Sterilised QE Analysis
Guest post by Azizonomics.
From the WSJ:
Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.
Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.
This confirms four important points that relatively few economic commentators have grasped.
First, if QE was intended — as Bernanke always said it was — solely to lower the interest rates on government debt, and force investors into “riskier” assets, rather than to directly stimulate the economy, why were the first two rounds of QE not sterilised? Is Bernanke making it up as he goes along? No — the first two rounds of QE were undoubtedly reflationary:
Sustainability of Italy’s sovereign debt
On the sustainability of Italian debt by Voxeu. In late 2011 as risk spreads on Italian government bonds surged to levels that had been associated with debt crises in Greece, Ireland, and Portugal, some leading economists called for a restructuring of Italy’s debt.1 With the recent easing in borrowing rates, such proposals look at best highly premature and at worst reckless. A pre-emptive move to restructure debt for the world’s seventh largest economy, especially in a manner imposing debt reduction, would likely trigger bank runs, a severe new round of financial instability, and perhaps the breakup of the euro.
The calls for debt forgiveness tend to leap from a simple combination of the 120% ratio of debt to GDP with an interest rate of 7% to reach a diagnosis of insolvency. In contrast, my calculations indicate that Italy could manage even such high interest rates for some considerable time, for two central reasons.
- First, Italy has reasonable prospects of achieving a relatively high primary surplus (fiscal surplus excluding interest payments) that can pay for most of the interest bill rather requiring ever more net borrowing.
- Second, the relatively long maturity structure of debt means that only about 10% of long-term debt needs to be refinanced each year. This profile delays the effective arrival of higher interest rates and provides time for demonstration of good policies (including especially growth-oriented reforms) to restore market confidence and reduce interest rates once again before the bulk of the long-term debt needs to be refinanced. (full article here).
High-Frequency Trading: Menger vs. Walras
By Paul Koning of Mises Institute.
While Carl Menger and Léon Walras simultaneously discovered the principle of marginal utility, their ideas about the nature of market prices are very different. Walras was more interested in the final equilibrium prices arrived at by traders than the process by which these prices were formed. Therefore, he dramatically simplified the pricing process by imagining it as if it were governed by an auction mechanism capable of instantly calculating all prices in an economy.
For his part, Menger was fascinated with the actual process by which prices are formed. Rather than trying to abstract from the messy process of haggling by devising an artificial auction mechanism, Menger worked with a number of real-life pricing scenarios including isolated bargaining, monopoly, and competitive exchange.
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