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There Is No Stable Monetary Policy "Risk Channel"
Via Natixis' Patrick Artus,
In reality, central banks control only the prices of the assets they buy directly
When a central bank buys an asset directly (often government bonds), it drives up the price of this asset, the demand for which increases.
But the prices of the other asset classes increase only if the economic agents that have sold the first assets to the central bank use the money received to buy these other asset classes.
This transmission of increases in asset prices to all asset classes is therefore unstable, since it depends on the behaviour of investors and savers. Since 2012, we have seen that central banks’ purchases first led asset sellers to buy risky assets (equities, corporate bonds), whose prices rose. But in the recent period, the rise in risk aversion has turned them away from risky assets, whose prices have fallen, and they have invested the money received from the central bank in risk-free assets.
There is therefore no stable monetary policy "risk channel"; the only asset prices that are controlled by central banks in the longer run are those of the assets that central banks buy directly. This could in the future push central banks to buy riskier assets if they want to change their prices in a stable manner.
Central banks’ asset purchases have a direct impact on the prices of these assets
When a central bank buys financial assets, it increases demand for these assets, which directly drives up their prices.
This occurred with purchases of Treasuries and ABS in the United States (Charts 1A and B) and with government bonds in the United Kingdom and Japan (Charts 2A and B), and with the announcement of covered bond purchases in the euro zone (Chart 3).
But the impact of the central bank’s asset purchases on other asset classes is uncertain
The central bank buys assets (especially government bonds, Charts 1A, 2A and B above).
It pays by creating money (Chart 4).
The economic agents that sell assets to the central bank use this money to buy other assets. But they have a free choice: a quantitative easing policy will drive up the prices of the assets that economic agents choose to buy, not the prices of the others.
We also saw from 2011-2012 until the spring of 2014:
- A tightening of credit spreads (Charts 5A and B, 6A and B);
- A rise in the stock market (Charts 7A and B, 8A and B).
But investors’ risk aversion has risen since the spring of 2014, (Charts 9A and B): they no longer buy risky assets and the prices of these assets have corrected downwards, whereas long-term interest rates on risk-free government bonds have fallen sharply (Chart 3 above, Charts 10A and B).
The transmission of the rise in the prices of the assets the central bank buys directly to a rise in the prices of other assets is therefore unstable, since it depends on investors’ attitude and their risk aversion.
Conclusion: The risk channel is not robust
The "risk channel" is the mechanism through which the central bank’s monetary creation drives down risk premia.
We have seen that this mechanism is unstable: it functions only if economic agents use the money created by the central bank, in exchange for purchases of risk-free assets, to buy risky assets.
If their risk aversion rises, this mechanism disappears - and so does the risk channel. In that case, the only remaining possibility for the central bank is to buy risky assets directly if it wants to drive down their prices.
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I've never seen the word premia used in a sentence
In reality, central banks control only the prices of the assets they buy directly.
So this clown has no idea what's been happening in real estate since Greenspan panicked in 2001?
Kyle Bass's analysis of Japan is looking better all the time; he really does his homework; and he's a smart guy.
AE 9/11 Truth researchers plan lawsuit to seek release of 500,000 documents held by FEMA, NIST
Another article that starts with the false premise that CB money printing is for any reason other than enriching the owners of the CBs, and then concludes that perhaps it's not such a great way to build an economy as if that were the intent.
I didn't see where he discussed the economy, just other asset classes (like housing or stocks for example). Banks don't want housing to fall too much since they have loans on them.
Note to Fed: When Cornering a Market, make sure the trend does not change.
The BOJ throwing money at the equity markets surely made me want to throw up. If the Fed does that, I just may be the next WH fence jumper. We'll see. A bottle of Jack and who knows... I'm too big a wuss to do that who the fuck am I kidding... LOL
central banks control only the prices of the assets they buy directly
Our friend is very naive if he thinks that the Fed has not been using its power and money to control the price of gold and silver as it printed trillions. Even Volcker, a fairly honest man, controlled the price of gold.
Central banks also control the prices of assets that they short and lease out - like gold and silver. But the serfs do not have to know that.
Somebody call the police. Arrest Janet Yellen. Don't let her get away.
According to Barron's Online:
http://online.barrons.com/articles/barrons-up-down-wall-street-tokyo-thr...
What markets didn’t know and didn’t expect was that Japanese officials would move so dramatically to try to spur that nation’s flagging recovery. Specifically, the BOJ upped its goal for the expansion of its monetary base, to 80 trillion yen ($720 billion) from ¥60 trillion to ¥70 trillion, a move the central bank’s governor, Haruhiko Kuroda, said is aimed at ending Japan’s “deflationary mind-set.” As a result of the plan to print more yen, the Japanese currency weakened to nearly 112 to the dollar from just under 108.
Meanwhile, Japan’s $1.1 trillion pension fund said it would shift its portfolio strongly toward equities—allocating 25% each to domestic and foreign stocks, up from 12% each—while trimming domestic bonds to 35% from 60%. In gambling terms, this is going all in on Abenomics, as the stimulus plan is called, after Shinzo Abe, Japan’s prime minister.
This is truly a dazzling example of 21st century government finance. The government runs a deficit covered by IOUs, or bond borrowings. The central bank buys those bonds to fund the budget shortfall and also purchases bonds sold by the pension plan, all with reserves it creates out of thin air. The pension fund uses the newly printed yen it receives from the BOJ for its bonds to buy claims against the future earnings of private industry—that is, common stocks.
Those are the financial impacts. In the real world, the effect is to make Japanese exports cheaper and to export deflation to Japan’s trade partners.
Remember that Japan has few natural resources and imports raw goods a weak yen will drive up the cost of these imports. The days of huge surplus trade deficits that blessed Japan are gone! The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency.
This means Japan will be paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world. They are past the point where they can return to a "free and fair market" interest rate marketing their bonds to the world and still be able to pay the debt service.
The moment the Japaneses stock market fails to rise enough to offset inflation and the people of Japan realize that even a weaker yen will not help we will see a tsunami of money fleeing Japan. This will constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/05/japan-sliding-towards-abyss.html
So the yen will depreciate faster than the nikkei will rise?
Last line
"In that case, the only remaining possibility for the central bank is to buy risky assets directly if it wants to drive down their prices."
Wouldn't a CB buying assets - risky or not - make the price of the assets go UP?
Its gotta be up.
For ever and ever. It's the only outcome they'll accept. Until it all breaks.
Bubbles are an interesting self reinforcing phenomena that feeds on itself and greed. The problem is how to recognize them as they form.Current policies is distorting values acoss the world. This is making things very unstable. The value of "something" is not an issue to take lightly.
Value is not a constant and can be derived from several factors such as how liquid a market is, supply and demand or utility value, things can spoil or become obsolete making where you invest very important. Value is not as constant as many people think or always destined to rise. I have discovered that when you start buying things at ten cents on the dollar your money begins to go a long way. This is a lesson many people may soon learn, or maybe not. The article below delves into how values constantly shift.
http://brucewilds.blogspot.com/2012/11/what-is-something-worth.html
My guess is the soverign bond bubbles and the us dollar will be the last bubbles standing. The CBs in Japan and Europe will nail down every soverign under their jurisdiction when dumptrucks full of Money flow to the us.
I contend the primary reason that inflation has not raised its ugly head to become a major economic issue is because we as a society are pouring such a large percentage of our wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.
It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. More in the article below.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....
inflation is a monetary phenomenon....it either comes out it prices of goods and services when debt is not monetized via QE, or inflation occurs in rising financial asset prices when debt is monetized via QE, as is presently being done.
the cost of not being able to save using a rational interest rate (i.e. a reasonable cost of debt to a borrower, like the tax payer via the US government or companies via the debt markets) results in an erosion of the pruchasing power of savers and an inability to fund retirement without sacrificing a very large (over 20%) share of current disposable income.
Ipso facto, QE lowers living standards in the future and in the present because more disposable income has to be saved today for a lower standard of living tomorrow, essentially make people more sick and hungrier in retirement, when they are not fit to work.
When the Fed's POMO was larger than the new issuance of debt by the US gov, POMO funds went elsewhere else. Entities that sell bonds to the Fed, presumably wanted to own bonds at some point. If the supply is increasing they jump back in.
That's because we have a toxic blend of ideologies here in America that is especially effective at screwing the decent people in the middle.
Our brand of socialism showers benefits on the poorest segments of society whether they are trying hard or just out scamming. It also passes out massive benefits to the top 1% by socializing business losses, subsidizing interest rates for big borrowers and otherwise gaming the economic system to benefit the richest. Those in the middle pay the price for the socialism at both ends.
Meanwhile our brand of crony capitalism preys on the poor, steadily erodes the middle-class and funnels riches to the top.
The worst of both world. People in America would be far more unhappy about all of this if they weren't medicating themselves with booze, drugs, junk food, video games, reality TV and cell phone addiction.