Links for June 15, 2016

“Huge foreign demand for Treasuries”. Via Across the Curve, here’s the Wall Street Journal:

The global hunger for U.S. government debt is intensifying as investors seek better returns from the negative yields and record-low rates found in Japan and Europe. On Thursday, an auction of 30-year Treasury debt attracted some of the highest demand ever from overseas buyers…

Thirty-year bonds typically attract a specialized audience, largely pension funds and other investors trying to buy assets to match long-term liabilities. There are few viable alternatives for such buyers around the world. The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise. …

One auction is hardly dispositive, but that huge foreign demand is worth keeping in mind when we think about the US fiscal and external deficits. A point that Ryan Cooper also makes well.

 

You get the debt, I get the cash. When I pointed out Minsky’s take on Trump on this blog a few months ago, there were some doubts. How exactly, did Trump extract equity from his businesses? Why didn’t the other investors sue?  In its fascinating long piece on Trump’s adventures in Atlantic City, the Times answers these questions in great detail. Rread the whole thing. But if you don’t, Trump himself has the tl;dr:

“Early on, I took a lot of money out of the casinos with the financings and the things we do,” he said in a recent interview. “Atlantic City was a very good cash cow for me for a long time.”

 

 

Unto the tenth generation. If you are going to make an argument for Britain leaving the euro, it seems to me that Steve Keen has the right one. The fundamental issue is not the direct economic effects of membership in the EU (which are probably exaggerated in any case.) The issue is the political economy. First, the EU lacks democratic legitimacy, it effectively shifts power away from elected national governments, while Europe-wide democracy remains an empty shell. And second, European institutions are committed to an agenda of liberalization and austerity.

From the other side, we get this:

I wish I knew where this sort of thing came from. Maybe Brexit would reduce employment in the UK, maybe it wouldn’t — this is not the sort of thing that can be asserted as an unambiguous matter of fact. Whether it’s EU membership or taxes or trade or the minimum wage, everyone claims their preferred policy will lead to higher living standards than the alternatives. Chris Bertram seems like a reasonable person, I doubt that, in general, he wishes suffering on the children of people who see policy questions differently than he does. But on this one, disagreement is impermissible. Why?

 

I like hanging out in coffeehouses. Over at Bloomberg, Noah Smith offers a typology of macroeconomics:

The first is what I call “coffee-house macro,” and it’s what you hear in a lot of casual discussions. It often revolves around the ideas of dead sages — Friedrich Hayek, Hyman Minsky and John Maynard Keynes.

The second is finance macro. This consists of private-sector economists and consultants who try to read the tea leaves on interest rates, unemployment, inflation and other indicators in order to predict the future of asset prices (usually bond prices). It mostly uses simple math, … always includes a hefty dose of personal guesswork.

The third is academic macro. This traditionally involves professors making toy models of the economy — since the early ’80s, these have almost exclusively been DSGE models … most people outside the discipline who take one look at these models immediately think they’re kind of a joke.

The fourth type I call Fed macro…

It’s fair to say a lot of us here in the coffeehouses were pleased by this piece. Obviously, you can quibble with the details of his list. But it gets a couple of big things right. First, the fundamental problem with academic macroeconomics is not that it’s a  study of the concrete phenomena of “the economy” that has gone wrong in some way, but a self-contained activity. The purpose of models isn’t to explain anything, it’s just to satisfy the aesthetic standards of the profession. As my friend Suresh put it once, the best way to think about economics is a kind of haiku with Euler equations. I think a lot of people on the left miss this — they think that you can criticize economic by pointing out some discrepancy with the real world. But that’s like saying that chess is flawed because in medieval Europe there were many more knights than bishops.

The other thing I think Noah’s piece gets right is there is no such thing as “economic orthodoxy.” There are various different orthodoxies — the orthodoxy of the academy, the orthodoxy of business and finance, the orthodoxy of policymakers — and they don’t agree with each other. On some important dimensions they hardly even make contact.

Merijn Knibbe also likes the Bloomberg piece. (He’s doing very good work exploring these same cleavages.) Noah follows up on his blog. Justin Wolfers rejects basically everything taught as macroeconomics in grad school. DeLong makes a distinction between good and bad academic economics which to me, frankly, looks like wishful thinking. Brian Romanchuk has some interesting thoughts on this conversation.

 

Are there really excess reserves? I’ve just been reading Zoltan Pozsar’s Global Money Notes for Credit Suisse. Man they are good. If you’re interested in money, finance, central banks, monetary policy, any of that, you should be reading this guy. Anyway, in this one he makes a provocative argument that I think is right:

Contrary to conventional wisdom, there are no excess reserves – not one penny. Labelling the trillions of reserves created as a byproduct of QE as “excess” was appropriate only until the Liquidity Coverage Ratio (LCR) went live, but not after. …

Before the LCR, banks were required to hold reserves only against demand deposits issued in the U.S. … As banks went about their usual business of making loans and creating deposits, they routinely fell short of reserve requirements. To top up their reserve balances, banks with a shortfall of reserves … borrowed fed funds from banks with a surplus of reserves… These transactions comprised the fed funds market.

Under the LCR, banks are required to hold reserves (and more broadly, high-quality liquid assets) not only against overnight deposits, but all short-term liabilities that mature in less than 30 days, regardless of whether those liabilities were issued by a bank subsidiary, a broker-dealer subsidiary or a holding company onshore or offshore …

The idea is this: Under the new Basel III rules, which the US has adopted, banks are required to hold liquid assets equal to their total liabilities due in 30 days or less. This calculation is supposed to include liabilities of all kinds, across all the bank’s affiliates and subsidiaries, inside and outside the US. Most of this requirement must be satisfied with a short list of “Tier I” assets, which includes central bank reserves. So reserves that are excess with respect to the old (effectively moot) reserve requirements, will not be to the extent that they are held to satisfy these new rules.

Pozsar’s discussion of these issues is extremely informative. But his “no one penny” language may be a bit exaggerated. While the exact rules are still being finalized, it looks like current reserve holdings could still be excessive under LCR. Whie banks have to hold unencumbered liquid assets equal to thier short-term liabilities, the fraction that has to be reserves specifically is still being determined — Pozsar suggests the most likely fraction is 15 percent. He gives data for six big banks, four of which hold more reserves than required by that standard — though on the other hand, five of the six hold less total Tier I liquid assets than they will need. (That’s the “max” line in the figure — the “min” line is 15 percent.) But even if current reserve holdings turn out to be more than is required by LCR, it’s clear that there are far less excess reserves than one would think using the old requirements.

Pozsar draws several interesting conclusions from these facts. First, the Federal Funds rate is dead for good as a tool of policy. (I wonder how long it will take textbook writers to catch up.) Second, central bank balance sheets are not going to shrink back to “normal” any time in the foreseeable future. Third, this is a step along the way to the Fed becoming the world’s central bank, de facto in even in a sense de jure. (Especially in conjunction with the permanent swap lines with other central banks, another insitutional evolution that has not gotten the attention it deserves.) A conclusion that he does not draw, but perhaps should have, is that this is another reason not to worry about demand for Treasury debt. There are good prudential reasons for requiring banks to hold government liabilities, but in effect it is also a form of financial repression.

This is also a good illustration of Noah’s point about the disconnect between academic economics and policy/finance economics. Academic economists are obsessed with “the” interest rate, which they map to the entirely unrelated intertemporal price called “interest rate” in the Walrasian system. Fundamentally what central banks do is determine the pace of credit expansion, which historically has involved a great variety of policy tools. Yes, for a while the tool of choice was an overnight interbank rate. But not anymore. And whatever the mix of immediate targets and instruments will be going forward, it’s a safe bet it won’t return to what it was in the past.