Scott writes
I certainly approve of the cash dispersion, as the principle-agent problem suggests that highly successful corporations will be tempted to waste their cash hoards on boondoggle investments. So it may be good for the economy. But I don’t see how it does much for the zero bound problem. At least I don’t see any first order effects. If Apple saves less I’d expect the recipients of this money to increase their saving my an equal amount . . . Those rich enough to own individual shares often have brokerage accounts where the dividends automatically spill into a money market mutual fund. If at the end of the month you have a tiny bit more in the MMMF, and a tiny bit less in Apple stock, but the total of the all assets remains exactly at say, $857,000, are you really going to spend more on consumption? I don’t see it.
I don’t think the key issue is consumption per se but whether money used to buy Treasuries is equivalent to money used to buy MMMF shares. I think the answer right now is no.
Right now the yield on T-Bills, the Interest on Reserve Rate and the overnight rate at MMMFs are not moving in total sync.
T-Bill yields are near zero, IOR is at 0.5% and MMMF rates have been on a glide path downward and have recently crossed the IOR rate.
One conclusion – that I tend to support right now – is that these products do not have equivalent envelopes, so that adjusting balances between them does have real liquidity effects. In particular, the marginal dollar on a reserve balance sheet will simply be held as excess reserves while the marginal dollar in an MMMF will be reverse repo-ed to a private sector counterparty using non-treasury collateral.
In addition, though I am still working this out in my head, I think an unstated objective of potential “sterilized” QE would be to eliminate this effect by making the Fed the marginal destination for MMMF inflows.
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Wednesday ~ March 21st, 2012 at 6:02 pm
Max Rockbin
There’s definitely a fallacy in assuming because amounts transferred at the margin are small (e.g. well to do people get a few hundred bucks from their apple shares so – no big deal – they’ll just let it roll into the Money Mkt acct).
Ponder this: Really rich people spend more than kinda rich people. That doesn’t happen on some happy Sunday. It happens gradually as rich people get richer. ON AVERAGE (which is generally how economics is done), spending increases, even if it’s just a small amount per person.
In an ideal world economics would be done with actual distributions of wealth/spending. Reasonable approximations of the wealth of Apple stock owners aren’t that hard to work out. Then you’d have something like a real answer – instead of a pull-it-out-of-your-pants guess.