Topic: Could take 5-8 years to shrink Fed portfolio: Yellen - page 4. (Read 10156 times)

But why would anyone pay you to hold your money if you were not taking on any kind of risk?

You should understand that anything you do with your money will carry some level of risk. If you spend all of your money then you could lose money in the way of late charges and interest payments if you had an emergency and needed to spend more money then you had. If you invest in the stock market then you risk that the price of your stocks declines more then the amount of dividends paid. If you invest in bonds then you risk that the issuing company is not able to repay their debt.

(snipped out some irrelevant stuff from my quotes)
Thanks! I'm assuming there are other ignorant idiots like myself, so it's really helpful.

If I'm understanding you, the banks actually had long treasury bonds, and they wanted those cashed out for... cash, right? Just to hold to meet reserve requirements and prepare for a possible second crisis. Does the Federal Reserve create the money, or is this money the Fed actually had to spend? I mean - is the Fed profitable and have real assets they pay from to these banks selling T-bonds? The Fed's supposed to be a kind of non-profit, where any "profit" goes to the Treasury, so how could they have "real" assets to pay cash to all these banks for T-bonds?

Does this bond-cash exchange introduce moral hazard to the banks, in that they can buy these long-term assets but have ability to sell them near-immediately and (I'm guessing) without any loss to the Fed, and doesn't this definitely indicate the value of treasury bonds are artificially and significantly inflated since they can be converted to cash whenever a bank needs it to boost their capital reserves (which basically negates all cons of holding T-bonds)? It seems like the Fed is almost forcing them to hold T-bonds instead of cash, since cash is basically worse than useless outside of capital reserves compared to T-bonds the Fed's willing to buy up at/near face value whenever a bank winds up with capital crunch. Maybe it's supposed to be some kind of consolation for reserve requirements?

How does would another HELOC/mortgage crisis cause a deflation event? From assumed decrease in money velocity (assuming a stronger lending freeze, decrease in consumer confidence), or because the money supply is "corrected" if a consumer or business defaults (due literally to lack of funds) and the bank wipes the debt out, basically removing the money from the money supply? (or both?)

Savings in money do not carry risk - when the money is good. I mentioned also money denominated securities, because they loose value to inflation just like money. It is basically loans - you lend money for others to invest, but still take a share of the risk.

Old advice for prudence is to save some money - which is risk free when the money is good, when you are comfortable with saving in money you can invest. With bad money, this is inpossible. Please distinguish saving in money from investment, it is not possible to discuss these things in a constructive way if the wrong words are used.

So inflation in both consumables and wages is neutral to consumption, but kills savings in money.

All investments carry some type of risk, otherwise there would be no incentive for others to pay you interest. Traditional "savers" (those who put money in the bank) are risking that inflation will eat away at the buying power of the money they have in the bank.

No, this a common misunderstanding. Even when you pay raise comes timely, is is only neutral for your consumption, not for your savings in money and money denomitated securities. It makes saving in money impossible, and force savers to investments involving risk.

 

Sorry, I'm not following this thread closely.

What's needed to be understood is that this money supply is not homogeneous. I mean Fed had bought a lot of treasuries, but it didn't really increase the amount of money in the economy.
What it did was actually replacing long-term treasury securities with short-term bank reserves (you can look up the excess reserves which closely correlate with Fed balance sheet).

So while on the paper the amount of money increased dramatically, for the real economy it didn't.

As of another crisis, banks set aside some capital (according to capital requirement rules) for this possibility. The possible consequence of another crisis is likely another deflation event and another dumb QE.

Policy is designed to somewhat control the market and to give it incentives to act in certain ways.

The Fed portfolio will eventually be able to be shrunk to a more manageable size, it will just take many years and careful planning to ensure that doing so does not create economic chaos.

This is true. A small amount of inflation means that people have an incentive not to put off purchases, but too much inflation means people's savings will be worthless or worth less (LOL)

Could take even longer..... forever.

Nah its the other way.  Market forces are stronger than policy.   Govt makes policy in response to market forces. The contradiction is that evreyone expects policy to counteract recessions but nobody demands govt to cockblock the boom times so we gets bubbles and subsequent busts. 

If inflation was constant around 3% it would be very manageable

Politician set the economic and tax policy, which influence market, price and pretty much everything we do.

What does that have to do w inflation? Or the topic.   Why is this the "economics" subforum when everyone keep talking politics

I would rather have price stability and let free market decide which companies survive than letting government plays god.

Remember, innovation means finding a new way to do things more efficiently and cheaply. In the process, that will kill off old industry and inefficiently run companies. Labor law needs to be more flexible to allow re-training and re-tooling workers.

The thing everyone should fear is deflationary spiral or runaway inflation.  You want a little inflation now to get us out of recession.   Otherwise unemployment gets worse

Salary lag inflation by months if not years while good are service are very sensitive to market and monetary policy.

Fix wages income,where most people belong to this category, can not keep up with inflation.

Only if your income doesn't keep up.   If you sell goods or services those prices rise w inflation

4% inflation is very high. Losing 40% of your saving every 10 years compounded to financial elite on top of taxes mean no ordinary citizen will be able to have any saving.

Exactly! 4% is a happy medium between everyone's life savings is rapidly declining in value and that inflation is so low that there is serious risk of wide spread, long term deflation and economic contraction

4% inflation is just above what the Fed would like it to be at as of now, and is much higher then it is now.