Operation Twist

Discussion in 'Economics' started by Illum, Aug 24, 2011.

  1. Illum


    "The Federal Open Market Committee known as Operation Twist (named for the Twist dance craze of the time[1]) began in 1961 was created to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. Although this action was marginally successful of reducing the spread between long-term maturities and short-term maturities, it did not continue for a sufficient period of time to be effective.[2] Yet, despite traditionally being considered a failure, the action has subsequently been reexamined in isolation and been found to have been more effective than originally thought.[1] As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.[1]"


    Ok old people. If you were trading at the time, what was the feel of it, if they go this route what are we looking at? Some memories of how money reacted
  2. S2007S


    Friday is going to be crazy, I think the markets could easily swing 300-500 points that day.

    Going to be and interesting day to trade. Too much anticipation on this one single meeting.
  3. clacy


    Agreed. This has desperation written all over it. IMO, the markets will not look favorably at "Operation Twist".
  4. To me, it seems like a lose, lose for the markets. Especially after a nice little run up. A strangle strategy (with quick fingers) might be the best way to play it.

    More printing and buying not good for the markets.

    Do nothing to keep afloat an already fragile economy not good either.

    Sooner or later we have to come to terms with this global debt crisis.

    Maybe all nations on the count of three should say "fuck you and my debt obligation to you" and start over.

    Greece needs to bring back their currency while maintaining the euro. Then they could devalue thierselves and maybe have a chance otherwise they're only prolonging the imminent.
  5. Quantitative easing does not work where the private sector is deleveraging. QE is based on the Quantity Theory of Money which assumes that when you increase the supply of money specie (Base Money) that through a money multiplier effect the increased supply of money will overwhelm the demand for money and result in higher leverage and increased asset prices bleeding through to an increase in all prices of goods and services. This theory was created in the 18th century when money was based on collateral, gold and or silver.

    As the experience of QEI and QEII showed in the U.S. this theory does not work with fiat currency. Today money has no collateral predicate so it is in fact pure unsecured credit. As James Grant has pointed out, today money is actually the expectation of obtaining credit in the future. In the present context the Quantity theory based on tangible collateral does not make any sense. There is no money multiplier where credit is already contracting. So increase the base money does not result in a real expansion of 'money' supply, the new specie, base mony, can only pool withing the Central Banking system.

    This is in fact what happened during the quantitative experiment of the past three years. Since 2008 the U.S. Fed increased its balance sheet from about 250 Billion to something now more than 2.3 Trillion Dollars. During that time the index price change measure favored by the Fed, the Core PCE, decline by 50% from just over 2% to now just over 1%. The prime effect of QE was to weaken the dollar, increase interest rates, increase commodity prices and the price of necessities and increase the price of public equities, decrease the price of tangible collateral assets, while strangling the real economy and keeping unemployment high and wages low. Because the U.S. is the world reserve currency the QE, which did not result in general infation in the U.S. domestically, was exported to emerging markets where it caused general inflation and malinvestment that will soon be exposed.

    The reason that the expansion in base money according to the Quantity Theory play book did not work is becuase the domestic economy in the U.S. was deleveraging....private credit was contracting. Where private credit is contracting there is no transmission mechanism between either money supply or interest rates effect bank lending or general price indexes. In a fiat money context, where money itself is credit, there can be no expansion of money supply without a credit expansion. Private credit expansion is the 'V' in the famous equation...private credit expansion is velocity. Where private credit is already contracting you cannot cause it to expand by lower rates or increasing base money. This is proved by the experiment of QEI and QEII during the past three years.

    So, know you want to know about a pathetic little QEIII gesture referring back to the 'twist.' If has not worked already its not going to work now. Big deal, the Fed sells long treasuries in its portfolio and it buys shorter term Treasuries to reduce the portfolio average interst rate. Its stupid in the face of the failure of QEI and QEII. If they announce such a stupit thing and the market ralleys...sell into it.

    There is only one way to create private credit expansion and it is not on the monetary policy side; its fiscal. There needs to be fiscal leadership that can change the fiscal context so that entrepreneurs and innovators will be convinced that future fiscal policy will allow them to possess profits from risk taking. There needs to be greater certainty of a future fiscal context that will not be hostile to profit. That takes policy that favors currency price stability, predictability in trade, predictability in tax policy and predictability in regulation. Such policy context needs to be promoted by a leadership that is perceived as credible and lasting. That is all it would take. I am not betting on it.
  6. You must be Robert Mundell. Perfect analysis, ridiculous, politically biased conclusion.
    The current political leadership, such as it is, isn't stopping Google or Zynga or Facebook or Apple. Jobs would look at you like you had two heads if you tried to convince him he wasn't innovating because of DC.
    If the private economy is deleveraging, which it is, then the government has to be levering up in order to at least offer some offset to that process. This is simple common sense, otherwise known as Keynesian economics. All Keynes said was: save when times are good, so you can spend when times are bad.
    The right hates this however, for the simple reason that saving when times are good would require a steeply progressive tax code, said steep progressivity having been dismantled in the US and UK over the past thirty years or so. Instead, when times are good, the Republicans offer inappropriate tax cuts and, in the Bush era, ramped up government spending, the precise opposite of what should have happened in good times. Now that the bad times are here, surprise, the government has less room for offering fiscal relief for the process of private sector deleveraging.
    There is no evidence, meantime, that the Republican policy of spending everything when times are good has led to a better overall outcome for the economy. The economy has been more unstable, the middle class has shrunk, and speculation, not regulation or taxation, is threatening to overwhelm enterprise, as you would expect in an environment of instability, because in such an environment the incentives are all short term.
    Just look at where this discussion is happening. The evidence is right under your nose.
  7. +1 and +1
  8. Buy IBM, wait for Nixon to float the dollar and buy gold, and make an easy 14% in a money market account when they invent it.

    Also, check out a little flyer called Xerox.
  9. Trefoil, I am flattered that you think my analysis is perfect. It took me many years to figure it out and now be able to write it down clearly in a couple of paragraphs. I benefited from meeting and listening to Robert Mundell and reading his work, but I am not him. I don't think he would entirely agree with my analysis. On the other hand I notice that you offer no analysis; just pure political bias.

    Private credit contraction cannot be countered by Government leveraging. They are two completely different things. In fact it is the Keynesian policy mistake of thinking that you can substitute government leverage and spending to counter private deleveraging that is causing the soveriegn insolvency crises that is now manifest in the smaller EU nations and is threatening the larger ones and the U.S., and Japan for that matter.

    Government can only spend the saved or present surplus of the private sector or it can borrow against the future surplus of the private sector. All debt, whether it is public debt or private debt must be justified and paid out of the surplus earnings of the assets that such debt has been used to create or maintain. If you borrow money and you do not invest the borrowed money in some asset that can earn a future income stream large enough to at least pay the debt back then you will go broke; public or private.

    The big lie that you clearly have bought into, is that spending and aggregate consumption is the prime economic driver. You probably think it makes sense when someone repeats the silly observation that 'consumption is 70% of the economy.' Do you even stop and say, 'What does that mean? How can that be? Can you really just create money out of thin air, just by spending it? It is ponderous to observe that two generations of our elites have been taught this crap like it is gospel, and they go along with it unquestioningly like it is some white noise humming behind the tanquilized obviousness thier carreer development.

    Come on!...consumption spending creates and maintains wealth and jobs?! Stop taking drugs...the proposition is stupid on its face. If that was true, Bush would have made everyone rich and we would be at full employment...hell, since then Obama would have tripled the world GDP and California would have no debt!

    In the famous equation C + I + G = GDP the only thing that matters is 'I'....both 'C' and 'G' are the surplus of 'I' and the export/import codicile is irrelevant (that is why I left it out of the equation). The whole confused idea of the GDP metric was created by an FDR socialist. It conflates C, I & G and has contributed to the over educated brainwashed thinking that 'C' is the economic driver ... as if spending on unemployment can actually create jobs, or that reducing the amount of payroll tax paid will make your payroll benefits more secure as you use the extra folding money to buy beer and cheetos while 'G' compensates by promising to borrow more money in the future to take care of you. Whose assets are going to pay for that debt? I am OK with trying to help people who need help but its a lie to justify charity as an economic engine...its a surplus that somebody has to pay for.

    There is no such thing as a money multiplier. Its a tooth fairy lie for political convenience. Ask Romer, she is famous for never finding one, though you would never know that unless you looked under her pillow and read her study.

    The only way to grow, increase and maintain wealth, is to invest capital in the creation and maintenance of assets. It is the cash flow from the assets created and maintained by 'I', that creates sustainable jobs and pays for 'C' and 'G'. If you stop putting money into 'I' and instead divert it just to 'C' and 'G' you will destroy your wealth and lower your standard of living...no matter what your political ideology is. Have you ever heard of 'seed corn?' Now, instead, we could create a fiscal context to attract more 'I' to domestic endeavors or we can just eat our seed corn and watch the 'I' go offshore and the whole country turn into Detroit.

    When I talk about the real economy and the need to foster a context for entrepreneurism and innovation, I am not talking about public companies like the ones you knee jerk to. I am talking about private companies that employ between 100 and 1000 people. I am talking about the companies that actually create jobs..not the public companies whose mature role and nature is naturally to reduce jobs. I am not talking about the companies run by rent seeking sector consolidating subsidized monopoloy protected whores that POTUS has appointed to his strong arm fund raising ruse parading as jobs commission. How many net jobs do you think Warren Buffet has created. Think about that as you listen to Lowell George sing, "There's a fat man in the bathtub with the blues. I hear you moan, I hear you moan, I hear you moan."

    I am talking about the job creating private companies that pay the top tax rates even though they are the job engines...I am talking about the Sub-S companies that have to pay tax on retained earnings even if they want to reinvest in their business. I am not talking about the rent seeking whore public companies who consolidate sectors, seek to restrain trade, and avoid the top tax rates. In the examples you gave above you confuse Wall Street for the real economy and you use a few high tech success stories to make a false point that doesn't sound in the real economy.
    #10     Aug 26, 2011