openpolitics.com

14:16
goes on to say here homeowners or and
14:19
allow homeowners to refinance that is
14:20
very true
14:21
the lower interest rates did give
14:23
homeowners the ability to refinance
14:25
their homes into lesser
14:26
you know payments the problem with it is
14:28
is that most of these people when they
14:30
refinance their home they took the
14:31
equity out once and spent that on
14:32
vacation or
14:33
whatever they did with it but they
14:35
didn’t just like refinance their home
14:36
and start making the payments on it they
14:38
took the money out
14:39
lower corporate bond rates will
14:41
encourage investment which
14:43
yeah i agree with that too because we
14:44
saw a huge amount of corporate debt
14:46
being sold
14:47
while these interest rates were dropping
14:48
down but what did those corporations do
14:50
with the money
14:51
they bought back their own stock making
14:53
the stock market rise did they reinvest
14:55
it i imagine a lot of them did but a lot
14:57
of them went back and bought their own
14:58
stock with it
14:59
so you know the things that ben bernanke
15:02
were thinking were going to happen
15:04
didn’t really quite happen out to the
15:05
way that he was anticipating they would
15:09
he says although asset purchases are
15:11
relatively unfamiliar as a tool of
15:13
monetary policy some concerns
15:15
about this approach are overstated
15:17
critics have for example worried that
15:19
it will lead to excessive increase in
15:21
the monetary in the money supply and
15:23
ultimately
15:24
to significant increases in in inflation
15:27
now i do agree with that because he’s
15:28
basically saying that all this
15:30
effort that they’re going to do with the
15:31
quantitative easing and stuff is not
15:33
going to increase the inflation and it
15:34
really didn’t like you know a lot of
15:35
people were screaming hyperinflation
15:37
back then
15:38
that all this money printing is
15:39
eventually going to find its way into
15:40
the economy and everybody’s going to
15:42
have like this hyper
15:42
inflation scenario take place but it
15:44
didn’t occur that way it
15:46
it just didn’t happen and
15:49
he goes on to say here we made all
15:51
necessary preparations and we are
15:53
confident that we have the tools to
15:55
unwind these policies at the appropriate
15:57
time
15:57
now i definitely disagree with that
15:59
because they never did unwind the whole
16:01
quantitative easing program
16:02
they never returned the balance sheet
16:04
back to normal and they did not do
16:06
anything that was even remotely close to
16:08
unwinding the thing to at the
16:10
appropriate time it just didn’t happen
16:13
so very interesting uh writings there
16:16
now this speech this is probably one of
16:18
my most favorite speeches from ben
16:19
bernanke was given back in 2002
16:22
and he was talking about deflation and
16:24
the title of his deflation making sure
16:26
it doesn’t happen here
16:28
now this is a very long speech but it is
16:30
a very good one and if you have the time
16:32
to read it i suggest you do
16:34
this is the speech that has the credible
16:36
threats um
16:38
gold story in it now i’ll talk about
16:40
that here in just a minute but a lot of
16:42
you
16:42
who follow my channel for any length of
16:44
time i’ve talked about the credible
16:45
threat and the guy who invested gold
16:47
machine this is where i got that from
16:48
was this speech
16:50
now in this he says however a
16:52
deflationary scenario may defer
16:56
in one respect from normal
16:59
i’m sorry may differ in one respect from
17:01
normal recessions in which the inflation
17:04
rate is at least modestly positive
17:06
deflation of sufficient magnitude may
17:08
result in the nominal interest rate
17:11
declining to zero or very close to zero
17:13
one of the nominal interest rates
17:15
when sorry once the nominal interest
17:18
rate
17:18
is at zero no further further downward
17:21
adjustment
17:22
in the rate can occur since lenders
17:24
generally will not accept negative
17:25
nominal interest rates when it is
17:27
possible instead to hold cash
17:29
at this point the nominal interest rate
17:31
is said to have hit
17:32
the zero bound all right so it’s kind of
17:35
funny how
17:36
back then they were talking about
17:37
negative interest rates
17:39
thinking that it wasn’t even a feasible
17:41
possibility and yet here we are talking
17:43
about negative interest rates as a
17:44
feasible possibility anyway going on
17:47
here he says
17:48
because central banks conveniently
17:51
conduct monetary policies by
17:52
manipulating the short-term
17:54
nominal interest rates some observers
17:56
have concluded that when the key
17:58
key rate stands at or near zero the
18:01
central bank has
18:02
run out of ammunition that is it no
18:05
longer has the power to expand
18:07
aggregate demand and hence economic
18:09
activity
18:10
it is true that once the policy rate has
18:13
been driven down
18:14
to zero a central bank can no longer use
18:16
its traditional means of stimulating
18:18
aggregate demand
18:19
and thus will be operating in a less
18:21
familiar territory
18:22
the central bank’s inability to use
18:24
traditional methods may complicate the
18:26
policy-making process
18:28
and introduce uncertainty to the size
18:30
and timing of the economics
18:32
in in sorry uncertainty
18:36
in the size and timing of the economy’s
18:38
response to policy actions hence i agree
18:40
that the situation is one to be avoided
18:42
if possible
18:44
but he goes on to say here deflation is
18:46
generally the result
18:47
of low and falling aggregate demand the
18:49
basic prescription
18:51
for preventing deflation is therefore
18:53
straightforward at least in principle
18:55
use monetary and fiscal policy as needed
18:57
to support the aggregate spending
18:59
so that seems pretty simple it was just
19:01
like when you started running into
19:02
deflation do something about it that’s
19:04
pretty much what he was saying there
19:05
goes on the fed should take most
19:09
seriously of course it does
19:11
its responsibility to ensure financial
19:13
stability in the economy
19:14
goes on to say a healthy
19:16
well-capitalized banking system
19:18
is smooth and sorry guys i guess i
19:20
should talk a little bit more about this
19:21
before i start in on that
19:23
he says that there’s basically three
19:24
ways to prevent
19:26
deflation and the first way he talks
19:29
about is to let inflation run
19:30
high like to have like over inflation
19:33
and then when if deflation starts to
19:35
kick in that hopefully the
19:37
inflation will drop down into that kind
19:40
of target range so that you don’t have
19:42
deflation taking place or the
19:44
disinflation
19:45
so you’re saying at first is to allow
19:47
inflation to run run hotter than what
19:49
you would typically
19:50
let it go that’s the first first way to
19:52
prevent it the second way
19:54
to prevent deflation was to keep a
19:56
healthy well-capitalized banking system
19:58
and smooth functioning of capital
20:00
markets
20:01
our important line of defense against
20:02
deflationary shocks
20:04
now that led me to think about september
20:06
and the
20:07
overnight repo agreements that they were
20:10
that they were conducting for however
20:12
many months before the quantitative
20:13
easings really started kicking in
20:15
but that overnight repo facilities that
20:17
they were doing that kind of reminds me
20:19
of that statement right there for the
20:20
second way to prevent deflation a
20:22
healthy well-capitalized banking system
20:24
and smoothly function capital and
20:26
capital markets are an important line of
20:28
defense against deflationary shocks
20:30
third he goes as suggested by the number
20:33
of studies when
20:34
inflation is already low and the
20:36
fundamentals of economy suddenly
20:38
deteriorate the central bank should act
20:40
more preemptively
20:41
and more aggressively than it usually
20:43
than usual in cutting rates
20:45
so back when we saw the federal reserve
20:47
reverse course as far as unwinding their
20:49
monetary policy and then they started
20:51
dropping
20:52
interest rates that was them acting
20:53
preemptively to keep
20:55
you know to keep the deflation from
20:58
kicking in
20:58
so those three things pretty much
21:00
occurred you know as far as
21:02
what’s happened here just recently
21:04
within the last year
21:07
goes on i believe that a combination of
21:10
strong economic fundamentals and policy
21:12
makers at the
21:14
at that are attentive to the downside
21:17
as well as the upside risk to inflation
21:19
make significant deflation in the united
21:21
states in the foreseeable future quite
21:23
unlikely
21:24
but suppose that despite all the
21:26
precautions
21:27
deflation were to take hold in the u.s
21:29
economy
21:30
and moreover the fed’s policy instrument
21:32
the fed funds rate were to fall to zero
21:34
what then
21:35
so what would happen if we land at this
21:37
exact moment right so
21:39
if you not back then in 2002 but right
21:42
now here in
21:43
you know 2020 what would the
21:46
federal reserve do if the deflation
21:49
started kicking in and the fed funds
21:50
rate were at zero
21:52
what do you do about that and this is
21:53
what he says curing deflation
21:56
says some observers have concluded that
21:58
when the central bank’s policy rates
22:00
have falled to zero
22:01
its practical minimum monetary policy
22:03
loses its ability to further stimulate
22:05
aggregate demand in the economy
22:07
at a broad conceptual level and in my
22:10
view
22:11
in practice as well this conclusion is
22:13
clearly mistaken
22:15
indeed under a fiat that is paper money
22:17
system
22:18
a government in practice the central
22:20
bank in cooperation with other agencies
22:23
should always be able to generate
22:24
increased nominal spending
22:26
and inflation even when the short-term
22:28
nominal interest rates are at zero
22:31
now he goes on to talk about the gold
22:34
story this is the
22:35
he has a little story written here i’m
22:37
not going to read it but i’ll just tell
22:38
you how it goes and that’s basically the
22:39
guy who invents a gold machine and with
22:41
this gold machine he can produce as much
22:43
gold as he wants
22:44
at will with very little cost or energy
22:46
the moment that that information gets
22:48
out to the public that he has this
22:49
machine
22:50
the price of gold on the market begins
22:52
to will just immediately plummet
22:55
even before the guy produces a single
22:57
ounce of gold
22:58
just that information alone the credible
23:01
threat that he has
23:02
that he has this machine will be enough
23:03
to move the markets
23:05
he goes on to say what has this got to
23:07
do with monetary policy
23:09
like gold us dollars have value only to
23:12
the extent that they are strictly
23:14
limited in supply
23:15
but the u.s government has a technology
23:17
called a printing pressed
23:19
or today it’s electronic equivalent that
23:21
allows it to produce as many us dollars
23:23
as it wishes at essentially no cost
23:26
by increasing the number of dollars the
23:28
us dollars in circulation or
23:30
even by the credible threat of doing so
23:32
the us government can also reduce the
23:35
value of the dollar
23:36
in terms of goods and services which is
23:38
equivalent to raising the prices and
23:40
dollars of those goods and services
23:42
we concluded that under a paper monetary
23:45
system
23:45
a determined government can always
23:48
generate higher spending
23:50
and hence positive inflation now we go
23:52
back to old richard’s uh statement here
23:54
the other day
23:56
in uh in that speech where he says uh
24:02
where was it
24:06
these programs are designed to offer
24:08
backstop sources of funding to the
24:09
private sector
24:10
and just the announcement that these
24:12
backstop backstop facilities would soon
24:15
be launched appears to have
24:17
bolstered confidence in capital markets
24:19
allowing many companies to finance
24:20
themselves privately
24:22
even before the facilities were up and
24:23
running uh-huh
24:25
see the credible threat alone
24:28
all right um
24:33
of course the u.s government is not and
24:35
this is i like this one
24:36
of course the us government is not going
24:38
to print money and distribute it
24:39
willy-nilly
24:42
are you sure okay
24:46
normally money is injected into the
24:48
economy through the asset purchases of
24:50
federal reserve
24:51
the to stimulate aggregate spending when
24:54
short-term interest rates have reached
24:55
zero the fed must expand the scale of
24:57
its asset purchases or possibly expand
25:00
the menu of its assets that it buys
25:02
okay we’re starting to experience in
25:04
that right now with the
25:05
you know purchasing of the
25:07
mortgage-backed securities the
25:08
purchasing of municipal bonds the
25:10
corporate bonds you know we’re starting
25:11
to see the menu
25:12
of what they put on their balance sheet
25:14
to start to expand
25:15
just like ben bernanke said it would
25:17
back in 2002.
25:20
because the long-term interest rates
25:21
represent averages of current and
25:24
expected future short-term rates
25:26
plus the term premium a commitment to
25:28
keep short-term rates
25:30
at zero for some time if work if it were
25:33
credible
25:33
would induce a decline in the
25:35
longer-term rates
25:37
a more direct method which i personally
25:40
prefer
25:40
would be for the fed to begin announcing
25:43
explicit
25:43
ceilings for for yields on long maturity
25:48
treasury debt
25:49
say bonds maturing within the next two
25:50
years the fed could enforce these rates
25:52
ceilings
25:53
by committing to making unlimited
25:55
purchases of securities for up to two
25:57
years
25:58
from maturity at prices consistent with
26:01
the targeted yield
26:03
so basically what they’re saying is that
26:05
if they promise to make sure that
26:08
short-term rates are only allowed to go
26:10
to a certain level that everybody’s
26:12
anticipation of that
26:14
would force the longer term rates down
26:16
as well
26:18
it goes on if lowering yields on
26:21
long-dated treasury securities proved
26:22
insufficient to restart spending however
26:25
the fed might next consider attempting
26:27
to influence directly the yields on
26:29
privately issued securities
26:31
you guys hear that one all right this is
26:34
like the privately issued securities
26:36
that’s corporate debt unlike some
26:39
central banks and barring changes to
26:40
current law the fed is relatively
26:42
restricted
26:43
relatively restricted in its ability to
26:46
buy private sector
26:48
private securities directly
26:51
right unless there’s unusual in exigent
26:53
circumstances like
26:54
old richard says however the fed does
26:58
have broad powers to lend to the private
27:00
sector indirectly via banks through the
27:02
discount window
27:05
for example the fed might make 90 day
27:07
and 180 day
27:09
zero interest loans to banks taking
27:11
corporate commercial paper
27:13
at the same maturity as collateral so
27:16
some of those things that we’re starting
27:18
to experience right now with the special
27:19
purpose vehicles
27:20
okay um what else does he say here
27:25
the fed can inject money into the
27:27
economy in still
27:28
other ways for example the fed has the
27:30
authority to buy foreign government debt
27:32
as well as domestic government debt
27:34
potentially this class of
27:36
assets offers huge scopes for the fed’s
27:38
operations as the quantity of foreign
27:41
assets eligibility
27:42
or eligible for purchase by the fed is
27:45
several times the stock of the us
27:47
government debt
27:48
now that leads me back to old richard’s
27:51
talk here where he says
27:54
the establishment of the new fima
27:57
foreign and international monetary
27:59
authority repo facility with potential
28:01
eligibility for
28:02
a broad range of countries sounds like
28:05
very much what ben bernanke was
28:06
suggesting that we could use as far as
28:08
being able to
28:09
purchase foreign debt and put that onto
28:12
the balance sheet
28:13
goes on to say here if all these things
28:15
don’t really work out
28:18
fiscal policy can be used now this is
28:20
the government’s
28:21
stimuli stimulating the economy as
28:23
opposed to the fed’s actions
28:25
a broad-based tax cut for example
28:27
accommodating
28:28
accommodated by a program of open market
28:31
purchases to alleviate any tendency for
28:33
interest rates to increase
28:35
would almost certainly be an effective
28:37
stimulant to the consumption
28:38
and hence to prices broad-based tax cuts
28:42
corporate tax cuts payroll tax cuts all
28:44
right
28:45
even if households decide not to
28:47
increase consumption but instead
28:49
rebalance their portfolios by using
28:50
their extra cash to acquire real and
28:52
financial assets
28:54
the resulting increase in asset values
28:56
would lower the cost
28:58
of capital and improve the balance sheet
29:00
position of potential borrowers
29:02
any money finance tax cut is essentially
29:05
equivalent to milton friedman’s famous
29:07
helicopter money drop
29:11
all right so talked about taxes
29:15
okay if the treasury issued debt to
29:18
purchase private assets at the fed then
29:21
purchased an equal amount of treasury’s
29:24
debt
29:25
with newly created money the whole
29:27
operation would be the
29:29
the economic equivalent of direct open
29:31
market operations in private assets so
29:33
the federal reserve can’t do it but the
29:34
federal reserve says hey i’ll buy a
29:36
bunch of treasuries and if the treasury
29:38
went and bought these
29:40
private assets then you know that’s kind
29:41
of the same thing but we’re not doing it
29:43
you’re doing it
29:44
and that kind of rel reminds me of the
29:46
tarp program the troubled asset relief
29:48
program
29:49
so anyway found that to be very
29:51
interesting stuff
29:52
it leads me to think more about how this
29:55
coronavirus is used
29:57
more as a scapegoat for the economic
30:00
downturn than an actual cause for the
30:02
economic downturn
30:03
considering that everything that they
30:05
were talking about being a possibility
30:07
for deflation in the future during the
30:09
next economic downturn and how great it
30:11
could be
30:12
is now taking place and they’re using
30:14
all those all those tools
30:16
right now and it’s all the tools that
30:18
they have in their playbook
30:20
it’s very interesting stuff and i’ll
30:22
leave links down in the description for
30:24
all these things
30:25
i know that video i kind of stumbled
30:26
through a lot of it i hope you guys got
30:28
through it it was you know there was a
30:30
lot there
30:31
but uh like i said i’ll leave links down
30:33
in the description for everything and i
30:34
would
30:35
love to get you guys response on that
30:36
one uneducated economist
30:38
you guys let me know