The US government's yearly deficit is over $1 trillion. 8.5% of the government's budget alone goes to interest on our debt (https://www.usaspending.gov/#/explorer/budget_function). To pay for the deficit, the treasury sells bonds (debt) which is immediately purchased by the Fed with newly printed money. Notice how equities are at all time highs - money is flowing to whatever it possibly can (stocks, housing, art, VC, anything) in order to chase yield. How people are saying inflation is low... I think they are measuring inflation wrong!
Inflation is largely measured on commodity goods that everyone buys. Thanks to the widening gap in earnings, the masses don’t have more money to spend on groceries and hammers so the prices of these stay relatively stable. But the things people with money try to buy, education, property, financial assets, are mostly of a fixed supply and the prices will just keep spiraling.
I’m potentially crazy here but I’m laughing off every article that calls stocks or bonds or real estate overpriced. As long as the economy keeps running this way there’s a never-ending supply of money and nowhere else for it to go.
I don't think it actually works as you describe. But if it did, such that necessary commodities tend to be anchored, while high-end stuff climbs, don't we then have an automatic, built-in way to extract more money from the well-to-do, proportional to how stratospheric their wealth is?
Why don't you read about how it actually works. If you're American, your tax dollars are paying for the wonderful data collection and analysis the fine people at the BLS perform:
"But the things people with money try to buy, education, property, financial assets, are mostly of a fixed supply and the prices will just keep spiraling."
Education is not in any way a fixed supply. We can train more teachers.
It's not fixed, but it's not perfectly elastic either the way, say, hot dogs are. Part of the value of educational institutions is their track record, new schools have no track record, so aren't a perfect substitution.
Sure there is, it can be destroyed in asset price resets or debased in terms of purchasing power by the Fed (which is what plenty of the stock market gains since 1970 are).
You could make the same claim about Japan - an extremely wealthy nation relatively speaking, with one of the world's largest stock markets. Tokyo also has very high priced real-estate. And yet the Bank of Japan is fully capable of decimating their national wealth through Yen debasement, chopping about 1/4 to 1/3 off all their wealth in the past decade.
The Japan scenario, which the US is following, is gradually eroded growth prospects as debt consumes all capital available & necessary for investment to grow the economy. Eventually you reach a heat death, perpetual stagnation and conflict with the debt load and its interest costs; which requires constant debasement of the national currency - once you can't afford the interest costs, as the US can't any longer - until you destroy enough of the debt to climb back above water and free up capital for new investment again. That process becomes an accelerating downward spiral until you violently change something in the equation (one time massive currency adjustment, spending cuts with massive tax hikes causing a severe and prolonged recession, etc).
There is a reason gold is now normal up at $1400-$1600, instead of $300 20-25 years ago. That's all dollar destruction (also represented by the skyrocketing GDPs of most nations in USD terms from 2002-2008 as the dollar imploded and by numerous other prominent commodities such as oil).
That much destruction happened due to a comparatively modest lack of fiscal discipline during the Bush years. Just wait until you see what the present course causes. The rich will not be able to keep up, and corporate earnings sure as hell can't (they're not growing much as it is). To make matters worse, the China miracle is over, the S&P group can't lean on that any longer, there's little to no growth anywhere in the largest economic zones.
The Fed will have to get more drastic by the year with its debasement efforts (aka QE aka debt monetization). There will be a tipping point (sooner than later given the rate of debt increase) where the wealth can't outrun it via traditional assets like housing or equities. Might have ten good years left of potential asset floating, where you can semi hide from the Fed in the stock market (give or take a recession or downturn that will claim some of that potential). There is nobody to buy a trillion dollars per year of new US Government debt; and nobody that is eager for $20 trillion of new debt at 0-2% yields. So from here on out, it's a Fed debasement party; asset price increases can outrun it for a while, assisted by perma low rates. That Federal debt load will hit $40 trillion in ~11-12 years however, and the heat death will climb ever closer as GDP growth sinks toward zero Japan style.
What's the safest course of action in a scenario like this? Put all your investment money in gold (an unproductive asset) and pray that you've timed it right?
How does this get corrected? Do investments wind up losing all of the gains, or do those who didn't have an opportunity to participate get left out and the value of their holdings diminished?
There's some debate down-comments about whether this specific policy is quantitative easing, but we can go back to a broader view.
In 2019, the US government spent about $400B on debt interest payments. The overall money supply (M2) grew by $900B, about 6.2%. Constant-dollar GDP growth is ~2.3%, and inflation is ~2.9% so that's about $145B of paper monetary growth not backed by assets or general decline in purchasing power. (Sorta. Maybe. The US can implicitly share in growth not reflected in GDP, which complicates all of this immensely.) Assuming that's fair shorthand, how do we make up the gap? In 2008, the paper 'value' of a whole bunch of physical assets (homes) diminished, closing the difference at the expense of homeowners and investors (and the USG).
We could see something like that again: private equity and credit card debt look like plausible options, and student loan debt may be "nondischargeable" but that doesn't stop people from defaulting or dying indebted. The USG could theoretically fail to pay its debts in full; that would only require a Greece-style 'haircut' rather than an outright default, but it's still basically out of the question. If investors arrange to not lose the full debt, various rearrangements (bailout + taxes, diminished public services, bankrupt pensions, etc.) could make up the difference by passing the damage to non-investors. Perhaps we could see a major US bond shareholder wiped out without transfer of the debt? I'm not actually sure what happens to those bonds when the bondholders are embargoed or cease to exist in sufficiently-unstable situations. Fascinatingly, a student loan collapse could be partially covered by university bankruptcies: since the value of a degree greatly exceeds the summed value of four years of courses, students are functionally investors betting on the continued existence of their school. (As ITT Tech students found out to their detriment.)
Or, of course, we could see inflation and value growth outpace M2 growth a few times and cancel it all out without any dramatic shift. People aren't in a hurry to call this in, and offsetting it doesn't even require the US to run a surplus.
An extremely controversial topic! If you are middle class to upper middle class, owning assets to protect from the inflation (stocks, bonds, housing, gold, bitcoin) would be one way.
If you mean unwinding our current loose-money global monetary system of fiat currencies, I'm not sure that genie can or will ever go back into the bottle. Let's hope the next recession is gentle.
On one hand I agree with you completely, on the other hand a very hard painful reset is kinda needed too. I really hope it doesn’t come to the later, but I’m not sure we can avoid it long term.
> The Federal Reserve System is not "owned" by anyone. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to the Congress.
Regional federal reserve banks are also not private corporations, although their organization structure shares some features in common with them. Member banks that participate in the federal reserve system, on the other hand, are typical companies.
The Federal Reserve is a private entity in the same sense as the Postal Service. They're not private in the same way as a normal bank; nobody becomes rich just because the Federal Reserve has more assets.
macro voices podcast has interviews about this frequently ... the answer is we don’t know but could be a 40 year recession, could be a financial crisis, could be a world war & collapse of countries. Today this aligns with income inequality ... stock market up 4x since 2008, home prices way up, poor people get none of those windfalls
At this point, it's not to chase yield, but simply to try and not shrink.
This is the reason why people are willing to buy debt with negative interest (e.g. EU sovereign debt): they're actually willing to pay money to shield capital from the impending implosion rather than grow it
Edit: or, better said: people are willing to buy debt with negative interest rates to get some sort of a guarantee on the size of the haircut that's coming their way.
Inflation is tracked using the Consumer Price Index, which indexes prices that ordinary consumers face, not housing speculators or art collectors. Inflation is high for the capitalist class and low for the working class.
My intuition then is that bidding wars among the capital holders for labor should be more common, but wages are stagnant. Is the value of labor decreasing faster than the value of money for capital holders?
The maximum they're willing to pay might have gone up, but they can find someone else instead of paying the maximum, because labor is provided by tons of different, individual people who don't coordinate a price. The rise of pro-union sentiment over the last year could be seen as recognition of that need for coordination.
The Federal Reserve (the Fed), the central bank of the United States, prints money and buys the national debt (treasuries) in order to increase bank reserves and stimulate the economy. The Fed is doing this to such an extent that they are now monetizing (printing and buying national debt) 70% of all the debt issued since October, roughly when they started . They refuse to call it quantitative easing (QE) (despite it meeting the literal definition of QE). It's why markets are going up despite zero increase in overall corporate profits and mediocre economic growth. Endless artificial stimulus like this, is why the economy shuffles from bubble to bust.
The literal definition of QE, AFAIK, is "injecting money supply into the market." What the Fed is doing here is swapping one risk free asset for another. These are very different. There was a hiccup in the repo market, so the Fed is "buying" extremely short term (e.g., O/N repo) instruments. There is no net injection into the market. In contrast, during actual QE, the Fed was buying across the curve so that actually available interest rates for economic actors were depressed (again across the curve), encouraging economic activity. The effect is VERY different. The effect was supercharged with operation twist but that is another story.
Regardless of the maturity length of the debt instruments the Fed is buying, it is an increase in the money supply unless you're literally defining the money supply to include what the Fed is purchasing.
So yea if U.S. government debt is defined as money, then I guess the U.S. government buying its own debt back with printed money is just "swapping assets". Surely however there are implications of a country indefinitely buying back it's own fiscal debt with printed money, even if they tend to be exaggerated since we're not exactly seeing hyperinflation now.
The United States has a substantial advantage in that the dollar is considered the world's reserve currency. This is in large part due to the "petrodollar" as the vast majority of oil is only sold in dollars. This puts a large demand on US Treasuries from foreign countries & banks so that they can meet this dollar demand.
The dollar's dominance is slowly weening as Iran now sells oil to China using the Yuan. The IMF also has a potential replacement reserve "currency" called Special Drawing Rights (SDR). Though it's not technically a currency but instead it's more an index based on basket of currencies. That basket includes US Dollars, Japanese Yen, the Euro, Pound Sterling, and most recently the Chinese Yuan.
This St Louis Fed article says the US made more money from Seigniorage when inflation levels were moderate than when they were low. So this is perhaps a thin pretense for a never-ending debt bubble.
Basket of currencies without a blockchain or digital ledger component.
Although the Libra Wikipedia page indicates that idea has been deprecated:
> As of January of 2020, Libra is said to have dropped the idea of a mixed currency basket in favor of individual stablecoins pegged to individual currencies.
I know very little about economics, but If there is no net injection into the market, why did the Fed's balance sheet start to expand at the same time? Are they separate things and this is a coincidence?
They are not separate things. It is not a coincidence. However, you are not taking into account the very real difference in the composition of the balance sheet. Buying a short-term risk free instrument (and thereby expanding the balance sheet) in order to increase liquidity in that market is very different from what was happening during QE.
This isn't really accurate, because it would describe any "expansionary" monetary policy. QE involves adding liquidity (i.e. cash) to the financial system directly when interest rates are already low and so the normal tools (open market operations and to a lesser extent the discount rate) are ineffective. QE thus typically involves very large expansion of the Fed's balance sheet (the assets are the securities they buy, and the liabilities are the cash issued), compared to small fluctuations when they are using OMO.
The ultimate effect is an increase in the money supply just like normal expansionary Fed operations, just through different means.
Also QE1 and QE2 involved the Fed buying "non-traditional" assets like mortgage-backed securities that were toxic at the time and some of which "fade away" over their lifetimes (e.g. an MBS is not worth anything once all of the loans composing it are paid).
It’s swapping an existing asset (a treasury) for an asset that was created completely out of thin air (reserves). It increases the monetary base. If you don’t believe me, look at the Fed’s own data.
QE has not caused excess inflation in terms of the consumer price level, but it has dramatically increased the price of interest-rate sensitive assets like real estate, equities, and bonds.
Sort of. It was a swapping of short term liquidity for assets across the curve. Which is why it was fundamentally different from what the FED is doing today.
"which is why it wasn't noticeably inflationary any of the times it was done"
This is quite a strong statement. I would disagree. My model says it was inflationary. The counterfactual is "what would the inflation/deflation rate be in the absence of QE all else being the same?". Such counterfactuals are hard to come by, which is why this is such a dismal "science." At any rate, it cannot be denied (IMHO) that actual QE depressed interest rates available to economic actors.
The reason Carlyle called it the dismal science is because so many classical economists were abolitionists, and Carlyle favored the institution of slavery.
I agree that counterfactuals are almost impossible to know in economics, but if predictions on one side repeatedly turn out wrong, then that side is probably wrong.
You can find innumerable doomsayers that predicted hyperinflation, and a loss of faith in the dollar and bonds. All of those people were completely wrong, and in fact the dollar strengthened, yields plummeted, and consumer prices were stable.
Fundamentally different from QE? Then what this guy is talking about?
"Kudlow says that ... the Fed's T-bill purchases are "basically" QE".
How something fundamentally different from QE can be "basically QE" at the same time? :-)
Kudlow is a political appointee clown who does not know what he is talking about. He has a master's degree in "politics and economics". This is not an economics degree. If you are going to appeal to authority (which I really don't have a problem with), then appeal to someone who has a relevant educational background to actually be an authority.
I think these policies over decades are why we have inequality. While the political class likes to show solidarity with the working class by punishing the wealthy, probably the working class actually cares more about not being stolen from (which to be fair many of the wealthy do). Except for the fact that these policies are explicitly designed to steal from the working class without notice by anyone.
> Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.
Furthermore, correlation is not causation, but if you look at graphs of when economic productivity diverges from worker compensation (https://www.epi.org/productivity-pay-gap/) the systemic divergence occurs suspiciously close to 1972, which is right after Nixon Shock, when the dollar ceased to be tethered to a neutral third party (flawed though it may be) and began to solely be in hands of policy interests. Yes, the EPI draws the line at 1979, but really? Do we not have eyes?
Yeah, I think if the average person understood this there would be riots in the streets. It's an unbelievably huge regressive welfare program for the .01%.
Fortunately it's boring and complicated which is a built in guarantee that a large percentage of people will never care about it.
A big irony to me regarding this is that people see the huge inequality in America and conclude "capitalism" has failed and that we need "socialism" as a remedy to the inequality failing to understand that the means that top echelons are capturing wealth right now are more socialistic than capitalistic (ie, using legislation to redirect wealth as opposed to making money by selling products and services). It's essentially a bizarre form of regressive socialism that got us into this mess.
Turns out when you create methods to transfer wealth within a society, whoever has the most power in that society usually uses it to capture wealth. We already have a type of de facto socialism, it's just controlled by the ultra wealthy for their own benefit.
I happen to be in the Hayekian camp that says this isn't really a just a failure to correctly implement socialism, this is an actual property of all socialism. Obviously you could argue that, but this seems to historically generally be true.
I believe that even if a well intentioned Bernie type came in and created a wealth transfer system, over time that system would be captured by the powerful and still end up transferring wealth back to them. You can be guaranteed that at a minimum there will be an attempt to do this.
Ironically, a switch to a more truly capitalistic situation where businesses had to make money in the marketplace instead of rent seeking for conducive fed policy would probably be less friendly to large business interests on average.
>Ironically, a switch to a more truly capitalistic situation where businesses had to make money in the marketplace instead of rent seeking for conducive fed policy would probably be less friendly to large business interests on average.
You focus so much attention on the Fed you lose sight of the fact that rent seeking would shift from the Fed to the Customer.
The problem is fundamentally tied to conservative investment behavior. Given a rational choice, most people lend money to the people most likely to pay it back which are the same entrenched players the lenders are already dealing with.
Throw in the wage growth stagnation incentivized in order to put on the appearance of bigger growth numbers, and you develop a clot in the flow of money to the labor class, therefore decreased mobility from the labor to capital side of things.
Throw in hyperoptimization facilitated value deserts around rapidly consolidating industries, and you have a perfect positive feedback loop to enable wealth extraction from the middle class, while the capital wielders are scratching their heads wondering where all the new blood is.
Crushed with debt, bled dry by the XaaS revolution, exorbitant uncontrolled healthcare costs, and in a distorted market in which the name of the game is to try to keep people buying for the love of God.
Agriculture is already starting to suffer from over consolidation of the dairy industry since Walmart's vertical integration combined with USDA policies favoring the hyperoptimized industrial farmer over everyone else.
Something has to give. Will be interesting toseewho throws up their hands first; Bankers, Business, the Fed, or Labor.
As a small retail investor, and someone who's income puts me in the middle class, I've had big gains in my equities. I consider myself an "average person". Why should this make me want to riot in the streets? Is your implication that only the 0.01% actually own stocks? Even my grandmother, albeit managed by a financial advisor, has a stock portfolio that is benefiting from the current market activity.
Stocks go up and down. When the whole reason that stocks go up is because a arbitrary number inside the fed and treasury databases went up, I'd argue that move up probably won't last forever. If you time the market then maybe you could profit off of this. Timing the market is hard, even when you can see the bigger picture.
But no, the .01% are the PE people who are using this imaginary money to transfer possession of real assets to themselves with 0 interest loans which will be subsidized as "too big to fail" in the event the whole scheme doesn't work out and the executives who are buying their own stock with the money to trigger their own 7 and 8 figure incentive packages before the scheme collapses then further triggering their golden parachutes.
You're not making as much as the tremendously wealthy; your equities likely represent a tiny fraction of your income.
If your equities are going up 10% a year but you only have $20k in the market, but make $100k in salary, and your salary growth is falling behind the cost of living, you're not doing well, particularly compared to the person with $100M in the market and not going to work for a living.
Because it's taking huge amounts of treasuries purchased to simply support the market. You're seeing stability, but your children are seeing a higher debt burden.
Because when gravity reassert itself and the market finally crashes, the hedge fund guys will get out early and you and your grandma are going to be left holding the bag, again.
As a small retail investor, I'd very much like all this artificial growth in my portfolio to stop so I can buy more investments at more reasonable prices and get better returns in the long term.
Admittedly, I haven't read the article yet, but can you explain why they are doing this now? All indicators seem to suggest the economy is strong, so why are they resorting to tactics we last heard about in 2008?
To cut through all the econ BS, basically because they stopped doing it for a while and markets went down a lot, then short term (overnight) lending rates start to spike higher and they freaked out.
Some sectors of the economy are strong, but other sectors are doing extremely poorly. Agriculture and mining have been hit by several recessions (two consecutive quarters of negative growth) over the past four years, while sectors like finance and technology are doing very well. The mining and natural resources sector was hit by a recession in ~2015 that was worse than the 2008 crash.
The problem is finance is by far the largest sector of the US economy, so when you look at aggregate GDP numbers, the US economy looks great because the modest gains in finance are more than compensating for the huge reduction in output in the smaller sectors. It's the same story for the stock market: the market cap of the stock market is heavily weighted towards technology stocks, which is compensating for the poor performance in lagging sectors.
Not sure why you think indicators suggest a strong economy - if you dig into most of them, the US isn't actually doing that great after you discount for the artificially easy money situation created by the Fed's actions for the last decade and its knock-on effects (ex. debt-funded stock buybacks).
i don’t agree with your assessment of the indicators.
We haven’t hit target inflation, because labor costs have been resisting upward pressure due to underemployment. The fed thinks it can paper over structural problems with cheap money, resulting in capital asset price inflation and increased wealth disparity...furthering barriers to real wage growth.
Some think it is because elections are near. Can’t have weak market before that. Same reason why China trade deal phase 1 was signed, which doesn’t solve problems in trade with China.
> All indicators seem to suggest the economy is strong
It's doing great if you ignore budget deficit, multiple debt balloons (national/municipal/auto/student), and looming trillions of unfunded liabilities. What could possibly go wrong?
Because your analysis is incorrect. The economy is flat, if that, based on stock market information. But most people don't have wealth in stock but a house or car with a 401k waiting.
Real income/wages are flat, the many tariffs and economic policy choices made by the current administration has slowed if not stopped manufacturing (steel tariffs especially), the rate of auto loan defaults is at a record high (see 2008 mortgage crisis), and worse. Adding $1 trillion of debt per year is insane and would send 2008-2016 debt hawks into a tizzy yet the current admin vastly increased the deficit over the previous administration. Most of this is tax cuts from the 2017 bill which disproportionately go to corporations and super wealthy. Tax cuts for corporations do not expire whereas those for citizens will sunset. These tax cuts have led to massive stock buybacks which artificially buoy the stock market (which is why it's the only 'good' thing about the economy as a whole right now).
The best news of each monthly job report, jobs gained, has been rolled back by later reports allowing the administration to trumpet growth and improvement but leave out how off the numbers really are each cycle. Also, most of the 'new' jobs are part time, low wage, low skill, or gig economy work that often doesn't pay a livable wage or is a supplement to another low paying or part time job. That pattern does not lend itself to a strong, robust economy but can create a short term projection that appears so.
We recently hit a known recession indicator where the Treasury yield curve inverted. An inverted yield curve occurs when long-term yields fall below short-term yields like when 1 year bonds have higher interest than 10 year. usually the long term investment has higher returns except when analysts or brokers predict a crash is coming. Since this metric was tracked, we have entered a recession within 24 months every single time the curve has inverted. This includes the negative bond rates we saw after 2008. Today we might be paying too much attention to this indicator for it to still work that way but it's still important.
For all intents and purposes, the Trump economy is not good, flat, and falling. We may see a massive correction once stock buybacks end or are banned, corporate taxes are raised by a liberal congress, or any number of policy changes. Manufacturing is set for layoffs and reductions through 2020 (see US Steel closing sites in Michigan) and I'm personally saving for a down payment on a house when the market crashes in my area.
I'm curious, what indicators are you going off to think they 'all' suggest the economy is strong? It may be your sources are lying by omission or spinning information to look good when it isn't a real representation of the economy, like pointing to stock market highs that mean almost nothing. We've crossed 26000 in the Dow averages like 5 times in the current admin, that isn't stable at all but a pattern of rise/fall boom/bust that is not sustainable.
"From December 2018 to December 2019, real average hourly earnings increased 0.7 percent, seasonally adjusted. The change in real average hourly earnings combined with a 0.6-percent decrease in the average workweek resulted in a 0.1-percent increase in real average weekly earnings over this period."
A .1% real average weekly earnings increase YoY is hardly worth writing home about and more a sign that something isn't working for most Americans. It's basically flat.
I did not leave anything out.
If you look at the page 5
( Table A-1. Current and real (constant 1982-1984 dollars) earnings for all employees on private nonfarm
payrolls, seasonally adjusted )
you will see exactly the numbers I have posted.
I think you are looking at
>"..
Real average weekly earnings decreased 0.2 percent over the month due to the decrease in real average
hourly earnings combined with no change in average weekly hours.
Chart 2: Over-the-month percent change in real average hourly earnings for production and
nonsupervisory employees, seasonally adjusted, December 2018–December 2019
..."
The 2019-nCoV is going to get much worse, before it gets better. Q1 in China is going to be much worse than Q1 last year.
Factory output will slow. And this will affect the entire nation’s export engine to the world, and including the US.
How do you think this will affect the stock market? It kept going up in a straight line, until the coronavirus outbreak, and then SPY fell 10 points off.
>It's why markets are going up despite zero increase in overall corporate profits and mediocre economic growth.
It's one of many reasons the markets might be going up, along with slow global growth around the world (where else should you put your money?) and potential global instability (Hong Kong, Iran, China; USD still a safe haven).
>artificial stimulus
What is the difference between natural and artificial stimulus?
>why the economy shuffles from bubble to bust.
You see this particular argument all the time, but one look at the data shows that the boom/bust cycles of modern times are few and far between relative to 30,40,50 years ago, and in particular when compared to the pre Federal Reserve days.
Booms and busts happen in every economy, ever, throughout history, with or without central banks.
Treasury bonds and bills are sold at auction to the highest bidder. The price they sell for determines the interest rate; the higher the price, the lower the rate. The Treasury department sells bonds to raise cash to pay government expenses, both for short term (until the next chunk of quarterly taxes come in) and the long term (spending in excess of government receipts).
A one-year $1,000 T-bill means that in one year from the date of purchase, it can be redeemed for $1,000. So if you pay $980 for it, then that means that your effective interest rate is 20/980 ~= 2%.
The Fed wants interest rates to stay low, so they're driving up the price of treasury bonds/notes in order to reflect that. That, in theory, means that financial institutions will prefer to lend to consumers/businesses/etc. for higher yields, rather than put their money into treasuries.
Usually these sell at auction and the Fed buys some of them, but otherwise the market determines what the future value of money will be based on general return on capital.
The Fed is at least delaying purchase and interest payments on a significant amount of newly issued (short term) Treasuries against which they allow currency (paper or electronic) to be issued. This borders on issuance of fiat currency since their purchase is itself "unbacked" although the trades could eventually be unwound in the market if/when there is enough inflation that their value is negligible.
It is what gold bugs call printing money... or a money drop that goes straight to the leveraged banking system which lends out a multiple of the money from the Treasuries now held at the Fed and earns interest on the full levered amount. That has an inflationary effect, but mostly on financial instruments (stocks & corp bonds) since that's what banks usually buy with their new found money... and the Fed hopes that has ripple (wealth) effects on the rest of the broader economy.
At this point its helping companies buy their own stock by having cheap loans to use instead of cash. It's not really doing much for the economy such as spurring more investment or hiring.
What are the mechanics by which loans and stock buybacks do nothing, while investment and hiring do good things? It's all shifting money around, the results of which benefit different groups. That's not to say that in specific cases dollars couldn't be spent better elsewhere, but there is no "this is better than that" formula.
"Investing" when there's nothing to invest in is pointless, and if you hadn't heard, unemployment is near all-time lows; companies are hiring.
Well, actually the stated point of the Fed's move is to spur inflation and that requires monetary velocity (spending and re-spending). For that stock buybacks are not very effective (relative to other Gov spending), because the money just stays in people's investments and doesn't go anywhere. Also, I think you really want to look at the participation rate rather than the un-employment (which has been steady for a year whatever the Fed is doing).
The Federal Reserve, which is the central bank of the United States, is creating new money in order to purchase US government debt, which is essentially equivalent to the government printing new money in order to finance its own spending.
Looking at it another way, it’s no different than some guy printing counterfeit US dollars in his basement and using them to buy real assets. The outcome is the same in either case - the counterfeiter and the government both get to spend newly created money while simultaneously devaluing of the purchasing power of the dollar for everyone else.
It means that the US economy is in much worse shape than various indicators (successful stock market, low unemployment, high price of US government bonds) would indicate.
The government regularly spends more than it takes in from taxes by issuing bonds. People buy the bonds because the US government is considered quite safe. That in turn lets the government spend money, which ultimately makes its way into the economy as a whole. People use that money to hire workers, buy stocks, etc, making the economy look good.
But the Federal Reserve Bank has the ability to invent money for buying those bonds out of thin air. That means the bond prices stay high (and the interest rates low). That implies that the current strong economy is an illusion, and that's worrying.
The expected response of extra money being pushed into the economy without added value is inflation, and the inflation rate has crept up over 2%[1]. It's actually a little surprising that it has taken this long, since this is actually something they've been doing for over a decade. There is considerable debate about that, but it may be that the inflationary chickens are finally coming home to roost -- in which case things might get real bad real quick.
tl;dr: this indicates that the economy may not be as strong as we think, caused by economic manipulation by the Federal Reserve to make the economy seem stronger than it is.
We need something similar to the Balanced Budget Amendment (BBA). Our system rewards short-term thinking. However, the BBA should take into account stimuluses during slumps. It would probably have to kick in slowly to avoid hurting the representatives who sign it.
Why? Do you think it would reasonable to require that all homes be paid in cash? Should we ban auto loans? Why is the government different in this regard? There is nothing wrong with using debt responsibly. I enjoy the opportunity this affords me to buy the debt. it's a good investment for me. When mixed in the proper ratios with the remainder of my portfolio in combination with reasonably applied leverage US debt provides a safe, stable, and inflation protected place for a great many of us to store excess earnings.
Government debt is different from personal debt. People don't work forever, or live forever. Buying a home on debt is a good choice for a person, since it lets them have a place to live after they stop working. And that debt is backed by the house: if the person dies before the house is paid off, they get the house rather than coming after the heirs for debts.
The government never retires, and never has to pay off its debts. That gives it a lot of leverage, but it also obligates new citizens to a share of the debt as soon as they're born. Your parents can't pass their mortgage debt to you, but they do pass on their share of money that the government has borrowed.
So the government can safely borrow money, but at some point it will accumulate so much debt that people begin to doubt its ability to pay it back. Whoever is left holding the bag at that point will be in very deep trouble.
I don't know what point that is. Interest rates are still low, so the answer appears to be "not today" (and "not imminently"). But the article points out that the low interest rates may be something of a false indicator.
So as you say, responsible debt is good. But decreasing revenue via tax cuts, and increasing debt accumulation, at a time when the economy appears to be booming doesn't appear to be responsible. It reduces the ability to borrow in the future, at precisely the time you could be increasing that ability by paying down old debts. Especially if you're then covering it up by borrowing in a way that's hard for people to see.
"So the government can safely borrow money, but at some point it will accumulate so much debt that people begin to doubt its ability to pay it back."
Currency issuers can always pay any debt denominated in the currency that they issue. It is literally impossible for a currency issuer to be forced to default.
"But decreasing revenue via tax cuts, and increasing debt accumulation, at a time when the economy appears to be booming doesn't appear to be responsible."
That's a sane position, but the argument against a Federal Balanced Budget Amendment comes from the opposite case. You want the capability to deficit spend during recessions. The Federal Balanced Budget Amendment forces you to make the wrong decision of cutting spending during recessions, driving the nation deeper into recession.
When factories are idle and unemployment is high, it is vicious to claim that the best policy is to choose to throw more people out of work. Federal spending should be explicitly countercyclical.
Illinois has one of those. It just means they explicitly call out the amount of debt they will take on, not that they will have a true balanced budget. Problem is that no legislative body can pass laws dictating the future actions of a legislative body- - they will just pass new laws if they need to.
"The government regularly spends more than it takes in from taxes by issuing bonds. [...] That in turn lets the government spend money, which ultimately makes its way into the economy as a whole"
This is straight up nonsense. All currency issuers have the ability to spend which is skew from their need to tax. Taxes do not fund Federal spending. Taxes destroy money, and thus control inflation. That is a fundamentally different role.
Taxes destroy money? How so? Taxes take money from some private entity, and give it to the government. The government then spends the money, usually by buying something from some private entity. How does that destroy any money?
We're not on the Gold Standard. We don't have to track Pretty Yellow Rocks.
The rules are different for Currency Issuers (nations with a fiat currency) versus currency users (citizens, provinces, and nations on the Gold Standard).
For the United States, which is a currency issuer, Congressional appropriations create money. Taxes do indeed return money to the government from the private sector, but there is no need to claim that money is "recycled" for spending purposes.
Revenue is an obsolete concept for currency issuers.
> For the United States, which is a currency issuer, Congressional appropriations create money.
What is your basis for claiming that this is true?
> Taxes do indeed return money to the government from the private sector, but there is no need to claim that money is "recycled" for spending purposes.
Are you saying that it isn't recycled? If not, what do you think happens to it, and what is your basis for claiming that it is true?
> Revenue is an obsolete concept for currency issuers.
Only if you want staggering amounts of inflation. It is true that a currency issuer can just issue more money, and therefore could survive (short term) with no tax revenue. But that debases the currency, and in the end destroys it.
And, I'm going to need to see better answers to these points than "But MMT says it's true!"
It means continue buying and holding broad market index funds because the dollar’s value will be sacrificed to prop up equity’s (stocks, land, etc) value.
I can't provide evidence that this specific intervention will depress the dollar's value, but since the Fed aims for 2% inflation, I expect my dollars to be worth less every day.
It seems all invested parties are budgeting at least 7% annual growth in asset prices, from the government's pension fund liabilities to people's 401k and IRAs. Since, voters won't like to see their balances go down, the powers that be will do everything they can to prevent it. And in the absence of a growing young population, I don't see many options other than devaluing currency.
Can’t wait to see what the Fed will try to do when the next recession hits. They’ve been searching deep into their bag of tricks to keep this phony expansion running.
The next recession is going to be a bloodbath. Not sure what else the Fed can really do and it’s not as if Congress can cut taxes too much lower. The last 10 years we’ve been doing the opposite of what we should have. But at least the boomers got one last big fake boom-bust cycle to live through! Just like the glory days.
2008 Crash and how US Fed handled it means that they have to
pump money into stock market for the next 30 years(20 left) until all the mortgages that they hold fully unwind. What could go wrong?
Well, the US Fed track record for such strategies being successful over 30 years is vacant as it never has been done before!
ie at least our problem with real estate-homes outpacing income gets worse
A broken clock is right twice a day. ZH has an overt political bias and is a perennial pessimist, but they do actually perform meaningful economic analysis.
Edit: Then again, their articles sometimes feature near complete fabrications, i.e., "Minneapolis Fed president Neel Kashkari [...] said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth", which is not even remotely close to what was actually said.
It's also not remotely close to what the USSR actually did.
Which was practice a weird form of state capitalism, where most corporate profits flowed into subsidizing the political class, the military, infrastructure, and a couple of really inefficient industries.
The government, of course, was adamant that this was just a temporary transition period, and that communism would be achieved soon - like, in a few decades. This 'transition period', of course, lasted nearly 70 years.
Read further. They explain this view. It is 100% correct, based on the evidence they provide. What they are saying is that this was LTCM but instead of banks coming in and forcing losses at 50 cents on the dollar, the govt came in and bailed everyone out at par. I have no first-hand knowledge of the extent of this trade but a lot of it sounds correct (the key premise of the Fed is that this isn't leaking into the market...whether you believe ZH or not, you should be extremely suspicious of this line).
> It is 100% correct, based on the evidence they provide.
This is very wrong. The "evidence" they provide is nonexistent. The ZH link is typical ZH garbage. A bunch of assertions without basis with a few misconstrued quotes thrown in.
It isn't. Read the quoted section from Russel Clark, the BIS has been talking about this (they specifically mention levered hedge fund positions), and they specifically mention an arb between cash bond and derivatives (do you know the history of this trade? It blew up twice in the 90s)/point out that some funds are running with a lot of leverage (is this repo? I don't know, but it is likely given that this has always been a financing source and the BIS are saying that it is).
So not nonexistent. The quotes look completely fine (I have looked at clearinghouses quite a bit, Russel Clark understands them...obv, the guy is not an idiot).
The FED would love for hedge funds to INCREASE their cash bond and derivative Arb activity. This would arb away the differential and hedge funds would make a tidy profit in performing this service for the market. The problem is that hedge funds, prop desks, banks, and pretty much everyone DIDN'T step in and arb away the differential. This led to a massive 10%! rate for O/N repo, which is supposed to be a risk free instrument.
Question for you, since you seem pretty knowledgeable. How does a HF lever up 10x+ using the repo market anyhow? Is this a typical leverage ratio for borrowing in the repo market? I'm guessing it's extremely rare for a UST to lose >10% of it's value overnight, which I guess would mean that this would be how they're doing it. What is the customary leverage ratio for repo borrowing and is there some repo-market specific name for this metric?
ZH is unmitigated garbage. It began by pushing the standard tropes of goldbug interpretations of the economy with the banker bad, armchair (amateur) realist good and an unrealized schadenfreude of global economic pandemic. Now it's realized that its early readership is just a subset of the broader misinformed armchair conspiracy theorist and has expanded its message to them as well.
Just as easily as someone in software can bullshit their way through a presentation with a couple years cursory understanding of SWE topics, same goes with "researching" and writing a ZH econ article. ZH does not do meaningful economic analysis, look elsewhere.
Bingo. Also this argument in particular is wrong because even if you want to describe the current repo operations as QE, it isn't inflationary or doing much to "prop up the economy" given that none of the other QE rounds were inflationary.
At the end of the day, fiscal policy is extremely important, and almost no amount of monetary policy can do much on its own.
Unless we decide to start actually minting money, like the trillion dollar platinum coin idea.
>> ..."none of the other QE rounds were inflationary."
Earlier QE rounds (and this "not QE" round too) are definitely inflationary, but that inflation is not evenly distributed through the economy.
QE inflates prices of financial assets and related stuff. The further you get from financial assets, and the correspondingly closer you get to the real economy, the less inflation there is. Eg. equities get inflated a ton, housing prices less, the price of a hamburger not at all. The mechanism for this non-flat inflation distribution is straightforwardly derive-able just from supply-and-demand; they increase the supply of capital, but only by bidding up the prices of financial assets, while demand for those assets is approximately constant.
That said, you're right that Zerohedge ranges from "mostly-uninformed" to "intentionally writing nonsensical clickbait lies." On the other hand, it is broadly speaking not any wronger than e.g. what you see on TV or read in major newspapers.
Shifting the definition of inflation this way is misleading and confusing for everyone involved - a better analogy may be that QE is equivalent to price controls on fixed income assets.
The effects of QE become much more clear - since the price of a bond is now fixed above its market clearing price (alternately, rates are artificially pegged low), this actually results in a shortfall of supplied liquidity and a situation that sharply favors strong borrowers.
The Federal reserve injected banks with money, not the economy. One would naturally think that these banks would then lend money to the broader economy (because that's how banks make money), but a law passed around that time allowed banks to deposit their money in the Fed itself and extract an interest rate better than they would get from normal lending. The Fed, which normally ran a surplus (money which goes to the Treasury to pay down debt), began to run a deficit from these payouts. Potential inflation just became more debt. This is why over a trillion dollars in "printed money" failed to yield much inflation over the last 10 years, but let's all just keeping reading ZH articles about the looming "inflation bomb"..
Overall consumer prices and aggregate demand were virtually unaffected by QE. All the individuals who, for ideological reasons, believed QE would be inflationary got wiped out.
Peter Thiel's hedge fund, Clarium Capital, lost huge amounts of money on such a bet.
If you use the original definition of inflation, i.e., increase of the money supply, there has been massive inflation. It hasn’t resulted in a substantial increase in the consumer price index, but you can see huge increases in certain areas such as the stock markets, housing markets in certain areas, health care and education.
Stocks did increase quite a lot, as it generally tends to do over the course of the business cycle. Although, it generally was tracking actual profits up until recently (when the Fed was drawing down their balance sheet). It was tethered to real profits during the QE periods.
As a paranoid rag goes, ZH's faults are many and varied, but come on - the critique that the Federal Reserve doesn't know what the hell it's doing is 100% valid.
The observation that the FRB consistently bats 0.000 in economic outlook and interest rate forecasts (e.g. Bernanke calling housing subprime defaults "contained", or Yellen constantly stretching out the timeline of getting off zero, or Powell cutting rates three times in 2019 after predicting four hikes less than a year prior, or claiming repo operations would be unwound completely by 15 Jan) is absolutely correct, and an absolutely appropriate critique to make, even by armchair quarterbacks.
Just look at the history of FRB dot plots to get a view for how absurd your implied position is that bankers/economists are any better at their jobs than a drunk with darts and an interest rate chart would be.
HN is more aligned with ZH than not in the sense that it seems most on here believe the stock market is rigged or a bubble or otherwise not a sound investment.
I agree it is a bubble and believe once the cheap easy money ends, all the money chasing yields will be sucked out of stocks.
I think HN shares some skepticism, but in general isn't quite as right leaning as ZH seems to be. I enjoy reading both for viewpoints along the entire political spectrum.
For one thing HN doesn't allow ZeroHedge on the frontpage, it's banned from getting there. I suspect posted links to ZeroHedge get auto killed as well at this point (haven't checked lately, however it used to be the case).
It's considered a non-reputable source, filled with propaganda and comically absurd pessimism about the world ending every other day of the week (they've been wrong about the last ten years to such an extreme degree that they should shut down the entire site if they had a conscience). It also posts very pro-Russia propoganda on an almost daily basis. Their bias is interesting, although most sites have one; theirs just happens to be Russian in nature (not a great bias for an economic / business site, given Russia has no functioning market economy, a dictatorship, and has seen zero net economic growth for a decade plus).
Every great once in a while they post an article that is actually interesting, correct and outside of the normal channels of what the mainstream sites are willing to say. They publish a few of those per week, you have to dig through the trash to get to them.
It's got dutch disease, due to its oil reserves, with most of the economy focused on resource extraction (and the rest being the service sector), but that's still a market economy.
I can confirm there is loads of trash you need to dig through to found interesting content. I browse daily to find counter viewpoints to mainstream media, and there is a lot of useless junk.
