"If You're So Smart: The Currency Trading Record of John Maynard Keynes"

Professor Chambers and his pal Prof. Dimson have written the premier piece of Keynes-in-the-equities-markets scholarship, links below. This is a look at Keynes-in-the-FX-markets.

From ValueWalk:

If You're So Smart: The Currency Trading Record of John Maynard Keynes

Olivier Accominotti

London School of Economics

David Chambers

Cambridge Judge Business School

Abstract:
This paper provides the first micro-study of the risks and returns to currency speculation during the 1920s and 1930s. Relying on archival research, we analyze in detail the trading record of one prominent currency speculator of this period: John Maynard Keynes. Our analysis reveals that John Maynard Keynes used his knowledge of macroeconomics and the international financial and political scene to speculate in foreign exchange markets. His trading strategy was based on a sophisticated analysis of macroeconomic fundamentals in contrast to the simple rules-based strategies characteristic of modern currency markets, namely, the carry trade and momentum. We find that John Maynard Keynes’s risk-adjusted returns were low compared to those on UK stocks and bonds and on the simple carry and momentum strategies. Whilst he exhibited some skill in forecasting the direction of currencies, Keynes found great difficulty in timing his trades. Overall, our findings indicate that Keynes’s economic expertise was of little benefit for speculating in currencies.

If You’re So Smart: The Currency Trading Record of John Maynard Keynes – Introduction
The interwar period was the most turbulent in the history of currency markets. The floating exchange rate era of the 1920s was marked by unprecedented foreign exchange volatility and the large depreciation of European currencies, whilst the 1930s are remembered for the successive waves of speculative attacks, which eventually brought down the gold standard system (Eichengreen, 1992). The interwar years also witnessed a major transformation in the practice of foreign exchange trading with the spread of dealings by telegraphic transfer and of the use of forward contracts. A large-scale spot and forward exchange market emerged for the first time in London. Anecdotal evidence from contemporaries suggests that currency trading became a substantial activity starting in the 1920s, as speculators sought to exploit the new profit opportunities associated with floating exchange rates (Einzig, 1937). However, whilst the literature on the causes and consequences of interwar currency instability is prolific, little is known about the risks and returns and the nature of speculating in currencies during this period....MUCH MORE

Here's a rather vicious drawdown.
Keynes was trading on 10:1 margin and by May 1920 his account was upside down by £13,125 and had a variation margin call of £7,000 which, while not enough to get his account to $0, kept his brokers from selling him out.

He raised a £5,000 personal loan and requested a £1,500 advance on the royalties from The Economic Consequences of the Peace:

At $4.80 to the £, that call was for $458,640, inflation adjusted, enough to get the great man's attention.
I'm a bit obsessive about this stuff, see also:

Keynes The Stock Market Investor
Dimson & Chambers-- "Retrospectives: John Maynard Keynes, Investment Innovator"

"Keynes the Stock Market Investor: The Inception of Institutional Equity Investing" (free download, 54 page PDF)

Keynes in the Commodities Markets
John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)

Finally, a back-up version of If You're So Smart... should the ValueWalk version fail.
(40 page PDF)

"If You're So Smart: John Maynard Keynes and Currency Speculation in the Interwar Years"

I was reading this paper and thinking "This seems familiar".

Duh. We posted an earlier version of it back in February. I'll post again though, but this time linking to the December 1 iteration.

Professor Chambers and his pal Prof. Dimson have written the premier piece of Keynes-in-the-equities-markets scholarship, links below. This is a look at Keynes-in-the-FX-markets.

From the Social Science Research Network:

If You're So Smart: The Currency Trading Record of John Maynard Keynes

Olivier Accominotti

London School of Economics

David Chambers

Cambridge Judge Business School

Abstract:
This paper provides the first micro-study of the risks and returns to currency speculation during the 1920s and 1930s. Relying on archival research, we analyze in detail the trading record of one prominent currency speculator of this period: John Maynard Keynes. Our analysis reveals that John Maynard Keynes used his knowledge of macroeconomics and the international financial and political scene to speculate in foreign exchange markets. His trading strategy was based on a sophisticated analysis of macroeconomic fundamentals in contrast to the simple rules-based strategies characteristic of modern currency markets, namely, the carry trade and momentum. We find that John Maynard Keynes’s risk-adjusted returns were low compared to those on UK stocks and bonds and on the simple carry and momentum strategies. Whilst he exhibited some skill in forecasting the direction of currencies, Keynes found great difficulty in timing his trades. Overall, our findings indicate that Keynes’s economic expertise was of little benefit for speculating in currencies.

If You’re So Smart: The Currency Trading Record of John Maynard Keynes – Introduction
The interwar period was the most turbulent in the history of currency markets. The floating exchange rate era of the 1920s was marked by unprecedented foreign exchange volatility and the large depreciation of European currencies, whilst the 1930s are remembered for the successive waves of speculative attacks, which eventually brought down the gold standard system (Eichengreen, 1992). The interwar years also witnessed a major transformation in the practice of foreign exchange trading with the spread of dealings by telegraphic transfer and of the use of forward contracts. A large-scale spot and forward exchange market emerged for the first time in London. Anecdotal evidence from contemporaries suggests that currency trading became a substantial activity starting in the 1920s, as speculators sought to exploit the new profit opportunities associated with floating exchange rates (Einzig, 1937). However, whilst the literature on the causes and consequences of interwar currency instability is prolific, little is known about the risks and returns and the nature of speculating in currencies during this period....MUCH MORE

Here's a rather vicious drawdown.
Keynes was trading on 10:1 margin and by May 1920 his account was upside down by £13,125 and had a variation margin call of £7,000 which, while not enough to get his account to $0, kept his brokers from selling him out.

He raised a £5,000 personal loan and requested a £1,500 advance on the royalties from The Economic Consequences of the Peace:

At $4.80 to the £, that call was for $458,640, inflation adjusted, enough to get the great man's attention.
I'm a bit obsessive about this stuff, see also:

Keynes The Stock Market Investor
Dimson & Chambers-- "Retrospectives: John Maynard Keynes, Investment Innovator"

"Keynes the Stock Market Investor: The Inception of Institutional Equity Investing" (free download, 54 page PDF)

Keynes in the Commodities Markets
John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)

Finally, a back-up version of If You're So Smart...
(40 page PDF)

HT: Value Investing World

Carry Trades: Beyond Foreign Exchange

A bit simplistic for our readers but the memory-jog of the Keynes insight is worth the price of admission.
Lifted in toto from All About Alpha:

Carry Strategies: Beyond Foreign Exchange

Carry strategies have long been a big part of the alpha-seeking landscape.
The idea behind such strategies is simple and arises most naturally in the foreign exchange context.  International investors borrow money in countries where interest rates are relatively low, and then lend it out in countries where the rates are higher. All they do is “carry” the money, so to speak, from one country to the other.

Carry trades of this sort have been quite robust in the last few years. Many hedge funds have made a fine thing out of the continued competition of countries and currency zones. This is sometimes given the exalted name “global macro,” but a more descriptive label might be: monetary-policy arbitrage.

A new white paper from Campbell & Co., written by Susan Roberts, looks at an expanded idea of the carry trade, and at the role it can play in a portfolio.
A broad definition of a carry trade is this: it can include any transaction designed to maximize exposure to the costs and benefits of holding an asset. In the case of a garden variety forex carry trade, the asset held consists of the principal amount borrowed in one currency and lent in another. The point isn’t that the principal amount itself gains in value (that would simply be speculating on the direction of currency moves), the point is that what the principal can do for you exceeds what it will cost you.

Other Types of Carry Trade
In a fixed income carry trade, on the other hand, an investor takes an asset’s yield-to-maturity, and pays the cost of financing, that is, the short rate.  On January 2, 2007, for example, Japanese bonds were yielding 1.7%, with a financing rate of 0.5% (the three month rate).  A carry strategy entailed a long position in those bonds.  If the yield had remained unchanged, the total gain would then have corresponded to the difference between those two rates, or 1.2%. Of course as Roberts observes, your mileage may vary, “shifts in the yield curve may either enhance or reduce returns.” Further, if the value of the underlying asset moves too much in the wrong direction, the expected gain becomes an actual loss.

In world of equities, a carry trade looks to benefit from the dividend yield. It is worthwhile for an investor to hold a stock for any period, setting aside any appreciation in its value, if and only if the dividend yield exceeds the risk-free rate on the same investment. Again to use one of Roberts’ examples: On June 1, 2005 the Amsterdam Stock Index had a trailing 12-month dividend yield of +3.6%. Risk free lending could have yielded 2.1% at the time. Thus, the carry was 1.5%.

Finally, in Robert’s presentation, there are commodity carries.  Here the benefit of holding a commodity is known as the “convenience yield,” and the costs include the financing rate, storage, transport, and insurance.

An Insight from Keynes
Unfortunately, it isn’t easy to observe the “convenience yield.” One can’t simply look it up in the Wall Street Journal. It has to be inferred from either the backwardation (a positive convenience yield) or the contango (negative convenience yield) displayed in the term structure.  One of the defining arguments in the formal study of commodity prices dates to a 1930 work by John Maynard Keynes, A Treatise on Money, in which Keynes explained that people and institutions that hold a lot of a physical commodity have to worry about a collapse in demand. At least in the short-run, the supply is inelastic, demand is unpredictable. As a consequence, producers have to hedge, and hedgers have to deal with speculators. Roberts doesn’t cite Keynes, but his argument is implicit in her explanations here.

After running through the four different sorts of carry trade as I’ve just summarized, Roberts remarks that there is a very low correlation and often negative correlation, historically, among the various carry return strategies. Thus, a hypothetical global carry strategy would itself be diversified. It could be further diversified, of course, by adding assets tied to directional strategies.

The bottom line, then, is that investors who blend carry with directional strategies can enhance their risk-adjusted portfolio results.

Keynes in the Commodities Markets

The paper is formally titled "Speculation and Regulation in Commodity Markets: The Keynesian Approach in Theory and Practice" but for right now my interest is Keynes' trading abilities not the regulatory questions.
We've looked at Keynes' trading in equities (I'm pretty sure he traded on inside information)* and foreign exchange and briefly at his adventures in commodities. Here's a whole lot more, the book has 13 authors.

A quick word for folks new to commodities theory, don't confuse "normal backwardation" with backwardated markets.

From the Sapienza – Università di Roma via the Munich Personal RePEc Archive, Feb. 2, 2013:

TABLE OF CONTENTS

Introduction

Maria Cristina Marcuzzo 

I. Keynes as speculation theorist and practical speculator

1. From speculation to regulation: Keynes and primary commodity markets

Maria Cristina Marcuzzo 

2. Keynes’s activity on the cotton market and the theory of the ‘normal backwardation’: 1921-1929

Carlo Cristiano and Nerio Naldi 

3. Keynes’s speculation in the London tin market: 1921-1930

Nicolò Cavalli and Carlo Cristiano

4. An analysis of Keynes’s investments in the wheat futures markets: 1925-1935

Tiziana Foresti and Eleonora Sanfilippo

...MUCH MUCH MORE (286 page PDF)

*In our April 2012 post titled "Keynes The Stock Market Investor" we see differing opinions on the trading-on-material-non-public-information question.
The Wall Street Journal's Jason Zweig who directed us to the Chambers, Dimson paper says:

...But, to paraphrase Keynes’s friend Bertrand Russell, it’s important to distinguish what you wish were true from what you believe is true.

You may wish that Keynes traded on privileged information, but that doesn’t make it true. There is zero evidence that he ever traded on inside information; furthermore, as my column pointed out, Keynes’s investing performance improved when he stopped relying on his own macroeconomic forecasts....

While here are Dimson/Chambers on the question, page 29 of the paper:

...Was Keynes an insider? One difficulty in answering this question is that the investment community then did not have the same view of insider trading that we have today. Other than directors who owed fiduciary duties to their company not to trade on price-sensitive information, insider trading by investors in general was not subject to regulation until 1980 in the UK (Cheffins, 2008: 39–40).

It is certain that Keynes was in receipt of what today would be deemed price-sensitive information – he was, for example, aware of a change in the UK bank rate before it occurred in 1925 (Mini, 1995). However, it is impossible to discover how frequently and the extent to which he exploited such information in his trading. What we can say is that he would most certainly have regarded the exploitation of inside information as substantiating the view of stock trading as a “low pursuit” rather than a “game of skill” (CWK XII, 109)....

Not that there's anything wrong with the insider trading if that's what he did, I bring it up as a component of  his alpha generation rather than for legal reasons.
You can download Chambers, Dimson (2012) which is now the paper on Keynes, the Chest Fund and its equity investments at the SSRN link, above.

In 2009's "John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)" I repeated a comment I had left at Clusterstock:

Neil,
Although Keynes ran King's College's Chest Fund 12-fold, £30,000 to £380,000, '27-'45,
the record is decidedly mixed.
Drawdowns of 32.4% and 24.6% in '30 and '31 exceeded the losses in the London market and had the fund at 1/2 it's 1927 value.

1932's 44.8% and '33's 35.1% return's were coincident with and subsequent to, Britain's departure from the gold standard.
As an economic adviser to the government Keynes was well aware of the coming devaluation.
Although King's hasn't opened all the trading records, there is strong evidence to suggest that Keynes was trading on inside information.

Some things never change.

and we note:

...In a 1983 paper "J.M. Keynes' Investment Performance: A Note" the authors are dubious of his performance, without casting the aspersion that I do in my comment. They on the other hand have a great tidbit:

...Investments in commodities were more substantial. The highest annual gain was for ₤17,000 from September 1936 to August 1937 and the highest annual loss, mainly in lard, for ₤12,600 in the following twelve months...

One final note, Jazon Zweig is pretty knowledgeable about Keynes, and his views are not to be taken lightly.
For some comments on the Keynes (attributed) quote "Markets can stay irrational..." see Mr. Zweig's MarketBeat post "Keynes: He Didn’t Say Half of What He Said. Or Did He?".

The AIG Deal: Stink, Stank, Stunk (AIG)

No grammarians please. The closest I've ever been to a past perfect was the day I was born.

The government's dealings with AIG are foul, from the first $85 Billion tranche of bailout loot two years ago to this latest.

From Kid Dynamite via Felix Salmon at Reuters:
A second look at the AIG deal

Well done to Kid Dynamite for doing the math on the way that we taxpayers are swapping our AIG debt for equity in the company. There are three big problems here:

1. The fact that we’re doing this conversion in the first place. The preferred stock we currently own pays a regular coupon, while the equity we’re swapping it for was described as worthless by AIG itself not so long ago.
2. The fact that as part of the deal we’re giving current AIG shareholders free warrants to buy stock at $45 per share. Which is very generous of us, but what have they done to deserve this?
3. Most importantly, the fact that the stock we’re swapping into is worth less, at current valuations, than the preferred stock we’re swapping out of. To the tune of about $6.6 billion.

KD has a query in with Treasury about all this; it’ll be interesting to see how they respond.
The only thing I’d note here is that there isn’t a secondary market for the preferred stock we’re swapping out of. So while its face value might be $72.1 billion, its actual market value might well be 10% or more below that figure. In which case it can be argued that the government is getting a good deal here, assuming that it’s actually able to sell its stock into the secondary market at something approximating current levels.

Still the government strategy here does seem to be based on the theory that “the market can remain irrational longer than you can remain insolvent-”...MORE

I'll come back to AIG on Monday. For now I'll riff on that cute little play on the quote attributed to Keynes:

"Markets can remain irrational a lot longer than you and I can remain solvent."

If he did utter the line it was probably due to his disatrous attempts at commodity and foreign exchange trading:

John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)

I prefer:
Keynes on Economists

The study of economics does not seem to require any specialised gifts of an unusually high order.

Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel! ...

We have more. In the lard post I mentioned that J.M.K. probably traded on material non-public information.
He underperformed the roaring British market in 1928 and '29.
He underperformed the collapsing British stock market from 1929 through 1932.
I re-ref'd on the thought in:

Investing Tips from the World's Richest Economist

No not Paul Krugman. The columnist and Laureate knows how to earn money as exemplified by his lending his name to Enron for $50,000 for four days work.
Judging by his temperament on the Sunday talking head circuit (there's that earnings power/branding again), I would think he's more of a hoarder rather than an investor, speculator or gambler.

And no, it's not John Maynard Keynes.
We had a look at Keynes' investing style in "Keynes The Money Manager". After a disastrous start in currencies, which led to the observation attributed to him by A. Gary Shilling: "Markets can remain irrational a lot longer than you and I can remain solvent."

The performance of the Chest Fund (a sidecar of the Kings College endowment) was indeed impressive.
However, it now appears that Keynes only achieved positive results starting in 1932.
It is probable that this timing indicates he was trading on inside information, knowledge of the British government's abandonment of the gold standard. He was an adviser to the gov. and pushed the policy....

Here is a chart of his record with the college:
The performance of Keynes’s fund from 1927 to 1946 is shown below. During these years the Chest grew at an annual compounding rate of 9.1 percent while the general British stock market fell at an annual compounding rate of slightly under 1 percent.

Chest Fund Performance 1927 to 1946

The whole thing is worth a read.

It is estimated that Keynes' fortune would translate into $35 million in 2010 buying power.
Here's the big dog, presented by professor Mark Skousen via The Daily Reckoning:

How David Ricardo Became The Richest Economist in History...

"Capitalisn’t: Can the Dollar Be Dethroned?"

From the University of Chicago's Booth School of Business, Chicago Booth Review, July 29:

Americans are often told that they benefit from the privilege of the dollar serving as the world's currency. A strong dollar makes imports cheaper, facilitates demand for American companies, and is tied to cheap government borrowing. But what happens when this powerful privilege weakens? What does it even mean for the dollar to be “strong” or “weak” as a medium of exchange and investment? Why should Americans care that the dollar serves as the reserve currency for the world’s central banks?

Harvard’s Kenneth Rogoff, former chief economist for the International Monetary Fund, argues that the dollar’s global dominance will erode in the coming years and that it will eventually share power with the European Union’s euro and Chinese renminbi in a “tripolar” world. On this episode of Capitalisn’t, Rogoff joins hosts Bethany McLean and Luigi Zingales to discuss why the dollar’s shifting dominance matters so much to the United States and what implications this has for the rest of the world’s payment network. 

Audio Transcript 

Kenneth Rogoff: The thing we really care about over the long run is having the dollar be like English, that everybody uses it. That’s what brings our interest rates down on a long-term basis.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Bethany: Way back in the 1960s, a French finance minister called the position that the dollar occupied in the global financial system “America’s exorbitant privilege.”

Luigi: Then there is the paraphrase of Churchill: “Indeed, it has been said that the dollar is the worst form of reserve currency, except for all those other forms that have been tried from time to time.”

Bethany: That always makes me laugh. I mangle the Churchill quote, or rather, I plagiarize it and change it in so many contexts.

OK, I will admit it, Luigi, in the past, when I’ve seen headlines about a strong dollar or a weak dollar, I mostly tune out—unless I’m about to travel to Europe and buy some shoes, of course.

Let me start with a question for you, Luigi. Why does the strength or weakness of the dollar matter? What does that quote about exorbitant privilege mean?

Luigi: I think that you are mixing two related ideas. One is whether the dollar is strong in terms of the exchange rate vis-à-vis other currencies. The Argentinian peso is relatively overvalued in this moment, but nobody would think about investing or using it as a reserve currency, ever.

You look at the exchange rate, and you compare the exchange rate with what you can buy in that particular country. For example, the magazine The Economist shows how much a Big Mac costs in different countries. If your currency is relatively appreciated, it’s pretty cheap to buy McDonald’s in another country. Vice versa, if your currency is depreciated, then when you go to another country, you spend a fortune to buy a Big Mac.

Bethany: I like the shoe index more than a Big Mac index, but that’s OK. We can keep going.

Luigi: I suspected that was the case, but anyway, you get the point.

A different thing is to what extent people want to use the dollar to, number one, write contracts in dollars; number two, invest in dollars; and number three, pay each other in dollars. This is the use of the currency as a medium of exchange, as a unit of account, and as a reserve of value.

Basically, the dollar has a very large market share of all three components around the world. It is a big advantage that the United States has. This big advantage is twofold. Number one, you can pay for your imports with printed money. Most other countries, in order to import a good, need to export a good and get some currency to pay for the good in foreign currency. The United States can buy foreign shoes just by printing pieces of paper that are dollars, which are very cheap to print. That’s one benefit.

The second benefit, which is connected but even more important, is that people feel safe investing in the US dollar and feel particularly safe when things really, really go badly.

The 2008 financial crisis actually originated in the United States. You would think that this is the last country in the world where you want to have your money invested. But people rushed to the dollar as a safe currency in that moment.

As a result of this unique quality, the US government and US households and firms can issue dollars and pay less than they would otherwise if they were located in the UK or in Europe. That really is an exorbitant privilege because you can save a lot on your debt.

Bethany: That makes sense. The influential economist Ken Rogoff has argued that we pay one-half to one percent lower in interest because of the dollar’s position. I think what you’re saying is that the strength of the dollar isn’t just this abstract financial-markets thing that only currency traders care about. It’s a real-world thing, one that affects the amount households pay in interest on, say, credit-card debt or mortgage debt.

But it’s also this abstract thing in that it serves as an unofficial barometer of US power, in a way. It allows all these advantages that are more abstract than the level of interest you pay but are connected to that and are really important in their own way.

How did the dollar get that role in the first place? It’s not like the world voted for the dollar to have exorbitant privilege—or did it?

Luigi: You know this little thing called World War II?

Bethany: Yeah.

Luigi: There is a fascinating episode of Planet Money about what happened in Bretton Woods. As the war was ending, the Allies met in this little town in New Hampshire called Bretton Woods. They were trying to figure out how they would organize the world moving forward. There was major tension between the UK representative, none other than John Maynard Keynes, and the US representative, Harry Dexter White.

What the Planet Money episode suggests is that surprisingly enough, Harry Dexter White outmaneuvered Keynes. Keynes was trying to save the role that the pound had in the international market. Harry Dexter White said, “No, no, let’s talk generically about a currency and then organize everything as a generic currency without specifying what currency it is.” Then at the last minute, in a tricky moment, he replaced this generic currency with the US dollar. The US dollar all of a sudden had the entire role.

By the way, it’s not related, but it’s too hard to resist: did you know that Harry Dexter White then was accused—and apparently accused rightly—of being a spy for the Soviets?....

....MUCH MORE, inclyding the podcast.

Doom and Gloom: What Can the Federal Reserve Do? Part II

We left part I at the "Money Rain" section of the Fed paper Monetary Policy When the Nominal Short-Term Interest Rate is Zero.

The paper's conclusions are worth an extended exerpt.

9 Conclusion
...When the nominal Treasury bill rate is at zero, the Federal Reserve could attempt to provide a stimulus to aggregate demand through effects in addition to those from increases in the monetary base. The Federal Reserve could purchase assets other than Treasury bills, such as U.S. Treasury bonds or foreign government debt. Even if these assets are perfect substitutes for U.S. Treasury bills, purchases of them could have a stronger stimulative impact than purchases of Treasury bills because of signalling effects."

...A similar effect is present if the Federal Reserve were to write options in an attempt to communicate its desired path for the Treasury bill rate.

But with discount window loans whether in the form of advances or discounts the Federal Reserve can accept as collateral (and therefore make liquid" for a depository) a wide variety of assets that the Federal Reserve cannot purchase. A potentially serious limitation on such loans is that it has apparently been the intent of Congress that the Federal Reserve not take onto its balance sheet the credit-risk of the collateral: The Federal Reserve could turn to the depository for full payment of the loan.

The Federal Reserve can bypass depositories and lend directly to individuals, partnerships, and corporations (IPCs). However, the Federal Reserve must and there to be "unusual and exigent" conditions and the IPC receiving the loan must be unable to secure credit from other banking institutions. It seems the intent of Congress was that the Federal Reserve should make such loans only to credit-worthy IPCs. With the Federal Reserve not taking credit risk onto its balance sheet, private- sector loan markets would still incorporate all credit risk into any new loans to households and businesses|preventing any decline in credit-spreads, which may be elevated should the economy be at the zero bound and should the economy be weak. Nonetheless, loans by the Federal Reserve to depositories and to IPCs could provide some liquidity for the credit instruments used as collateral and thereby could lower liquidity premiums. Even if these restrictions on accepting private-sector credit risk were surmounted, or relaxed by an act of Congress, direct involvement by the Federal Reserve in the credit allocation process would raise a number of difficult issues...

To which we can only say Amen.
Another paper, this one from the Dallas Fed, addresses the same issues with a distinctly different tone, e.g.

Image from Monetary Policy in a Zero-Interest-Rate Economy.

...Bold, but impractical–eliminating the bound altogether
The most daring suggestion for escaping the zero-interest-rate trap is one that eliminates the zero lower bound altogether. How can this be done? As noted in the first part of the presentation, the zero bound on interest rates exists because money pays a sure nominal interest rate of zero. No one would be willing to hold any asset that pays a negative nominal rate, as long as zero-interest money is available as a store of value. The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of ‘carry tax’ on currency and deposits....

More workable modifications to standard policy
...We will consider three possible candidates:

1. Foreign exchange
2. Real goods and services
3. Other domestic securities-such as longer-term Treasuries.

Strategies which target the first two candidates, as we’ll see, can only succeed if the Fed coordinates its policy actions with those of other actors–namely, foreign central banks or domestic fiscal policy-makers. A strategy targeting the third is something the Fed can do today, unilaterally, within the constraints imposed by the Federal Reserve Act.

...The goods & services solution
Why not have the Fed just conduct an open market purchase of real goods and services? Even more so than exchange rate intervention, this strategy would represent a direct stimulus to aggregate demand. As posed, though, the strategy has a major drawback: it violates the Federal Reserve Act. The Fed isn’t authorized to purchase goods and services, apart from those needed for the operation of the Federal Reserve System. The strategy can be implemented, however, by coordination with fiscal policy-makers. The Federal government, for example, could purchase goods and services and finance the purchases with new debt, which the Fed in turn would buy–in technical terminology, the Fed would ‘monetize’ the resulting debt.

...What if the assets in the “not allowed” column were “allowed”, though? This point is not moot, since aggressive use of the discount window–under certain emergency provisions in the Federal Reserve Act–can allow the Fed to sidestep, to some extent, the restrictions which apply to open market operations.

Even if the legal constraints were not present, however, it’s not necessarily desirable to have the Fed acting in markets for corporate debt or mortgages. Whatever benefits there might be from such actions would have to be weighed against the cost of putting the Fed in the business of allocating private sector credit–a task for which the Fed has no particular expertise, and which would likely subject the Fed to unwelcome political pressures.

Interesting, no?

Finally. from a speech to the National Economists Club by Ben S. Bernanke, Nov. 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here
...Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level.

Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost....

Some of the footnotes to the speech:

8. Keynes, however, once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public

12. The Fed is allowed to buy certain short-term private instruments, such as bankers' acceptances, that are not much used today. It is also permitted to make IPC (individual, partnership, and corporation) loans directly to the private sector, but only under stringent criteria. This latter power has not been used since the Great Depression but could be invoked in an emergency deemed sufficiently serious by the Board of Governors.

15. In carrying out normal discount window operations, the Fed absorbs virtually no credit risk because the borrowing bank remains responsible for repaying the discount window loan even if the issuer of the asset used as collateral defaults. Hence both the private issuer of the asset and the bank itself would have to fail nearly simultaneously for the Fed to take a loss. The fact that the Fed bears no credit risk places a limit on how far down the Fed can drive the cost of capital to private nonbank borrowers. For various reasons the Fed might well be reluctant to incur credit risk, as would happen if it bought assets directly from the private nonbank sector. However, should this additional measure become necessary, the Fed could of course always go to the Congress to ask for the requisite powers to buy private assets. The Fed also has emergency powers to make loans to the private sector (see footnote 12), which could be brought to bear if necessary.

18)...Some have argued (on theoretical rather than empirical grounds) that a money-financed tax cut might not stimulate people to spend more because the public might fear that future tax increases will just "take back" the money they have received.

Prescient.

As The 2-Year Treasury Trades at -1.74% Izabella Peers Through The Looking Glass and Asks Just How Weird Things Can Get

First up, ZeroHedge:

Treasury Shortage Is Back: 2 Year Plunges To -1.74% In Repo

It has been a while since wholesale shorting of Treasurys pushed them so far deep into negative territory that one needed a bigger chart to see just how little underlying collateral is available. This morning, following the most recent scramble to re-short the bond curve, we find that not only does the 5 Year continue to trade with negative repo rates for all of the past week, but that the 2 Year just cratered into super special territory, as the latest collateral shortage has manifested itself in the form of a -1.74% near "fail" rate for the 2 Year.

Of course, today's shortage may be merely a technical glitch ahead of auctions. As SMRA notes, "drops like this are not uncommon for the 2-year, and often happen before its auction announcement. Issues tend to tighten prior to their auction announcements, and then often tighter further as the auction approaches. Tomorrow the details of next week's 2-year note auction will be announced."

Actually, they are rather uncommon, and as the following chart shows there have been only 4 such sharp "super special" repo episodes in the past year....MORE

And from FT Alphaville:

Negative rates as global cash burn

As Paul Krugman always likes to recount, strange things happen at the zero bound. Macroeconomics gets weird. Liquidity traps prevail. And a whole slew of paradoxes come into being.

And that’s largely because below the zero bound things get even stranger still.

What you think should happen, doesn’t, and what you think definitely won’t happen, does. Furthermore, negative interest rates don’t just kill off the traditional point of banking, they encourage bad incentives and dubious market practices for all purveyors of capital.


There’s also the fact that negative rates aren’t necessarily all that liquidity enhancing. To the contrary, they may even be liquidity absorbing. Indeed, John Maynard Keynes foresaw the day when central bankers would have to work more on keeping negative rate forces at bay by propping rates up and targeting zero than the other way around.

According to Bateman, Hirai and Marcuzzo, writing in 2010 on Keynes’ influence on modern economics, what happens in a negative-rate world is that money markets become less efficient at getting rid of surpluses, due to long-standing presumptions about future scarcity or other ongoing carry opportunities getting in the way of rational and efficient pricing. And because generally, well, it’s goes against our human instinct to set banknotes on fire.

In that sense, money markets begin to behave more like commodity markets, wherein extended periods of negative carry are not at all unusual, and which manifest whenever investor expectations about future supply shortages or demand surges overshoot in such a way that the industry is over rewarded for holding back emergency buffer stocks.

But why should money markets, which have historically proven so resistant to negative rates, suddenly have become so inefficient?

According to the authors the answer may lie in the way foreign exchange markets have created a hot potato incentive to keep passing the surplus money float over to those markets that are most likely to burn it....MUCH MORE

"China tears down tower blocks in effort to boost stalling economy" (plus Keynes and copper)

From The Telegraph via Yahoo Finance, August 23:

China is tearing down tower blocks and pausing construction on buildings that could house 75m people as Xi Jinping’s government seeks to prop up the country’s stalling property market.

Analysts have warned Beijing has adopted a “build, pause, demolish, repeat” strategy as Chinese officials seek to restrict supply to avoid a plunge in house prices and boost economic activity through more construction.

Researchers at Fathom Consulting revealed that around 3bn square metres of housing has been put on pause or demolished in recent years, stopping properties reaching the market. It is enough to house 75m people, more than the entire population of the UK.

Indebted Chinese developers have been plunged into crisis as the struggling property market weighs heavily on the world’s second-largest economy. China has vast unoccupied “ghost cities” after huge amounts of debt-fuelled development while demolitions have increased as builders run out of money.

Joanna Davies, head of China economics at Fathom, said that houses on average take a “staggering” eight years to be completed as supply is “drip fed into the system”....

....MUCH MORE

They've done this before: January 2016
China Goes Full Keynesian, Builds 27 Story Building, Demolishes It
Who needs banknotes in bottles?

Also July 7, 2022:
"China Prepares $220 Billion Stimulus With Tsunami Of Bond Sales"
Because more debt and more infrastructure spending is exactly what China needs.
The only thing better would be building thousands more apartment and condo towers.

Or:

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."

—Keynes, John Maynard. "Book III: The Propensity to Consume." 

The General Theory of Employment, Interest and Money. 

New York: Harcourt, Brace, 1936. 129.

Related, November 1, 2012: "Frequent Bridge Collapses Help Boost China’s GDP"

...Zhao Wenjin, the lead commentator of Lanzhou Daily, commented on the incident, saying, “With each collapse, we need to reflect: why are we chasing GDP?”
According to a Jingyang Net report, Wang Yang, Party secretary of Guangdong Province, said at a provincial Party meeting in 2009: “Sometimes the GDP number looks good, but it didn’t really create wealth for society. It was, instead, a waste of society’s wealth....

Finally, from the psychic or psycho file, May 2022:

Copper: It Is All About China's Economy

If China ever begins tearing down the tens of millions of apartments that are sitting empty the amount of supply from copper that will be recycled is mind boggling. Barring that, the huge cutback in residential construction has taken one of the largest demand factors out of the equation and except for the run-up in price we saw immediately after Russia invaded Ukraine, when it appeared China was converting their foreign exchange holdings into just about any kind of tangible stuff that would be storable, grains, metals etc., the trend since the Shanghai lockdowns became widely publicized has been pretty much unidirectional....

4.2190 down 0.0360 (-0.85%) last. 

That was then. The red one is changing hands at $3.4125 today having touched 3.1315 in July (and looking at a return visit, methinks)

"Tycoon running a quarter of China’s copper trade is on the ropes"

A very deep dive from Bloomberg via Mining.com, September 18:

From a start guarding trains full of metal from thieves on freezing winter nights, He Jinbi built a copper trading house so powerful that it handles one of every four tons imported into China.

A born trader with an infectious sense of humor, the 57-year-old grew Maike Metals International Ltd. through the rough-and-tumble rush for commodities in the early 2000s, to become a key conduit between China’s industrial heartlands and global merchants like Glencore Plc.

Now Maike is suffering a liquidity crisis, and He’s empire is under threat. The ripple effects could be felt across the world: the company handles a million tons a year — a quarter of China’s refined copper imports — making it the largest player in the most important global trade route for the metal, and a major trader on the London Metal Exchange.

With his wide network of contacts giving enviable insight into China’s factories and building sites, He has been a poster child for China’s commodity-fueled boom over two decades — making a fortune from its ravenous demand for raw materials and then plunging it into the red-hot property market.

But this year, Beijing’s restrictive Covid Zero policies have hit both the property market and the copper price hard. After months of rumours, He admitted publicly last month that Maike had asked for help to resolve liquidity issues.

He said the problems are temporary and affected only a small part of his business, but his trading counterparties and creditors are being cautious. Some Chinese domestic traders have suspended new deals, while one of the company’s longest-standing lenders, ICBC Standard Bank Plc, was concerned enough that it moved some copper out of China that had been backing its lending to Maike.

Even if it can secure support from the government and state banks, industry executives say Maike may struggle to maintain its dominant role in the Chinese copper market.

Much as He’s rise was a microcosm of China’s economic boom, his current woes may mark a turning point for commodity markets: the end of an era in which Chinese demand could only go up.

“In some ways, Maike’s story is the story of modern China,” said David Lilley, who started dealing with Maike in the 1990s, first as a trader at MG Plc and later as co-founder of trading house and hedge fund Red Kite. “He has skillfully ridden the dynamics of the Chinese economy, but no one was prepared for the Covid lockdowns.”....

....MUCH MORE

Some of our copper in China posts:
May 2022
Copper: It Is All About China's Economy 

If China ever begins tearing down the tens of millions of apartments that are sitting empty the amount of supply from copper that will be recycled is mind boggling. Barring that, the huge cutback in residential construction has taken one of the largest demand factors out of the equation and except for the run-up in price we saw immediately after Russia invaded Ukraine, when it appeared China was converting their foreign exchange holdings into just about any kind of tangible stuff that would be storable, grains, metals etc., the trend since the Shanghai lockdowns became widely publicized has been pretty much unidirectional....

September 1, 2022
"China tears down tower blocks in effort to boost stalling economy" (plus Keynes and copper)

September 9, 2022
"China’s copper imports continue at record pace on lower prices"

Over the years I've joked that China might be returning to the bronze age or considering a monetary 'copper standard' when their copper imports couldn't be explained by current usage.

The government/Communist party are not shy about hoarding storable commodities e.g. January's "China and Food Prices: "One reason for rising food prices? Chinese hoarding"" and the recent order from the State Council for the release of 37 tonnes from the National Pork Reserve for the month of September.....

August 8, 2022
And In Non-Labor Market News: "Copper Worth Nearly Half a Billion Dollars Goes Missing in China"

Most active (December) NYMEX futures: $3.4750, our best guess is lower, a test of the summer low of $3.13 and possibly sub-$3.00

"Copper price falls on Chinese demand fears"

Lifted in toto from Reuters and Mining.com, November 7:

Copper prices fell on Monday after China reaffirmed its stringent covid-19 restrictions and data reinforced demand worries.

After its best trading day in years on Friday, copper for December retreated by 2.6% in New York to exchange hands for $3.593 per pound ($7,904 a tonne) in midday trade.

“China’s zero-covid policy is not the only problem,” said Julius Baer analyst Carsten Menke. “Removing that policy won’t fix the property market … wiring in buildings and households account for a large proportion of copper demand.”

China’s property market continued its slump in October, with private data showing home prices and sales falling, while trade data showed imports of unwrought copper and copper products fell 1.5% in October from the same period a year ago.

The country’s zero-covid approach and lockdowns have squeezed its manufacturing sector and hit demand for industrial metals.

“Easing lockdowns ahead of winter – as China’s covid infections are rising – seems an irrational bull case for investors,” Liberum analyst Tom Price said in a note.

(With files from Reuters)

Mining.com home

Most active futures down 0.0215 (.60%) at 3.5820

Welcome to my world. We thought the market's misapprehension of what was going on in China was important enough to make three posts on Sunday: 

"No relief for the people: China to 'unswervingly' stick to its zero-COVID policy, says health official"

"Copper price back above $8,000 on China reopening hopes" 

Table Tennis, the Chinese Communist Party lifted the covid restrictions for a table tennis tournament.

Regarding the country as a whole, the leadership has to crush the dreams of the middle class lest they become too powerful and fall away from the Party leadership. - coming up....

‘Let it rot’: Once-flourishing middle class faces end of ‘Chinese Dream’

And regarding the Chinese property market:

May 2022
Copper: It Is All About China's Economy 

If China ever begins tearing down the tens of millions of apartments that are sitting empty the amount of supply from copper that will be recycled is mind boggling. Barring that, the huge cutback in residential construction has taken one of the largest demand factors out of the equation and except for the run-up in price we saw immediately after Russia invaded Ukraine, when it appeared China was converting their foreign exchange holdings into just about any kind of tangible stuff that would be storable, grains, metals etc., the trend since the Shanghai lockdowns became widely publicized has been pretty much unidirectional....

September 1, 2022
"China tears down tower blocks in effort to boost stalling economy" (plus Keynes and copper)

 

October 31, 2022 

Breaking China’s grip on rare earths markets a ‘pipe dream,’ Australia says"

Better to stick with the battery metals right now, though nickel is going into surplus this quarter or next, copper is as sensitive to the slowdown in Chinese housing construction as it is to upside in the green revolution, cobalt is on the way out of battery chemistry if Mr. Musk has his way and lithium has gotten so expensive it is now a bottleneck on the final-price of electric vehicles.

Of the four we are betting copper trades down to last summer's low of $3.13, and maybe below $3.00 before turning into a shiny red rocketship.

On the headline stuff, somewhere between 2010 and today the U.S. and the West lost their way on the rare earths and we've only posted sporadically since the  Happy Time™ with MolyCorp and all the little scams, all the while reflecting back on what's probably the best book on investing that's been written since de la Vega's Confusion de Confusiones (Amsterdam, 1688...

That, of course, was posted four days before the covid reopening story possessed the market and the most active futures jumped  9 or 11%, I don't remember which, it was sort of a blur. 

Of course.

Welcome to my world.

China’s Property Pain Deflates ‘Overhyped’ Iron Ore Market" (copper too)

We've been pitching the construction malaise, particularly in reference to copper, for over a year. It's one of those big, big drivers of economic activity to which attention must be paid.

From Bloomberg via ScrapMonster, April 27:

After a bullish start to 2023, iron ore is struggling with the reality that China’s property sector — the steelmaking material’s largest demand driver for two decades — is still far from a robust recovery.

After a bullish start to 2023, iron ore is struggling with the reality that China’s property sector — the steelmaking material’s largest demand driver for two decades — is still far from a robust recovery.

Iron ore dipped below $100 a ton this week for the first time since early December, becoming the biggest victim of a bearish mood across industrial metals. The main culprit is a weaker-than-expected peak construction season, which runs from April through June, highlighting China’s uneven rebound.

President Xi Jinping’s flagship campaign to squeeze debt from the real estate sector has stifled commodities demand, as developers focus on completing existing projects with few new ones in the pipeline. That’s crimped the appetite for iron ore and metals during a period when building sites should be buzzing.

“Developers are very reluctant to start new projects outside of the top-tier cities, and that’s where the bulk of steel demand used to come from,” said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd. Iron ore was “overhyped” as the price rallied late last year into March, he added.

China’s steelmakers are already losing money and cutting output in an ominous sign for global miners. Prices for iron ore to copper — and the fortunes of major producers such as BHP Group and Rio Tinto Group — have been tied to the nation’s property booms and slowdowns since 2000.

Chinese mills monitored by the country’s statistic bureau made a first-quarter loss for the first time in more than a decade, according to data from the National Bureau of Statistics released Thursday.

Still Shrinking
China’s economy grew at the fastest pace in a year during the first quarter, and several banks recently raised growth forecasts, but the rebound has been patchy. The recovery has been led by consumer sectors, with the government so far reluctant to unleash major stimulus.

While real estate has turned a corner in terms of prices and sales this year, fresh investment is still falling. Property starts will decline 12.5% in 2023, according to Hong Kong-based consultancy Real Estate Foresight. Citigroup Inc. is even more pessimistic, with a forecast for a 40% contraction.

“China’s property sector is not completely out of the woods and steel consumption from the sector is unlikely to see a meaningful turnaround this year,” Citi analysts including Max Layton wrote in a note this week.

Iron ore slipped to $99.90 a ton on Wednesday in Singapore before rebounding, and was down 0.7% at $104.40 as of 3 p.m. local time Thursday. Prices are down around 16% in April, heading for the biggest monthly drop since October, after surging above $132 in mid-March.

‘Missed Expectations’
The property sector typically accounts for between a third and half of metals use in China, and the construction malaise has fed into base metals. Copper fell to the lowest level in a month on the London Metal Exchange this week, while aluminum was down for a sixth session on Thursday.

“Chinese copper demand has missed expectations,” Ni Hongyan, the vice president of trading firm Eagle Metal International Pte Ltd. told an industry conference this week in Shandong province. She expects prices to go even lower, under pressure also from US monetary tightening and financial stress....

....MUCH MORE

 As the old-timers used to say: "Pay attention or pay the offer."

This next post was written as copper was on its way to $3.13 in July 2022, down from $5.04 in the February-March '22 run-up:

May 2022
Copper: It Is All About China's Economy 

If China ever begins tearing down the tens of millions of apartments that are sitting empty the amount of supply from copper that will be recycled is mind boggling. Barring that, the huge cutback in residential construction has taken one of the largest demand factors out of the equation and except for the run-up in price we saw immediately after Russia invaded Ukraine, when it appeared China was converting their foreign exchange holdings into just about any kind of tangible stuff that would be storable, grains, metals etc., the trend since the Shanghai lockdowns became widely publicized has been pretty much unidirectional....

A few months later it actually happened:

September 1, 2022
"China tears down tower blocks in effort to boost stalling economy" (plus Keynes and copper)

Up through last week's:

Copper: No Dramatic Impact From China's Re-Opening

And if CRE owners follow Kyle Bass' advice and tear down their buildings we'll have a whole new source of supply. 

Just kidding about "new", around 2/3 of copper is recycled so the copper in those buildings would come onto the market eventually, it's just a question of when.

More important will be the effect of any recession on demand in Europe and the U.S., particularly in construction and less so in electric vehicles. Wind turbine manufacturers, a very large per unit user of Cu have, in the U.S., the $3/4 Trillion in loans and tax credits that wind farm developers will suckle upon....

*****

....Most active (May) futures 4.0345 -0.0425 (-1.04%) . Here's the last few months of prices from the COMEX, you can see the burst of enthusiasm on the announcement of the end of the Covid controls and then, meh:

Right now the futures are at $3.9110 up 0.0270 and bouncing back from a multi-month low of $3.8165 achieved earlier today.

There are a few dozen posts both preceding and following that May 2022 post, use the 'search blog' box if interested. Don't pay the offer. Instead, enjoy some whining and moaning from March 13 when a couple banks were in the news:

Copper: Oh Who Knows Any More

Things were proceeding according to plan, the dollar was making a major move higher and then, some rat-bastard bankers who didn't want to pay the, what, eight basis points, to hedge their interest rate exposure waited too long to raise capital while at the same time their customers, the venture capitalists and their portfolio companies, did nothing.

I mentioned a few days ago that these Jedi knights, these masters of the universe could have shored up what they are calling the heart of the Silicon Valley ecosystem, that they could have shored up the bank with three billion or so dollars with maybe another $1 or 2 billion to follow but no, just like their rat-bastard banker the rat-bastard VC's did nothing. 

Meaning:

the dollar—proxied by the DXY, it excludes China though so not perfect— was making a solid move to the upside from just above 101 in early February, the dollar which is greatly influenced by relative interest rates gets hammered on the flight to quality i.e. treasuries, and by the hope that the Fed will quit fighting inflation.

Meaning the copper market, which is in almost perfect balance at the moment and was thus trading off exogenous factors like oh, the strength or weakness of the dollar, did this:

Halting the decline that was developing so nicely.

And now we have supply coming back on the market from Panama and soon from Peru and China isn't reopening anywhere near as fast as the rah-rah guys said it would and the Chinese are sending copper out of the country and big supply is being developed for later in the decade and the market won't care because it's all about the dollar and interest rates and bailouts and some skinflint banker who didn't want to pay to hedge.

Here are the headlines at Mining.com, not that anyone cares (at the moment):

Panama gives First Quantum go-ahead to operate port terminal 

China copper exports to jump in rare deliveries to LME depots

Rio Tinto starts underground production at Oyu Tolgoi

....Oyu Tolgoi is expected to become the fourth-largest copper mine in the world by 2030

 

Oh, and February's huge landslide at the world's second largest copper mine has been dealt with: Freeport Indonesia says Grasberg mine operations back to normal after floods

 

Hunter S Thompson nailed it:

"Still humping the American Dream, that vision of the Big Winner somehow emerging from the last minute pre—dawn chaos of a stale Vegas casino. Big strike in Silver City. Beat the dealer and go home rich. Why not? I stopped at the Money Wheel and dropped a dollar on Thomas Jefferson—a $2 bill, the straight Freak ticket, thinking as always that some idle instinct bet might carry the whole thing off. But no. Just another two bucks down the tube. You bastards! No. Calm down. Learn to enjoy losing.... 

 -Fear and Loathing in Las Vegas

Excuse me, I have to take a moment 

Out of Bullets, Throwing Rocks: Fed Keeps Rate Near Zero, Is Ready to Buy Treasuries

They aren't really out of bullets.
Last February (has it already been a year?) We had a couple posts on the extraordinary measures the Fed could employ, from "Doom and Gloom: What Can the Federal Reserve Do?":

...More relevant to the American markets are a couple Fed papers, the first of which is astounding for its frankness:

Monetary Policy When the Nominal Short-Term Interest Rate is Zero.
...This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act. The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and private-sector credit instruments (at least those that may be purchased by the Federal Reserve); unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, in some circumstances, may include the use of options.

...8.1 Money Rains
Money rains are a clean way to study theoretically the effects of increases in the supply of money. In practice, it seems a bit difficult to envision how the Federal Reserve could literally implement a money rain, that is give money away either through directly disbursing currency to the public or by disbursing it through the banking system....

And from my favorite post of the last year "Doom and Gloom: What Can the Federal Reserve Do? Part II":

...The paper's conclusions are worth an extended exerpt.

9 Conclusion
...When the nominal Treasury bill rate is at zero, the Federal Reserve could attempt to provide a stimulus to aggregate demand through effects in addition to those from increases in the monetary base. The Federal Reserve could purchase assets other than Treasury bills, such as U.S. Treasury bonds or foreign government debt. Even if these assets are perfect substitutes for U.S. Treasury bills, purchases of them could have a stronger stimulative impact than purchases of Treasury bills because of signalling effects."...

and:

...To which we can only say Amen.
Another paper, this one from the Dallas Fed, addresses the same issues with a distinctly different tone, e.g.

Image from Monetary Policy in a Zero-Interest-Rate Economy.

...Bold, but impractical–eliminating the bound altogether
The most daring suggestion for escaping the zero-interest-rate trap is one that eliminates the zero lower bound altogether. How can this be done? As noted in the first part of the presentation, the zero bound on interest rates exists because money pays a sure nominal interest rate of zero. No one would be willing to hold any asset that pays a negative nominal rate, as long as zero-interest money is available as a store of value. The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of ‘carry tax’ on currency and deposits....

Also from that post:

...Finally. from a speech to the National Economists Club by Ben S. Bernanke, Nov. 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here
Some of the footnotes to the speech:

8. Keynes, however, once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public...

See! The Fed has lots of ammo left!
Here's the headline story from Bloomberg:

The Federal Reserve left the benchmark interest rate as low as zero, said it’s prepared to purchase Treasury securities to resuscitate lending and warned inflation may recede too quickly.

The Fed is ready to buy “longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement today in Washington. Any purchases before the FOMC’s next meeting in March would still need a vote to authorize the action.

Chairman Ben S. Bernanke, by making emergency credit programs rather than rates the focus of policy, is quelling some of the panic in markets while failing to revive growth. Falling home prices, rising unemployment and more than $1 trillion in losses and writedowns at global financial institutions are deepening the longest recession since the 1980s....MORE

"Not Triffin, not Miran: Rethinking US external imbalances in a new monetary order" (plus, the paper that destroyed world trade)

 Before spouting off it is often prudent to heed the witticism attributed* to Abe Lincoln:

It is better to remain silent and be thought a fool, than to open your mouth and remove all doubt.

First up, some background, Wikipedia with a straightforward overview of Triffin:

Triffin dilemma 

In international finance, the Triffin dilemma (sometimes the Triffin paradox) is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin. He noted that a country whose currency is the global reserve currency, held by other nations as foreign exchange (FX) reserves to support international trade, must somehow supply the world with its currency in order to fulfill world demand for these FX reserves. This supply function is nominally accomplished by international trade, with the country holding reserve currency status being required to run an inevitable trade deficit.^[1] After going off of the gold standard in 1971 and setting up the petrodollar system later in the 1970s, the United States accepted the burden of such an ongoing trade deficit in 1985 with its permanent transformation from a creditor to a debtor nation.^[2] The U.S. goods trade deficit is currently on the order of one trillion dollars per year.^[3] Such a continuing drain to the United States in its balance of trade leads to ongoing tension between its national trade policies and its global monetary policy to maintain the U.S. dollar as the current global reserve currency. Alternatives to international trade that address this tension include direct transfer of dollars via foreign aid and swap lines.

The Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the worldwide Bretton Woods system established in 1944. John Maynard Keynes had anticipated this difficulty and had advocated the use of a global reserve currency called 'Bancor'. Historically, the IMF's SDRs have been the closest thing to the proposed Bancor but they have not been adopted widely enough to replace the dollar as the global reserve currency.

In the wake of the 2007–2008 financial crisis, the governor of the People's Bank of China named the reserve currency status of the US dollar as a contributing factor to global savings and investment imbalances that led to the crisis. As such, the Triffin Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency role exacerbates the U.S. current account deficit due to heightened demand for dollars.....

....MUCH MORE

Next, at UnHerd, a look at Miran:

The paper that destroyed world trade 

The tariff theory isn’t radical enough 

Some intellectuals in the Trump orbit have developed a rather elaborate critique of the situation. They might not have a functional plan, but they do have a theory. That theory has come closest to being spelled out in a November 2024 paper by Stephen Miran, the Harvard-trained economist who now serves as the chairman of Trump’s Council of Economic Advisers. Titled “A User’s Guide to Restructuring the Global Trading System”, Miran’s 41-page paper is making the rounds and creating quite a buzz.

It’s a dry, technical slog. But — love or hate the trade war — Miran’s ideas are worth understanding.

He argues that America’s economic crises stem from the fact that the dollar serves as the world’s “reserve currency”. The dollar, more than any other currency, is held in large amounts by governments, central banks, and major financial institutions across the planet, because it serves as the most trusted medium for international trade and is seen to be “as good as gold”.

As the world’s reserve currency, the dollar is used to price commodities like oil or gold, to settle cross-border transactions, and to provide a safe haven during economic turbulence. Because everyone wants dollars, US government debt and Treasury bonds are in constant demand. This gives the US government and American businesses tremendous power and advantage. In a crisis, Americans can more or less print “gold” and spend their way out. Many struggling economies would like to have such “problems”.

But in Miran’s view, several serious interconnected problems flow from the dollar’s global dominance. The dollar is overvalued relative to other currencies because as a reserve currency, it is in constant demand. This undermines domestic manufacturing, by making American exports more expensive. Over the long run, the high expense of the dollar is bound to bring about deindustrialisation.

While Miran is correct about the overvalued dollar’s role, he neglects deindustrialisation’s other causes, not least neoliberal deregulation that has allowed firms to do things with cheaper and cheaper labour, rather than develop labour-saving technologies, and the excessive financialisation that characterises this order. Nor does he address the fact that other countries that don’t issue the world reserve currency have also suffered deindustrialisation.

In the event, Miran contends, deindustrialisation leads to declining productivity and slower economic growth. We now know that when production takes place on one side of the Pacific while engineers and designers labour are on the opposite side, innovation and productivity flag — and, with them, growth. Thus, even as the US economy grows, it grows slower than, and diminishes relative to, those of its emerging rivals, most notably China. Along the way, both the private and public sectors become ever more indebted.

Deindustrialisation, moreover, ultimately undermines the reserve currency issuer’s military prowess — that is, one of the foundations upon which America’s reserve-currency status rests in the first place. A deindustrialised economy has a hard time producing and maintaining a modern military....

....MUCH MORE

The author of that piece, professor (econ) Christian Parenti at John Jay College, City University of New York, goes on to blow some holes in the the Miran paper while highlighting what he thinks is accurate.

Next up, from the Bank for International Settlements:

Triffin: dilemma or myth? 

Abstract
Triffin gained enormous influence by reviving the interwar story that gold scarcity threatened deflation. In particular, he held that central banks needed to accumulate claims on the United States to back money growth. But the claims would eventually surpass the US gold stock and then central banks would inevitably stage a run on it. He feared that the resulting high US interest rates would cause global deflation. However, we show that the US gold position after WWII was no worse than the UK position in 1900. Yet it took WWI to break sterling's gold link. And better and feasible US policies could have kept Bretton Woods going.

This history serves as a backdrop to our critical review of two later extensions of Triffin. One holds that the dollar's reserve role required US current account deficits. This current account Triffin is popular, but anachronistic, and flawed in logic and fact. Nevertheless, it pops up in debates over the euro's and the renminbi's reserve roles. A fiscal Triffin holds that global demand for safe assets will either remain dangerously unsatisfied, or force excessive US fiscal debt. Less flawed, this story posits implausibly inflexible demand for and supply of safe assets. Thus, these stories do not convince in their own terms. Moreover, each lacks Triffin's clear cross-over point from a stable system to an unstable one.

Triffin's seeming predictive success leads economists to wrap his brand around dissimilar stories. Yet Triffin's dilemma in its most general form correctly points to the conflicts and difficulties that arise when a national currency plays a role as an international public good....

....MUCH MORE

And finally, the headliner from VoxEU/CEPR:

10 Apr 2025
In a recent Vox column, Bordo and McCauley argued that foreign central banks no longer drive US external deficits, and that fears voiced by Stephen Miran, Chair of the US Council of Economic Advisers, of a revived Triffin dilemma are misplaced. This column takes a different view: while agreeing that the Triffin logic no longer applies, it argues that the deeper reason lies in the structural evolution of global finance. We no longer live in a world where the reserve status of the dollar hinges on the US current account. That status now depends on the credibility of US institutions, the depth of its markets, and the robustness of the infrastructure that underpins the global dollar system....

....MUCH MORE  

Is it any wonder that economics is called the dismal science? Here's a 2009 post:

Keynes on Economists

The study of economics does not seem to require any specialised gifts of an unusually high order.

Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel! ....MORE

*And Lincoln? He probably didn't say the line attributed to him. From The Quotations Page:

...It's been attributed to many persons, but seems to have its roots in the Bible:

It is better to remain silent and be thought a fool, than to open your mouth and remove all doubt . -- George Eliot

Better to remain silent and be thought a fool than to speak out and remove all doubt.-- Abraham Lincoln (also attr. Confucius)

It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.-- Mark Twain (1835-1910)

Even a fool, when he holdeth his peace, is counted wise: and he that shutteth his lips is esteemed a man of understanding. -- Bible, 'Proverbs' 17:28.

There are no citations for Lincoln or Twain. I have my doubts about Confucius