Posts

Lihaa luiden ympärille!

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Lihaa luiden ympärille! Seurattuani pari päivää Jussi Ahokkaan ja Juhana Siljanderin mielenkiintoista keskustelua twitterissä, innostuin piirtämään hommaa omasta perspektiivistäni auki. Liittyy mm. seuraavaan twitter-ketjuun: https://twitter.com/ahokasjaj/status/1265587056966844417 Punaisella loppusaldojen muutokset. T=0. Lähtötilanne, meillä on keskuspankki, pankki A, valtio ja yritys. Taseiden summa 200$.  T= 1. Valtio liikkeellelaskee 100$ velkaa, yksityinen sektori lainottaa (pankki A ja yritys). Valtio saa 100$ pankkitalletuksia tililleen pankissa A. Taseiden summa 350$.  T=2. Valtio kuluttaa 100$ yritykseltä tilattuun rakennusprojektiin. G: +100$ Taseiden summa 450$. T=3. Keskuspankki aloittaa QE-ohjelman ja ostaa valtionvelkakirjat pankilta ja yritykseltä. Pankki saa 100$ reservejä ja yritys 50$ lisää talletuksia. Huomataan, että pankilta ostettaessa, kyseessä oli vain "asset swappi", mutta yritykseltä ostettaessa pankkitalletusten

Why Central Bank balance sheet expansion during COVID19 is not pumping asset prices

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As there still seems to be major confusions regarding central bank actions and what it means for the financial markets in general, I decided to try "one last time" to explain in maybe one of my most detailed posts on how different balance sheets across sectors of financial markets react to central bank policy and how financial markets are supposed to work in "normal times". The essential message of this post is the same as that of my previous short post on covid crisis , but this time with more rigorous technical exposition. As I have explained here in detail, the monetary policy implementation method since the Global Financial Crisis (GFC) is a so-called "floor system", where in theory, the interest rate on excess reserves (IOER) works as a lower bound for short term interest rates in the economy. In short, this is because the reserve supply greatly exceeds that of which there is demand for in the banking system as a whole, thus, in theory, the comp

Raha- vai fiskaalipolitiikkaa?

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Rahapolitiikka on aina osittain fiskaalipolitiikan rahoittamista fiat-järjestelmässä. Tämä on fakta, joka on monelle vaikea purtava. Koetan perustella asian yhdysvaltojen keskuspankin Federal Reserven (Fed) ja sen viimeaikaisten toimien kautta. Rahapolitikkaa ohjataan tavanomaisesti lyhyiden korkojen välityksellä. Tärkeimpänä näistä lyhyistä koroista yhdysvalloissa on Federal Funds Rate, joka on korko vakuuksettomalle yön yli tapahtuvalle pankkien väliselle lainalle. Vaikka Federal Funds Rate on koroista ns. "tärkein" (vaikkei käytännössä enää kovin käytetty markkina), kuuluu keskuspankin tehtävään implisiitisti ohjata kaikkia lyhyitä korkoja. Fedin tapauksessa lyhyiden korkojen ohjaus tarkoittaa teknisesti sitä, että Fed asettaa ohjauskoron targetin (Federal Funds Target Rate) esim. välille 0 - 0.1%. Koron alalaidan määrittää Fedin asettama Reverse Repo (RRP=0%) korko (Fed lainaa rahaa rahoitus-instituutioilta takuuta vastaan) ja ylälaidan korko targetin määrittää korko, j

A Proposal on how to save the eurozone...for now!

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For the current crisis, the ECB had to intervene with a sizeable 750billion € Pandemic Emergency Purchase Programme (PEPP) . This program comes with a plan to buy 750 billion € worth of private and public sector securities across the yield curve (from 70day to 30year) and the purchases are to be made "flexibly", but in the long in the end according to capital keys . Also, one major feature of this program is the rule that purchases made under PEPP are not to be counted in issuer limits according to which the ECB can only hold 33% of all available government debt issuances in order to avoid being a decisive vote in a case of debt restructuring. In plain English, this means that the ECB can temporarily purchase any amount (in short term, the purchase allocation does not have to follow capital keys), within the capped 750billion € limit, of any government securities it wishes (Italian debt for example). The fact that PEPP purchases have no effect on the issuer limit is a major

Central Bank balance sheet and COVID19

I have been reading multiple complaints about central banks ballooning their balance sheets in order to combat COVID19-crisis, mainly from the same people who are wondering if this will lead to hyperinflation as the amount of central bank money in the system is increasing rapidly. I am going to argue that it will not and that this crisis is a best case example of a situation where central banks must increase the size of their balance sheets. In order to fight the virus, governments around the world had to resort in extreme measures, causing a full stoppage in business activity across sectors, barring people from even exiting their homes. However, as the businesses that are under forced lockdown are at the same time in need to meet their financial obligations, like rolling over their debt or paying employee salaries, some cash flow must be generated in order to avoid bankruptcy. If there is no cash flow and companies are in need to pay e.g. salaries, a new demand for debt financing

On Helicopter Money

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As current emergency times call for serious action from monetary and fiscal authorities alike, a famous topic to pop up in these discussions is "cash handouts" for the people financed by central bank money creation, or more familiarly, helicopter money. Here, I will try to elaborate on why helicopter money may turn out to be a policy that will backfire into a constant need of covering ECB losses, or more gloomily, a refinancing "death-loop" that could wreak havoc throughout the whole monetary system as it is currently functioning. As a case example, and maybe here as the "most likely" one that will have to rely on some sort of helicopter drops, I will be using the European Central Bank (ECB). In a fiat monetary policy framework, short-term interest rates are either controlled mainly through reserve scarcity (a corridor system) or when reserves are abundant, through deposit rates (a floor system). Currently, the monetary policy implementation method used

Summary of Explaining "Not-QE"

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All though there are even more dynamics in play than what I have described in my previous post, I had multiple requests on making a shorter summary of it. I’ll try to keep this one as short as possible, but if you wish to have more detailed (but not detailed enough imo.) description of the core of my argument, please refer to my previous post . Here we go. Before the Global Financial Crisis (GFC), the implementation method of how the Federal Reserve (FED) implemented its monetary policy in order to attain its SHORT-TERM rate target was called a “corridor system”. This is a corridor system that came with three important factors. First, it had a roof, or the discount window , which is a “lender-of-last-resort” channel to get funding if balances at the FED are overdrawn. Second, there was a floor, which was the zero lower bound (ZLB), or Federal Funds Rate = 0% and third, and from the perspective of current issues the most important one, reserve scarcity (deposits at the FED