Quick thoughts on FARPs

Just a few notes.

1) Yesterday I wrote a piece explaining why FRFARRPs are not really tightening, but that they probably are part of the tapering which was signaled. Nevertheless, all they do is make the system even more dependent on the Fed Balance sheet. FARPs hook savers and turn potentially productive or bubble inducing capital into lazy capital.

David Beckworth tweeted that he shared my concerns.

I’d like to just point out — because I forgot to mention it in the post — that I’m not necessarily disagreeing with the Fed action here.

I’m kind of, of the opinion that the fed is damned if it does and damned if it doesn’t.

On one hand I agree with Brad Delong that there isn’t necessarily too much of a downside in collateral constraints that result from QE.
The negative repo rates and the collateral shortage that results are arguably a good thing IF YOU BELIEVE THERE ARE STILL PRODUCTIVE INVESTMENTS TO BE MADE.

My position on the collateral shortage is that a) its intensity confirms my suspicions that there aren’t enough productive investments out there and b) it represents the system’s panic attack about the prospect of money and capital going through the looking glass as a result of this. Money now has a negative time value.

The Fed is attempting to pacify savers with FARPs. It’s trying to stop them freaking out, because it knows the alternative — higher yield environment — ain’t gonna be around anytime soon.

Remember Keynes envisaged that in a steady state economy the ideal would be for a dollar’s value to be constant overtime. It’s up to the cbank to just pump in enough new dollars (Monopoly board game pass GO collect 200 style) to ensure that people can keep the game going and are not disadvantaged by that fact that all the assets and capital are positioned in very concentrated hands.

Problem with FARPs steadying the dollar and avoiding negative time value is that the economy probably still needs readjustment and redistribution. It’s too early to freeze the system as it is for all eternity.
Unless matters are taken into the hands of government and/or the fed is prepared to distribute the QE side of the equation more equitably via real money drops or basic income.

In short, hooking the system onto the Fed’s balance sheet is not necessarily a bad thing if there really are no productive investments out there, and if alternative action will be taken to sort out the liquidity draining and velocity slowing nature of this action.

2) I was thinking about Kotlikoff’s early proposal for a “sale of a century” resolution. What would happen if we just started giving stuff away for free?

I’m starting to like this idea. It’s hard to anticipate how the public would react.

For sure it would encourage the sort of restocking that would hopefully stimulate the economy.

If things were free people would initially accumulate like crazy if they thought the free period was only temporary. If it transpired that things would remain free for a long time people would start using shops and retail units as personal storage space. They would take only what they need.

3) if there really aren’t many productive investments left — at least not without the consequences that things simply become free — then it’s understandable why capital will seek refuge in anything that has the means to reverse this equitable process and which once again restores the hierarchies.

What’s attractive:

* Companies or assets that monopolise distribution of goods and resources. Commodities are attractive because if you own all the commodities you can control who gets them and in that sense retain your relative advantage over everyone.
Same applies to companies that purposefully restrict supply.

Of course, the new economy is defying this repression now (why I disagree with Grantham’s pessimism on this front, because I have a feeling a lot of the bull cycle was the result of unwitting monopolization in the face of a renewable threat).

* Rent seeking opportunities. Anything that has a property right attached to it, is needed and can be rented. Housing and land are the most obvious assets here, but so is any infrastructure that can be rented or charges for use. From utilities to iTunes. (With iTunes Apple transformed itself into a rent-seeker. It keeps out creative content in storage and rents it out on demand. We rent rather than download for free because of convenience and the entanglement burden of not keeping everything Apple when you depend on Apple devices.)

Rent-seeking can only be busted by the dissolution of property rights, the economy’s shift to a collaborative and sharing economy of its own will, because of convenience (things like home swapping etc) or direct government intervention.

* Last and not least, as the economy moves to fee itself from the grip of the above monopolists and rent-seekers, it will do so increasingly by learning how to dispose of stuff.

Our biggest upcoming problem is going to be clutter. Companies that can make clutter go away, ideally in a way that stuff can be repurposed — freeing our dependence on access to fresh commodities — will be the Apples of tomorrow.

We’ve still got a long way to go before this seems overtly appealing though.

6 thoughts on “Quick thoughts on FARPs

  1. Ms. Kaminska,
    On a roll; your best stuff in a while!

    The Financial services industry is the absolute worst when it comes to establishing rent extraction in sly and manipulative ways. I hope the new generation will see through the manipulation and demand something more fair and actually useful.

    We actively avoid rent-seeking behavior in our business and fee structure. (Registered Investment Advisor). Basically; pay what you can or feel is right. Makes for a very healthy relationship. I know plenty of people like us, that would love to do what they do for free if they could. We just love what we do and have an ongoing curiosity about everything involved. Profit motive is over rated.


  2. Ms. Kaminska,

    This move by the fed is obviously important and I’m still thinking through my position on this. A couple of things come to mind; but it still the early days..

    First of all I’m pretty sure that a large part of the investment community hasn’t quite understood what this means (except for some bond people) but I’m quite sure the bankers have. Not because they tend to be brighter but because their immediate livelihood depends on it.

    Recent comments by otherwise astute observers can be summarized as “okay we were tricked by the fed; the taper is off”. I’m pretty sure that given time, they and the markets will realize that this is not the case.. I’m watching behavior of real rates here.

    The feds FARP facility seem likely to increase moral hazard in the system. Banks have little choice now but to take on more risk, while at the same time sleeping perfectly well at night, secure in the knowledge that they will be bailed out if they fail. At least that is how they talk and act.

    A degree of entropy is always present, and even if the fed somehow manages to become the sun in our universe, capital markets will not obey “the laws of the fed” for long; they need uncertainty in order to price risk. (Which is also why Mr. Dalio is wrong in his description of the economy, it’s not a machine; it’s an ecosystem).

    We are at a juncture in human development, of which capital markets are a critical part, where the obstacles to progress are not fiscal policy, monetary policy etc. but the average human’s inability to comprehend the environment in which she lives. The amount of information received on a daily basis by the average person today is exponentially greater than that received by our grandparents. Information theory can deal with this but we cannot. Yet.

    Which is why Mr. Attenbourogh is correct in my view when he states “humans have stopped evolving”. Yes there is evolution, by a hair splitting, technical standard, but effectively we are still functioning as if being charged by a Lion when it’s just too much information hitting the frontal cortex; our minds are not any different than they were when we left Africa. Perhaps a better way to put it would be we have created a world that’s far more advanced than we are; toddlers driving Ferrari’s.

    We are the obstacle and to the best of my knowledge there is nothing the fed can do about that.

    I’m still thinking about and observing how FARP will play out, but I do know this; any attempt to fix entropy at zero will either fail or kill off the system upon which the attempt is made.


    • You are too kind. I don’t know how you do it! You actually have meaningful interesting things to say. Will give it some thought; it would mean leaving the peanut gallery!

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