Assorted links


Interesting point from (5):
"First, the Treasury and Fed need a new "accord" to decide who is in charge of interest-rate risk, most likely the Treasury, and then grant it clear legal authority to manage that risk. The Fed should then swap its portfolio of long-term bonds for a portfolio of short-term Treasuries and forswear meddling in the maturity structure again."

I'm wondering what others think about whether such an accord is needed, and whether the Treasury should be in charge of interest-rate risk.

This is interesting. One comment in the article suggested that the Treasury convert to long bonds. Great idea, but that would increase the borrowing costs as well.

I think that we will begin to see serious discussions about the advisability of default coming from Washington. The ultimate kick of the can.

Professor Cochrane explicitly contemplates a scenario in which the Fed tightens without shedding much of the Treasury debt from the Fed balance sheet. In which case, the increased interest is payable to the Fed, and gets rebated to the Treasury. Even supposing the Fed decides it would like to sell off a lot of the debt, the Fed's decisions as to how much to hold, and what rates to target will be driven by overall economic conditions at the time. Why would the Fed tighten to the point that a debt crisis ensued?

They can tighten simply by not buying newly issued debt. But the debt will be then priced by the market, not the Fed. The question becomes what would the 30 year or 10 year yield look like if the Fed wasn't buying up a good portion of new debt issuance? The yields would go up, debt servicing costs would go up, then the Fed would start monetizing again to keep them low.

I think that they are stuck. This stuff was all designed to get the economy roaring again, revenues would go up, and the problem would go away. But it didn't. We are seeing in real time the Rogoff Reinhart scenario playing out. The solution is to pay off debt, which is untenable. That would require a substantial shrinking of the cost of government, and a substantial increase in taxation. Hence my prediction that default will be seriously contemplated. The Fed balance sheet is not unlimited.

"Professor Cochrane explicitly contemplates a scenario in which the Fed tightens without shedding much of the Treasury debt from the Fed balance sheet. In which case, the increased interest is payable to the Fed, and gets rebated to the Treasury."

Yes, Cochrane assumes a situation in which the Fed does not liquidate its portfolio. However, if rates rise the Fed doesn't automatically earn more interest. The interest rate is generally constant on the MBS's and the Treasuries they hold on the balance sheet. If rates rise, the market value of the portfolio will diminish substantially and the Fed could stand to take large losses if they did liquidate. The only way "the increased interest is payable to the Fed" would be to the extent that the Fed allows its existing portfolio to rollover into newly issued securities that bear a higher interest rate. That takes time, and it doesn't really benefit the Treasury: Treasury pays the Fed higher interest and gets most (but probably not all) of that back as general revenue from the Fed. Fed studies show that with higher interest rates the revenue payback to the Treasury will substantially diminished and will likely be discontinued entirely for a period of about 6 years during this transition period assumed to begin in 2015:

And, that paper does not consider large downside risks---it only considers the risk of a 100 basis point increase in rates over the Blue Chip consensus. The tail risk is substantial.

This is exactly right. Doing nothing will create an ugly balance sheet for these reasons. I understand that means little financially for the organization that creates the reserve currency of the world, but it has political risk as few politicians, the mainstream media or the public will be able to grasp that.

4. I thought the beer monopoly situation was much more about the distributors and wholesalers, which although independent companies, are effectively controlled by Bud and Miller. Couldn't find any good links on that in a 2 minute search though.

4. I am on the fence about the AB Bev buyout mostly as putting the number 1 & 3 player in the US will give strong market power over the distributors and wholesalers. They use this market power over these entities versus consumers and use the enormous amount of state regulation to protect their interest. On the other hand, I know AB Bev will completely screw the purchase and continue to lose market share as Lewis Black put it "Why would anybody buyout the beer company that Americans have tolerated for years." How could we make a freer booze market?

One of the things i have always wondered about with bitcoin is the possibility that the earliest adopters could generate worthless transactions and use the fact that they know what those transactions will be like in order to gain an advantage in the mining process. In other words, if you know there will be little traffic on the network and you can be the only one performing a transaction, you could start processing the blockchain before you release the transaction, thereby giving yourself a headstart.

I think bitcoin should be thought of as a 'beta' system that proved out the technology but gets scrapped in favor of a proper 'final' system.

I'm not sure that's even right; unless you know every transaction which is going to be in the block, you can't start looking for appropriate hashes 'in advance'. Might as well ask, 'why don't we start mining transactions for 2015 and save up a bunch of blocks?'

And with the earliest adopters, there'd be no point in such a subterfuge. For example, why would anyone bother with such a strategy when simply switching from CPU mining to GPU mining would gain you literally more than 3 orders of magnitude more hashing power? (On my laptop, the official client would CPU hash at a few thousand hashes per second; when I finally got the GPU miner to work with my ATI card, it went up to a few million hashes per second.)

And ASIC miners mine at billion hashes per second.

You could know every transaction in the block if there were no transactions occurring otherwise. This is why i mentioned early adopters, you would have to do it at the earliest stages of bitcoin's development when you could have time when no transactions occur except the ones you plan. Your point about CPU vs GPU is meaningless. Why would you assume that someone who is cheating wouldnt also take advantage of the benefits of switching to GPU processing? How does the availability of GPU processing negate the advantage of knowing ahead of time what the outcome will be?

It seems like one of the most crucial missing bits is the lack of a lending mechanism. In order to issue a bitcoin loan you essentially have to rely in the counterparty's goodwill right now. A loaning mechanism embedded in the system would be extremely useful.

Open Transactions (made by Fellow Traveler) takes care of that.

Bitcoin is a replacement for cash, not the entire financial edifice built on top of it (although money transfer is baked in).

Isn't almost any loan dependent on counter-party goodwill or a hypothicated physical asset? How is Bitcoin different?

I thought #6 said "Keynesian" at first.

The men went into finance.

The "peak capitalism" graphs looks rather like the intersection of an early twentith century idea of "retirment" with an aging labor force overlaying a loss of confidence that the Fed will keep ngdp rising at a predicatable clip.

#1 and #5 are extremely interesting- not sure I grok completely, but this seems like the right conversation.

Wow. John Cochrane talking about his own Wall Street Journal Op-Ed.

I've never understood the point of the cartoon of him yelling at the WSJ over his breakfast cereal. Unless it's some amazingly self-aware commentary about preaching to the choir.

I think he's supposed to be irked by whatever is happening in the news.

1. This is some really dopey, warmed over Marxism.

That was my impression too.

@#3 - is TC's elephantine chess master memory fading? Since the Bitcoin paper is a repeat from February 23, 2013 at 1:38 pm. Or perhaps it's for emphasis.

Macroeconomists simply don't "get" bitcoin. Its deflationary nature is a feature, not a bug. Its what allows the entire process to work properly.

I dont get that either, what is so great about a deflationary nature?

#1 is not interesting at all, it's merely colorful: Post-modernism pure. Charlie Marx would be turning over in his grave.

#1 - I stopped reading after these clauses. If this is the standard of definition...

"Let’s back pause a minute to define what this means: Capitalism is the system of relationships between the labour class and the capital class."

When I saw the reference to "surplus value" I felt carried back to 1970, with campus Marxists and the labor theory of value. That also reminded me of the inadequacy of the term "capitalism". There are markets without capital and capital without markets. Capitalism is just a pejorative term used by Marx.

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