Thursday, June 15, 2017

The Fed should only hold trade book uncertainty

Charlie Plosser makes the case that the Federal Reserve should hold only Treasuries in its asset portfolio, at Hoover's "Defining Ideas"

Nah.  Borrowers hold debt and depositors hold deposits.   If borrowers are matched against depositors, then their is a quantization error, which the pit boss holds.  I really doesn't hold anything else.  The Fed only borrows or saves, on the margin, to cover the  quantization error. But since the Fed is a currency issuer, it may include a trend loss in its contract, allowing non-deflationary real growth and contraction.

Bit error, a tiny amount of 'fails to deliver' or 'left on the loading dock'.  Those instances where shelf space does not quite match shipment containers. Looking a excess reserves, we se it quite busy compared to treasuries held. That is out of variance, trying to match flows over the cycle we would see lots of bit error, events where unexpected credit  impulses, negative or positive, are missed, and the currency issuer picks some of that up depending upon the current and bound  precision.  Trade book uncertainty is a positive stop, the permanent wedge.   Treasuries held barely budges, so there is missing price action in the loans,  and interest charges to loans should increase.  That is, can we homomorphically shrink the deposit tree and expand the loan tree until they match, and payoff yields are all within precision?  Never, really.  Bit error is the round off.

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