Wallace Neutrality... don't fight the Fed

Miles Kimball gave me some help on understanding Wallace Neutrality, which in turn might help me understand more where Stephen Williamson is coming from when he says QE is irrelevant. I asked Miles:

I'm not sure if I entirely understand the Wallace neutrality argument.

If I may paraphrase, does it mean something like... the Fed could buy a bunch of stocks on the NYSE, and they might be able to push their prices up (their dividend rates down). But if they did so, the price of these stocks would rise above their intrinsic value and profit-seeking agents would immediately take the opposite side of the trade, thereby pushing the purchased stocks' value back to their intrinsic value. So in order for the Fed to permanently increase stock prices above their intrinsic value, there must be some sort of "friction" that prevents profit-seeking agents from taking the other side of the trade. Is that what it means?

Miles:

Yes... You said it very well.

That's a relief. Sometimes I have troubles translating the somewhat Spockian language of formal economics into words that are more comfortable to me, that being the daily lingua of the marketplace, trading, and investing.

To further re-translate, I'd say the idea of Wallace Neutrality falls in the same boat as the old trader's adage... don't fight the Fed. If traders believe the Fed is all-powerful and too strong to trade against, then the Fed can effectively change assets prices above or below what they should otherwise be. If traders think they can fight the Fed, then the Fed can't change asset prices - traders will collectively take the other side of any Fed action, canceling out any Fed-induced price changes. What "friction" motivates traders to believe they can or can't fight the Fed?

Here is my older post on Stephen Williamson's QE irrelevance. The frictions I point to in that post are the Fed's size relative to other actors in asset markets and the Fed's ambivalence to profits/losses in a environment in which all other actors are hypersensitive to profits/losses. In other words... don't fight the Fed. It's massively big and doesn't care if it loses on the trade.

Brad DeLong had a comment on the idea of Wallace Neutrality here. Miles goes into the idea of Wallace Neutrality again here.

Comments

A way to make anonymous online donations

Paying for things online usually means giving up plenty of privacy. But this needn't always be the case. Last night I donated to a local charity via their website and didn't have to give up any of my personal information. The trick for achieving a degree of online payments anonymity? Not bitcoin, Zcash, or Monero. I used a product created by old fashioned bankers: a non-reloadable prepaid debit card. (I wrote about these cards here and here ). Had I used a credit card or PayPal, all sorts of parties would have gotten access to my personal information including the site owner, the payments processor, my bank, the site owner's bank, the credit card networks, my partner, and many more. To get a good feel for how many different parties touch an online payment, check out this graphic by Rebecka Ricks, which shows how PayPal shares your information. A powerful visualization by @baricks showing how PayPal shares your data: https://t.co/vd8w8d8xn6 ht @akadiyala Due to Europe...

Stock as a medium of exchange

American Depository Receipt (ADR) for Sony Corp You've heard the story before. It goes something like this. There's one unique good in this world that serves as a universal vehicle by which we conduct every one of our economic transactions. We call this good "money". Quarrels often start over what items get lumped together as money, but paper currency and deposits usually make the grade. If we want to convert the things that we've produced into desirable consumption goods (or long-term savings vehicles like stocks), we need to pass through this intervening "money" medium to get there. This of course is fiction—there never has been an item that served as a universal medium of exchange. Rather, all valuable things serve to some degree or other as a medium of exchange; or, put differently, everything is money. What follows are several examples illustrating this idea. Rather than using currency/deposits as the intervening medium to get to their desired final...

Buoyant Ireland

Nick Rowe is pessimistic , and points to one of the dreariest articles I've read to date on the Europe situation. I noticed that Ireland seems to be doing much better than the other peripherals. See the chart below. Its stock market is relatively strong, having outperformed markets in Greece, Italy, and Spain while keeping up to the German DAX. At the same time, Ireland isn't seeing capital outflows anymore. While Greece, Spain and Italy's TARGET2 balance is deteriorating, Ireland's has been improving for over a year. (Note that data is to end of April). ( click here for expanded version) What are the Irish doing differently? Is Ireland presaging how the other peripherals might be stabilized, or are they just lagging behind? Note: For one explanation of the difference, see this Allied Irish Bank report ( pdf ).

Typography

Search This Blog