Typography

Normally this blog is just a comment aggregator, but once in a while I write a substantial post. Here’s one. As a bit of a Bank of Canada watcher, I recently noticed that the Bank of Canada’s balance sheet is undergoing some interesting changes. Firstly, on the liability side of its balance sheet, government deposits held at the Bank have been growing quite quickly and are now at their highest level since the credit crisis. On the asset side of its balance sheet, BoC assets are growing at over 15% year over year after relative slow growth for the last few years. Before exploring the reasons for these changes, as always I like to put the data into charts for context. As my first chart entitled North of 10% shows, BoC assets have only grown this fast a few times over the last few decades, mostly during crisis points like Y2K and 9/11. Giddy stuff. click to zoom The chart entitled Flight of the loon decomposes the growth of the BoC’s balance sheet into various components since 1981. If y...

From here ( pdf ). Eccles is speaking about the Fed's ability (since withdrawn) to lend directly to the Treasury without the intermediation of the market: Mr. SPENCE. I assume the reason the authority was repealed in 1935 was because of the existing conditions, then, when there was no reason for the authority: is that correct? Mr. ECCLES. Well, as I remember the discussion—and I have referred to it in this statement—there was a feeling that this left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to b...

The Austrian vs Keynesian end of the blogosphere often battle over the existence of a natural rate of interest. The Keynesian side typically points to Piero Sraffa's argument that there are many natural rates of interest, or own-rates, and therefore an Austrian sort of monolithic natural rate of interest simply doesn't exist. Over the last few weeks I've participated in the comments here at Jonathan Finegold Catalan's blog and here at Daniel Kuehn's blog. Here is an older comment in this vein on "Lord Keynes" blog. Bob Murphy also has a paper ( pdf ) on this subject and has commented on the above blogs on this subject. Sraffa's point that there are different own-rates was not a new one. Irving Fisher pointed this out many years before, in Appreciation and Interest (1896): If we seek to eliminate the money element by expressing the rate of interest in terms of real " capital," we are immediately confronted with the fact that no two forms o...

James Hamilton at Econbrowser had an interesting series of posts ( here and here ) on determining the effect of naive commodity index funds in crude oil and other commodity markets. His hypothesis was that: the more futures contracts the funds want to hold, the more risk the counterparties who short the contract are exposed to. According to the model, the futures price must be bid high enough to compensate the short side for absorbing the risk. This compensation comes in the form of an expected profit to the short side of the futures contract.  I pointed out in the comments that this sounded very familiar to me: ...isn't this an attempt to prove a version of Keynes's theory of normal backwardation? Here is Keynes: "If supply and demand are balanced, the spot price must exceed the forward price by the amount which the producer is ready to sacrifice in order to hedge himself, ie. to avoid the risk of price fluctuations during his productions period." Keynes wrote that ...

Stephen Williamson has been thumping the drum on the irrelevance of quantitative easing for some time now. See here , here , here , here , here , here . I jumped into the comments of his most recent on this issue, and have done so here and here as well in the past. I've had problems squaring Steve's irrelevance theory with the very real fact that in the day-to-day drama of financial markets, traders with large portfolios think QE is very relevant. Because they are large traders, and because they think it is relevant, quantitative easing IS relevant. One way to square this is to conclude that both Steve and the markets are right, but it depends on how you approach the problem. Steve is approaching the question from the Miller-Modigliani framework, which carries with it all sorts of assumptions. If those assumptions hold, he's probably right about irrelevance. But as commenter Richard Serlin consistently points out , MM only holds under conditions that don't actually c...

I learnt some interesting facts about inflation-linked investment products. To begin with Sober Look had an intriguing chart showing an inversion in the TIPS yield curve. Michael Ashton at Epiphany had an interesting explanation for this. Basically, short-dated TIPS begin to trade like gasoline futures . Like zero-coupon inflation swaps, TIPS are indexed to headline inflation, not core inflation. The most volatile component of headline inflation are gas prices, although in general large changes in gasoline prices will mean-revert to core inflation. We've had a large fall in gas prices, so near TIPS have fallen in value. More distant TIPS price in an expectation of gasoline reverting to core, and therefore are less sensitive to the fall in gas prices. Michael explains here why inflation swaps are a better indication of true inflation than TIPS. I learn here that the 5Y 5Y forward inflation curve is the market price for an inflation swap that starts in 5years and ends in 10 years...

John Cochrane has had a few interesting comments on Greece leaving the Euro, here , here , and here . Cochrane doesn't believe in the consensus view that a Greek default means a Greek euro-exit. He thinks Greece can default and stay in the Euro. He also makes the good point that Eurobonds already exist... in the form of Target2 transfers. His last post illustrates how difficult it would be to create a new drachma. I am sympathetic to many of his views. I had an interesting debate in the comments section of his last post on the difficulties of creating a new drachma. Someone pointed out that Gresham's law dictates that bad drachmas will easily drive out good euros. Therefore, drachmas will quickly gain currency. This is a mistaken view of how Gresham's law works: Gresham's law only applies when there are two circulating currencies and the authorities successfully enforce a peg such that one currency is artificially overvalued. The undervalued currency disappears from cir...

A few comments at MMT blogs on the subject of consolidating the nation's central bank and its treasury. See here and here . This argument could probably go on forever, but it is an interesting one. MMT's "general case" is one in which there is a government and at some sub-level a treasury and central bank. The government reigns supreme as a currency issuer since it consolidates both institutions. I don't know why this setup must be the "general case" and everything else anomalous. Why not call an independent central bank and a non-issuing treasury the "general case" and then reason from there? It seems ad hoc to me. I prefer thinking not in terms of hierarchies, nor in some sort of tiered progressions away from the general case, but in terms of poles. At one extreme is a totally independent central bank, at the other is a totally consolidated central bank. In the real world, every institutional setup lies somewhere in between. This reminds me ...