Tuesday, September 3, 2013

Sumner's HPE Explanation


Geoff's comment:


"If somebody gives me, say, $500 in cash but my wallet is already full, then I’m going to do something else with it. I might spend the cash on real stuff or convert it to another kind of financial asset like a bond or stock. That’s the HPE in action, right?
But there is only one problem. The Fed can’t just give me $500 in cash. All they can do is buy an existing financial asset from me (aka an asset swap).
I know Dr. SS understands this. So what am I missing?
PS I agree with your post, Cullen. Sorry for going O/T :)"

Geoff, I agree that's a problem. Just giving you the $500 is what the MMists call a "Helicopter Drop."

But what Scott's saying in his gold analogy, the difference between cases 3. and 4. is that gold is the MOA in 4 and prices are "'sticky" (meaning they don't move instantaneously).

Therefore in case 3, the price of gold drops in half instantly. That's still the HPE. In case 4 this happens more gradually, and what changes instantly are things like "interest rates."

Make sense?

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  1. Hi Tom,

    That still doesn't make much sense to me. Yes, I understand that if you double the amount of gold in people's hand, that the price will drop in half. But how do you get the gold into people's hands in the first place?

    The Fed doesn't just give gold (or cash) away for free.

    1. "how do you get the gold into people's hands in the first place"

      Well, that's what I'm trying to get at in my line of questioning over there. TallDave has taken me up on it... and is proving some good feedback with his "Magic Box" example.

      I think there is a case to be made along the lines TallDave is going, but I'm offering him some press back still to see where he goes with it. I'm not sure where this will turn out myself!