago
The difference is, distributing $100 million to the already-wealthy does not incur increases in aggregate demand (it might, in fact, decrease it), as the wealthy tend to lock up their funds in financial instruments (from bonds to stocks). And invest in a company (stocks) all you want, if there's no demand for what it's selling.... why are you investing?
- tedsanders 13y ago
  I think your answer is a bit self-contradictory. The only way for the $100 million not to enter the money supply is for the wealthy to hold $100 million more in cash. If they invest it in bonds and stocks, then now the previous holders of those bonds and stocks hold the cash. The point of distributing the money is so that money is worth less and prices become effectively lower, causing people to buy more stuff and businesses to make more stuff (i.e., monetary stimulus of aggregate demand). Here is a blog post on the hot potato effect: http://www.themoneyillusion.com/?p=23314 http://www.themoneyillusion.com/?p=23314
  - warfangle 13y ago
    Yet the previous owners of those bonds and stocks who now hold the cash are likely members of the same elite investment class, and immediately ... reinvest it in bonds and stocks, instead of spending it on goods and services. (unless they are the recipients of, say, social security -- the biggest single investor in government bonds) edit: replied without reading the HPE post. My point, I guess, is that this helicopter drop of cash, if evenly distributed (e.g., every US citizen received 3.19488818e-9 of it), would disproportionally be distributed to those who would spend it immediately, increasing aggregate demand - compared to those few percent who would just add it to their investment portfolio.

nerfhammer 13y ago

Who owns treasury bonds? * Foreign - $5.724 trillion (national breakdown: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt http://www.treasury.gov/resource-center/data-chart-center/ti... or http://www.gao.gov/special.pubs/longterm/images/countries_largest_holdings_tres_sec_2012.png http://www.gao.gov/special.pubs/longterm/images/countries_la...) * Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.764 trillion * Federal Reserve - $1.794 trillion * Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) - $1.497 trillion. * Mutual Funds - $946.4 billion * Office of Personnel Management (Federal Employees Retirement, Life Insurance, Hospital Insurance Trust Funds, Postal Service Retiree Contributions) - $826.8 billion * State and Local Government, including their pension funds - $703.5 billion * Private Pension Funds - $457.7 billion * Military Retirement Fund - $419.5 billion * Banks - $341.4 billion * Insurance Companies - $263.3 billion * Dept. of Health and Human Services (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) - $260 billion * Other Federal Programs and Funds - $260 billion * Uniformed Services Retiree Health Care Fund - $189 billion * U.S. Savings Bonds - $181.7 billion * Department of Energy - $54.8 billion. * Federal Deposit Insurance Corporation - $33 billion * Department of Labor (Unemployment Trust Fund) - $30 billion * Department of the Treasury (Exchange Stabilization Fund) - $26 billion

tedsanders 13y ago
Thanks for bringing some facts into the discussion. One thing I'd like to point out from your list above is that Social Security is the largest owner of treasury bonds. If the Fed buys treasury bonds from Social Security, that is essentially distributing money to lots of people directly - exactly the suggestion of this thread's article! :) (Though it's not really the same, since they buy treasury bonds in an open market, not directly from Social Security. The amount of bond-buying has nothing to do with the amount of Social Security checks going out, which is a good thing, in my opinion.)
natrius 13y ago
This doesn't refute my claim that buying treasuries disproportionately benefits the wealthy.