Thread by @NathanDallon

Does the fed's expansion of the balance sheet constitute money printing?

Lacy Hunt doesn't think so.

A quick thread:

1/18

Dr. Hunt talked about this on May 25th, 2020 on @RealVision in an interview with Kiril Sokoloff about the fed balance sheet expansion.

Hunt's take, not inflationary AND IF IT IS A LITTLE it won't last long at all.

https://twitter.com/RaoulGMI/status/1265044761754456070?s=20

2/18

Hunt highlights that the Fed's purchases of government and agency securities were greater than the cumulative deficits of those two years. The fed basically covered the deficit by a balance sheet expansion.

3/18
fred.stlouisfed.org/series/WALCL

"When the Fed buys the seven-year average maturity dock, a debt instrument, what happens is after the transaction clears the bank's holdings of overnight deposits at the Fed go up, moves through the banking system..."

4/18

"... but at the end of the day, one type of government liability goes down. That's Treasury securities outstanding. Then the liabilities of the Fed to the depository institutions go up by the same amount."

5/18

"Now, when this money initially moves through the system, there is an increase in the money supply... However, there is another important linkage here. The GDP equals money times velocity...

6/18

"The Fed can execute this first round increase, but it will not accelerate the GDP growth if the marginal revenue product of the dead is declining, the velocity of money will go down.."

7/18

"The issue becomes what happens to the increase in total returns that goes to the depository institutions? Now, the depository institutions could make additional loans. That's the distinct possibility."

That is the key. New lending. No new lending, no new money.

8/18

Hunt's take is that moving OLD debt to the balance sheet of the Fed creates a first round creation of money, but that money is trapped on the bank's balance sheets. M2 grows as one type of government liability goes down and 'reserves' go up. Its an accounting trick.

9/18

A trick meant to ease regulatory conditions on the banks. If the trick leads to NEW lending, then there is an effect. BUT, if no new lending occurs, then the first round effect is muted, then reverses since the economy is too deep into debt already.

10/18

Earlier in 2020 Dr. Hunt spoke with @DiMartinoBooth on @RealVision about Repo, reverse repo, and QE.

realvision.com/why-the-feds-r…

https://twitter.com/dimartinobooth/status/1235898181373882368?lang=en

11/18

There Dr. Hunt added this important point:

"I would have never done the quantitative easing. I don't think that there's evidence that the quantitative easing has made anything better. I think what the Fed did during the Lehman crisis...

12/18

"and those extraordinary measures they had to be done, but I think that Quantitative 1, 2 and 3 really did not lift the economy. The academic studies show that. The Fed won't accept that, but to me...

13/18

"...the nasty aspect of the quantitative easing is that as it came in, it exacerbated the income and wealth divides.

In other words, if you were heavy in stocks, and if you were upper income, you were able to do things to
participate in wealth appreciation...

14/18

"..., whereas the folks that were pushed down to the zero bound are basically your low and moderate income folks. The Federal Reserve, and this is the problem with theories of grand design...

15/18

...the Federal Reserve actually made a lot of people in relative terms, a lot worse off and made a few a lot better off."

16/18

Bottom line: QE is only inflationary IF it leads the banks to new lending. If no new lending occurs, the first round effects are to inject money in financial assets through this balance sheet expansion (see @scientificecon and verified by Hunt).

professorwerner.org/blog/

17/18

Whatever the effect of the balance sheet expansion, it isn't inflation in the real economy. Its an asset trap. Reserves are used to push rates down and entice more real money into financial assets.

18/fin