What matters isn't the size of the Fed's balance sheet or what it contains. The Fed's balance sheet is "invisible" to the private-sector economy. This expansion of their balance sheet is simply a reflection of the stimulus we're doing.
When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.
The important thing to keep in mind is that we are intentionally shutting down parts of the economy. But some of those parts include mechanisms (jobs) that we normally rely on to supply spending money to consumers and businesses.
Due to the partial shutdown, the economy's productive capacity has taken a hit. But even so, our economy still has the capacity to provide a decent standard of living for everyone. We don't want to compound the crisis by failing to ensure that consumers have sufficient spending power to activate the remaining capacity.
It would be scary if the Fed's balance sheet weren't expanding like this right now.
>When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.
This is simply not true. The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed) and is effectively injecting money into the economy. This is a bailout as the Fed is making a liquid market (that otherwise would not exist) for assets, saving the balance sheets of firms. Future generations pay this back not through taxes but through inflation.
Whether or not the U.S. dollar will collapse or not is another topic, but what can be said is that it is not sustainable to continue bailing out irresponsible businesses like banks and others when they do not exercise good business practices like prudence, not being overleveraged, or having a buffer in case of lost revenue. The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
> The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed)
That's not necessarily true, economic transactions aren't necessarily zero-sum. I would assume for most of the assets being sold to the Fed, the banks need liquid cash more than they need the asset and so would be willing to take a haircut.
>The only way this ends is either a depression the scales of which we've never seen in history before[...], or a hyperinflationary collapse of the U.S. dollar
Why specifically do you think this will happen now when it didn't happen post 2008? Sure the scale so far seems bigger, but also the scale of the hit the "real" economy is taking is much bigger. And, in March, when some of these asset purchases had already started, CPI declined by 0.4%.
Asset managers are front running the Fed. The Fed hasn’t even bought junk corporate bonds yet. They’ve only signaled that they are willing to do so, which immediately sent the price of junk corporate bond ETFs skyrocketing.
If the Fed steps in to save this market they’ll overpay for debt from companies included in these bond ETFs that will likely go under anyway.
It also creates a moral hazard situation where poor performing companies can raise cheap debt because everyone now thinks the Fed will step in and guarantee it.
This is not accurate. A "plummet" in value when it comes to the fallen angels that the Fed is purchasing is more like a 10% drop, and even if you treat the difference between the "true" value of the bonds (if the Fed didn't purchase them) and what the Fed pays as a surplus, the aggregate value of all those surpluses is still tiny in the grand scheme of things.
It likely would have fallen even further, until the fed decided to intervene and buy corporate bond ETFs.
Now LQD has fully recovered and is back to pre-corona virus levels.
More interesting is the rebound in HYG, another Corp bond ETF, which is 50% BB rating, and the remaining 50% below BB rating. I imagine those will get downgraded and be even worst.
Now what happens when companies can’t meet their debt obligations is that covenants will get triggered and that can mean a whole lot of bad things for corporate debt. Which the federal reserve now holds because nobody else wants it.
Yes, this is a good methodology: we should take the lowest point of a random ETF, extrapolate it out, and use that number in our analysis of the Fed's actions.
edit: they edited their comment extensively after I sent this haha.
I'm not saying I agree or disagree given mild inflation trends over the past decade, but how long do you think inflation takes to really get in gear if you're right? We experienced deflation last month according to the consumer price index despite fiscal stimulus and Fed buying assets. [0]
The consumer price index is definitely flawed. However, one thing I've heard is that the massive drop in demand and velocity of money is necessary to consider when analyzing inflation. I also was initially worried about inflation given the massive stimulus numbers we're seeing but have been reconsidering this.
I'm not well-versed in this at all, but demand-pull inflation under Keynesian economics [1] or a drop in V (velocity of money) in the equation of exchange in the monetarist theory of money [2] seem to be what is supporting why folks are worried about deflation. I would venture to guess that this is part of why the Fed is doing these massive buys right now, too.
Tangentially, pointers to good econ learning resources from anyone would be helpful. I've only started with Khan Academy and what I remember from old classes so far.
It's worth noting that part of the reason that inflation statistics are so "low" is that there's an official adjustment done when things cost more but (supposedly) have increased quality, called a "Hedonic quality adjustment"
This adjustment has been made multiple times in recent decades for housing, which is a large part of any given adult's spending.
So the Fed economists keep saying "wow inflation is so low even after we pump gazillions of dollars in during QE", while ignoring the fact that easy money has lead to massive multinationals consolidating control of real estate and jacking prices up.
So even if it is somehow true that houses have gotten better in some ways (I'm not really convinced), that doesn't matter to people lower on the income scale where the price of housing is the difference between having a roof over their head and not - they can't really afford to care about the latest greatest improvements in housing. They have a different demand curve - be homeless or spend most of their income on rent.
"The theory is that the vast majority of that 70% price increase of a Camry since 1990 is due to quality improvements, with buyers today getting a far superior Camry; and that only a smaller part of that 70% price increase is due to monetary inflation, namely the dollar losing its purchasing power"
Just anecdotally, I wouldn't be surprised if a Camry really were "more valuable" (as measured by some sort of ideal fixed value-marker not subject to inflation) than in 1990. I seem to recall when I was growing up that the average expected lifetime of a car if well-maintained was about 100k miles; now it seems to be about 200k.
I agree that’s an opinion many people familiar with cars would share.
However the usefulness of that improvement is going to be a lot lower to someone who just needs a car to get somewhere rather than someone who can afford to buy a car with the long view of how it will affect their finances over many years.
The “purchasing power of the dollar”, even if you accept the accuracy of hedonic adjustments, is an extremely limiting view of the value many participants in the economy are deriving from that dollar.
I agree housing is a better example because the cost floor is much higher.
"the usefulness of that improvement is going to be a lot lower to someone who just needs a car to get somewhere rather than someone who can afford to buy a car with the long view of how it will affect their finances over many years."
I don't understand how a longer lifespan could not affect TCO regardless of how long you keep your car or what portion of its life you use. What does it mean to say people can't afford to spend less money?
> So the Fed economists keep saying "wow inflation is so low even after we pump gazillions of dollars in during QE", while ignoring the fact that easy money has lead to massive multinationals consolidating control of real estate and jacking prices up.
This is not remotely grounded in fact. The majority of real estate is controlled by homeowners and small-time landlords, not massive multinationals. Landlords don't have monopoly pricing power, rents have gone up (in specific cities) because anti-development policies restrict supply.
If you only look at home rentals, yes corporations make up less than 10% of ownership. But even the small percentage of ownerships really affect things, in Chicago we can see it has repeatedly taken just a few new luxury high rises to blow up cost of living in entire neighborhoods - it has a follow-on gentrifying effect where stores rush in to serve the new monied residents and the people living there can no longer afford to participate in their local micro-economy.
Again, real, actual lived experiences tell the store more than the super-super high level macro numbers might suggest.
There's still the effects on non-home real estate too, in which there is significant consolidation:
"During the past ten to twelve years, Blackstone has grown tremendously. Since going public in 2007, it has quadrupled in size. On top of that, Blackstone’s real estate division has exploded from a $17.7B venture to a $100B portfolio. According to BizNow, since 2009, it has spent more than $50 billion on commercial real estate. In addition, Blackstone closed a real estate fund worth about $16B in 2015. As a result, Blackstone now has the crown of ‘Largest Real Estate Owner in the World.’ Business Insider has even called the group’s Chairman and CEO Steve Schwarzman, ‘America’s landlord.’"
> If you only look at home rentals, yes corporations make up less than 10% of ownership. But even the small percentage of ownerships really affect things, in Chicago we can see it has repeatedly taken just a few new luxury high rises to blow up cost of living in entire neighborhoods - it has a follow-on gentrifying effect where stores rush in to serve the new monied residents and the people living there can no longer afford to participate in their local micro-economy.
You are confusing cause and effect. The luxury high rises are the result of rising demand and rising prices, not the cause. If you could magically cause prices to increase by building luxury apartments, you would see luxury apartments sprouting up all over the impoverished parts of the South side. But you don't, because the demand is not there. If you stop luxury apartments from being built in desirable neighborhoods and desirable cities, people will just bid up the prices of crappy older housing stock and drive poorer people out anyway (see: San Francisco).
Building new housing decreases the price of existing housing by expanding supply. It does not increase it. People who have a vested interest in seeing housing costs go up (landlords, existing homeowners) understand that fact, which is why NIMBYs keep voting against development. Unfortunately many people who do not want housing costs to go up do not understand the basic economic fundamentals and are motivated by reflexive hate of wealthy developers, so they sabotage their own interests by voting against new housing to the delight of their landlords.
I think it's a bit more complex than this. No, you can't magically create a yuppie utopia in the middle of the Southside, but you can start on the northwest side and expand it just a couple blocks west, then a few more blocks west. It's a coordinated effort from the large-scale developers and the city - look at Lincoln Yards for the most large-scale and egregious example.
Housing supply absolutely needs increased, but we must require developers to build mixed-income housing. The wealthy developers can afford to leave many units empty to maintain the luxury cache of the building or area. The relationship between supply and price in housing is not that sweet sweet smooth curve - it's lumpier than that in reality.
Additionally while the increase in supply can hurt your local landlords, it can also raise the average income of the clientele of an area, which then benefits them. In practice these landlords have not been staunch opponents of all the new luxury buildings.
> but you can start on the northwest side and expand it just a couple blocks west, then a few more blocks west.
Again, you are confusing cause and effect. The luxury apartments are popping up because of rising demand and rising prices; they are not the cause the rising prices. San Francisco refuses to build new housing stock and rents are still soaring there because people just bid up the prices of crack shacks.
> The wealthy developers can afford to leave many units empty to maintain the luxury cache of the building or area.
That is completely false. Real estate developers don't intentionally leave a large fraction their buildings empty to project an image of luxury. No renter is going to pay 2x as much rent because they see that the building is half empty and they think that makes it more exclusive. If they wanted an excuse to pay 2x the rent they would just get a larger apartment or move to a more expensive zip code. Deliberately leaving part of a building empty would be an extraordinarily financially dumb move. If a building is substantially empty then the developers screwed up their market research and are losing money on the project.
> Housing supply absolutely needs increased, but we must require developers to build mixed-income housing.
Building luxury housing frees up existing cheaper housing stock for lower income households. You don't have to build cheap housing to make more cheap housing available. Blocking the construction of luxury housing is counter-productive because it just means people will bid up worse housing stock.
I didn't say the Fed calculated it. I did say they reference it to say their policies (or whoever's policies) aren't causing inflation.
When a majority of leading economists subscribe to economic views that don't reflect the lived reality of an average person, it may not be a conspiracy, but the effect (groupthink) is similar.
>Sorry, but it's at this point in the thread that I realize that talking to tech bros on hacker news about monetary policy is actually the seventh circle of hell. Glhf.
Appealing to the authority of mainstream economists in a perpetual state of groupthink is not an argument. It is this kind of hostile and borderline elitist attitude that scares away people from discussing monetary policy and makes it seem more complex than what it really is, and I don't think that is productive at all. Ironically it is the same kind of elitism that caused the collapse of the planned economies of the 20th century (which grade-school students learn about today), despite being comprised of supposed "experts" in economic affairs who should never be questioned.
Please, this isn’t Soviet Russia, economists disagree about practically everything, so the whole argument that the profession has a serious groupthink problem is unconvincing to me. The reason why economists mostly agree on this particular topic-the way the Fed operates-is because it’s exceedingly transparent, theoretically (not to mention mathematically) simple, and empirically verifiable.
>Please, this isn’t Soviet Russia, economists disagree about practically everything, so the whole argument that the profession has a serious groupthink problem is unconvincing to me.
They disagree on a lot of things, that is true, but the one thing they all seem to agree upon (except for Austrian economists) is that the economy can be effectively modelled and that effective policy prescriptions can be derived from said statistical models. It is a supremely complex system and it is the pretence of knowledge (in the words of Hayek) to believe that you can use monetary policy to command it, much less policies based upon empirical models which are as you say constantly bickered and debated about.
Furthermore, the Fed is not exceedingly transparent - audits of its operations and its meeting minutes are classified and are not open to public review, as is the case with most central banks in the world. I know because I've tried to ask for copies of open market operation details from my central bank (the Swedish Riksbank) but was denied as they are classified by law (which is incredibly unusual for a society where other government agencies publish everything, including income tax returns).
Statistical models exist primarily for the falsification of hypotheses. The Austrians didn't submit such models so their theories could never be subjected to the same scrutiny that mainstream theories are. "It's too complex" is a cop-out, and Austrian theory's lack of math is enticing to people who don't want to put forth the effort involved in rigorous study (i.e., internet scholars). They pretended to be agnostic about economic principles, when really they just applied ad hoc explanations for economic events (which they were free to do because they weren't constrained to those pesky mathematical models).
I’m sorry that your Swedish central bank is classified, since, based on your worldview, there are presumably a bunch of Swedish economists working there behind closed doors to screw you over.
"Effective March 15, 2020, the meeting was closed to public observation by Order of the Board of Governors1 because the matters fall under exemption(s) 9(A)(i) of the Government in the Sunshine Act (5 U.S.C. Section 552b(c)), and it was determined that the public interest did not require opening the meeting."
This seems to be the case for almost all of their meetings.
They only keep certain parts secret so market actors don’t make decisions based on what the Fed is thinking about doing. Obviously if people knew the Fed was thinking about raising interest rates, for example, it would affect their decisions (and the market as a whole) negatively. This is something any business or economics undergrad learns in an introductory banking class; since you are evidently unfamiliar with the Fed’s system (as opposed to the Swedish one), you may find it helpful to consult an American money and banking textbook.
From your own link, verbatim:
"Items considered in closed session include primarily
- Bank and bank holding company supervisory matters, discussions of which generally disclose information from bank examination reports or commercial and financial information obtained in confidence by the Board
- Monetary policy and other matters whose premature release could be used in financial speculation
- Personnel matters."
> But over the same period, the Consumer Price Index for new vehicles – so this is one of the many subcategories of CPI – has risen only 22%. In fact, it rose 22% from 1990 to 1997, and today is flat with where it had been in 1997.
So inflation only accounts for log(1.22)/log(1.77) = 37% of the price rise.
I had the same question a few weeks ago! Apparently, the delay between monetary stimulus and the time we'd notice inflation is estimated to be greater than 12 months. I found one of the sources whose abstract I scanned when I had this question[0].
Hedge: I'm not saying it's true or that I've verified any of the research, only saying that economists have studied the effects of central bank stimulus action on inflation rates and the economic response seems to take a while.
It's complicated. Hyperinflation occurs generally when the banking system's regulation is gets out of control and goes into a lending/money creation spiral. That can happen very quickly - within several month. All things considered what's more likely to happen at the moment though is a monetary implosion, as massive debt defaults occur destroying the money in the banking system. Which is why people are muttering about Great Depressions.
Demand for dollars won't evaporate overnight. The thing about being a reserve currency is in a crisis, the entire levered world is short your currency.
That, combined with the fact that it's not like any major developed economy is doing that much better, means US goods, services and financial assets are still pretty competitive with the rest of the world.
The dollar is up 40% vs the lows of 2008. When DXY is back at 70, it's time to worry about a crack in the dollar reserve system.
The worry isn't demand dropping over night, since in that case the Fed could just sell the assets it's been buying. The worry is that the value of the Fed's assets will drop overnight.
This is inaccurate; most economists think we're most likely to see deflation over the next several months as demand collapses. Considering the position of the dollar, a "monetary implosion" like you're describing is still exceedingly unlikely.
"Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy." - Ben Bernanke, Chairman of the Fed, in 2005.
I don’t understand how your quote from Ben Bernanke is relevant. Where in the quote does Bernanke say that we’ve fully eliminated volatility? And how is he representative of “most economists?”
I’ve said in other parts of the thread that economists can, in fact, be wrong sometimes. I just find the people making completely unjustifiable assertions about the economy, while simultaneously castigating the economics profession as some cabal of out-of-touch elites who can’t be trusted, unconvincing, when I know that the vast majority of economists are simply researchers trying to understand the world and how to improve it.
I don't think the problem at the current time is inflation - it's deflation. There's less money chasing the same amount of goods and services. That was the case during the Great Depression - and the Fed exacerbated things at that time by not intervening in controlling the money supply because they were bound by rules which prevented them from doing so.
If inflation suddenly increases, then the Fed has tools to combat that. They can sell off some of their balance sheet or raise interest rates to reduce the amount of money in the system. Inflation only occurs because there's too much money chasing goods and services.
> They can sell off some of their balance sheet or raise interest rates to reduce the amount of money in the system.
The Fed was unable to unwind more than ~$650B out of $4T from their balance sheet in one of the longest expansion periods in US history. How will they do this? This is not a rhetorical question, I am genuinely curious in how people think this will be done if the Federal Reserve itself can't do it (either reducing the balance sheet or influencing the target rate above low single digits).
They couldn't do it without causing deflation which they didn't want. But if they were combatting hyperinflation then they would want to cause deflation, so it would be fine.
Look at what happened in December 2018 when the Fed tried to raise interest rates and let assets bought during the financial crisis roll off at maturity...the market immediately crashed.
Fed is backed into a corner where it can’t raise rates without crashing the market and can’t lower rates now that we’re at 0.
> The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up.
Uh, the latter is not a distinct option from the former.
Also, you've left out: “the government continues as it has for generations, occasionally bailing out out wide sectors of the economy in black swan events with wide impact but mostly letting businesses big and small that are not prudent fail while cushioning some of the impacts of that failure with bankruptcy (both regular rule-based bankruptcy and similar, ad hoc restructuring in special cases; the latter is often also referred to as a ‘bailout’, but is meaningfully distinct from other bailouts.)”
The fact that it has been going on for decades doesn't make the point less valid. This kind of monetary intervention is compounding in nature, and it can be clearly seen as how each financial crash over the past 2-3 decades has been worse than the one before.
> The fact that it has been going on for decades doesn't make the point less valid. This
No, the fact it what you describe has not been going on for decades. It is an occasional response to extreme events, not a continuous mode of operation, and your criticism is all about the potential risk it has as a continuous mode of operation. There've been a couple major cases fairly recently, but that was in response to the biggest financial crisis in 70 years and the most significant acute global pandemic in over a century happening to fall a little over a decade apart, not some change in general approach.
>The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
Most countries are actually passing larger fiscal stimulus measures than the USA so far, at least relative to their existing currency base, so wouldn't this mean every currency hyperinflates all at once?
>The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
Or, like last time, a global war.
Also, I cannot emphasize more fervently your accurate correction here:
>Future generations pay this back not through taxes but through inflation.
It's a form of theft, really. Increasing the velocity of money is important to Keynesians and the faster that stuff degrades in value the faster those who are paying attention want to get rid of it in tangible or better-performing assets rather than, say, saving it long-term for something like capitalizing a small business.
And, whether an individual or organization, taking out loan after loan and not worrying so much about bankruptcy is easier to tolerate since sooner or later the gambling will pay off and it'll be easier to pay off in the future with easy money. When a dozen eggs cost 50$, 100,000$ in student loans will be easier to pay off.
I read something today about how China is gambling on the dollar collapsing and have been hoarding lots of gold in anticipation of some kind of at least partially gold-backed currency that's likely to be digital.
> Future generations pay this back not through taxes but through inflation.
Inflation expectations have collapsed in recent months. We didn't see steep inflation when the government pumped trillions of dollars into the economy after 2008, why do you think we'll see steep inflation now?
The most obvious illustration of this is the jump in junk-bond ETFs after the Fed began buying up junk bonds.[1]
The Fed is supporting the price of dubious, high-yield corporate debt. Whether or not that's good for the economy is a separate question, but it's not as if the Fed is just replacing assets with cash at 1:1 value. It is encouraging lending to risky enterprises, by itself taking on the risk.
That could be true, but one thing is that the way (or some of the ways) the money is added to the economy is dubious and another that nothing should be done.
>Future generations pay this back not through taxes but through inflation.
I don't think that's a fair characterization. Inflation helps people with student loans (salary grows but debt stays the same) and hurts people with retirement accounts full of bonds. Broadly speaking, inflation helps the young (by closing the wealth gap between haves and have-nots).
The actual reason why inflation hurts young people has to do with economic stability and its cascading effects on the economy. A period of significant inflation can wipe out generational mobility. Inflation has a minimal effect on "closing the wealth gap" in comparison and I think it's irresponsible to act like hyperinflation would be a reasonable way to solve economic inequality.
Yes, fully agree that economic instability from hyperinflation hurts far more than reducing the wealth gap could help.
In recent times, the fed has been below its 2% inflation target.If it missed on the other side, and inflation went to 3-4%, I think that would be totally reasonable economic policy. Double digit inflation, however, would end up making everyone poorer.
"Given that the stimulus is appropriate for the economy, this is all fine."
Very casually assumptive, but ok, let's go with it...
"It's not anything that future generations have to "pay back. And it's not going to cause a collapse of the dollar."
If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??
> If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??
This is a good question. The answer is that the virus and lockdown are currently causing lots of deflation. So the Fed needs to cause lots of inflation to cancel it out. But if they did four times more then that would be too much and would cause inflation to be far too high.
Personally I suspect the the Fed has undershot and we'll see net deflation over this year and the next.
The GP is saying that the future generations have not to pay back and that the stimulus is necessary now and it will not be inflationary. It's not saying that it's not possible to spend too much and create undesired inflation.
But note that, in the same way it's possible to spend too much, it's possible to spend too little. For some reason there are people who think that is impossible.
The Keynesian theory of economics doesn’t exactly have a spotless track record for modeling and predicting outcomes of non-routine interference in the economy.
The velocity of money has gone way down so the current liquidity injection makes great sense.
A major question is whether and how the Fed will absorb the excess liquidity back later to prevent too much real inflation, beyond what is measured by consumer price index. (Some inflation is expected as the economy is less productive because of Covid-19 and the stimulus is used to partially offset its impact.)
> It's not anything that future generations have to "pay back."
I really wish the term "debt" were not used in these contexts. This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt.
In this context the term is being used to refer to an accounting construct that looks like debt, but the meaning of this particular accounting entry is completely different. Using this term only creates confusion among the public and even politicians who don't understand the complex and esoteric details of modern economics.
In the end it's still a debt. The nominal value in USD may not be all that important, since the Fed can manipulate it more or less at will, but you're still borrowing productivity from the future—by consuming capital—and that debt will be repaid one way or another.
The fallacy here is assuming that capital is finite over all time. It's not. Capital is created.
Of course not all economic activity creates capital at the same rate, and I do definitely agree that the type of economic activity you get during and after a recession with massive QE is likely of a lower quality than what you'd get otherwise. But it may still be that more capital (wealth) is created this way then if you allow the economy to completely shut down.
I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies. Dead or dying companies do die under such circumstances, but so do really innovative ventures that have not yet reached comfortable sustainable profitability. A mega-recession right now might take out a lot of junk, but we'd also risk losing stuff like SpaceX, Tesla, Boom Supersonic, and hundreds of small innovative startups. We might also lose the whole renewable energy revolution and any work being done on next-gen nuclear power like small modular reactors.
In short we'd lose both the bottom and the top end of the innovation curve, keeping just the boring middle.
I suspect you may have intended to reply to a different comment, but since you're here…
> The fallacy here is assuming that capital is finite over all time.
Capital is "finite"—as opposed to "infinite", "unlimited", "superabundant"—but I agree that it isn't fixed. There is no law of conservation of capital; it can be created or destroyed.
With that said, taking on debt is not necessarily a bad thing; it depends on how you use it, and whether you have a viable plan to repay the debt out of future earnings. QE fails on both counts; there's no real direction beyond "inject more money into the economy", and no viable repayment plan.
> I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies.
I'm not sure whose premise that was, but I would also disagree. Clearing out underperforming companies would be a silver lining at best, and not enough to make recessions or depressions "good". In any case the companies hit the hardest are not necessarily the ones with marginal profits but rather the ones which are incapable of adapting to changing circumstances. That can include old companies set in their ways as well as new, experimental ones which depend on emerging opportunities.
This is a pretty naive take. You are suggesting that all these trillions are somehow ending up in the hands of people when the primary effect has been to prop up asset prices e.g. the stock, mortgage, and corporate bond markets.
The second order consequences of a massive balance sheet will be felt not in the immediate future but at some point down the line when the Fed attempts to shrink the balance sheet.
We have a very recent example of the Fed trying to do exactly that in late 2018, and the market immediately crashed on rate increases and assets rolling off at maturity.
Another way of putting it is that it took the Fed 10 years to even think about trying to extricate themselves, and they realized they couldn't. Now they have gotten their hands much deeper in.
Yes. The next recession will just be worse since Fed cannot lower rates any more and if they signal any sign of pulling back on propping up corporate bonds or mortgages those markets will just crash.
The Fed is not focused on the stock market. When they improve the status of the economy through monetary policy, they indirectly improve the value of publically listed companies. This makes sense, because companies are the central entities in the economy. I don't know how the Fed could improve the state of the economy without affecting the prices of shares.
Take a look at December 2018. There was no pandemic. The Fed tried to very slowly reduce its balance sheet. The stock market threw a major tantrum (by dropping 20% or so) and voila, the Fed reversed its course.
The same in 2016, and other times
How can you say they are not focused on the stock market? They are primarily focused on propping up the markets.
If you think they are propping up the stock market, then it doesn't make sense to be worried about inflation. Inflation would devastate the stock market.
They shouldn’t be but this is not true now. What they’ve done has directly propped up asset prices. No question. This isn’t a second order effect. They know what they are doing.
This would make sense if the Fed's newly-created money went directly to households that need it due to economic shutdowns. But it doesn't, it mostly goes to financial institutions. You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants.
Also, your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith, not some falsifiable statement supported by facts. We don't know if that is true or not.
Uh, actually, the notion that the economy has the capacity to provide enough for everyone is a falsifiable statement supported by facts. You can analyze the total amount of resources and the amount of work required to produce them, and figure out how they could be distributed differently. We've known for a long time that, in the US at least, there is enough food, shelter, and healthcare for everyone.
> You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants.
They're related. There's both fiscal stimulus and monetary stimulus going on here. The monetary stimulus only makes its way to consumers indirectly. On the fiscal side, as you say, Treasury can spend money on whatever they want. And when they do, they transform some of the financial sector's money into assets (treasuries). If the Fed wants to maintain its accommodative monetary policy, they're going to want to re-monetize those assets.
> your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith
"decent standard of living" was not crucial to my point.
There's some part of our economy's productive capacity that we have consciously decided not to shut down because we've deemed "essential" to consumers. My point is that it would be a mistake for us not to provide consumers with the means (money) to access that capacity.
The Federal Reserve's balance sheet, and its actions matter very much. What is essentially in the process of happening is a massive disconnect between the "operating system" of the economy - the financial system, which is in the process of crashing (bear with it, it's a very slow system it takes a while), and the economy - the computer - which is as you say, essentially fine, but no longer working because... operating system.
As far as the balance sheet itself is concerned, it's important to look at all of it - with any magician it's critical to watch both hands - and in this case, the right hand is doing this to the M2 money supply, i.e. creating $2 trillion.
M2 is the total sum of all liability deposit money in the US banking system, and liability money has dominated in all monetary transactions since at least 1890. (Dunbar.)
This isn't your term paper-you don't need to cite your sources. But, if you're going to, at least try to do it correctly (the parentheses go inside the sentence, the period goes outside the parentheses).
Regardless, it's this line: "Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly" that I was referring to. That calculation does not reflect what the M2 number actually means. You already have a definition of M2, so I'm sure you can figure out where you went wrong yourself if you just stare at that for a little bit longer.
One of the biggest things confusing people about how public finance works is that everyone is focused on the Fed rather than the Treasury.
A good aspect of MMT is that it explains how the Treasury spending more than it takes in in taxes means more money is created into the economy than is deleted out of the economy. This is the more important thing to focus on.
Some of the MMT professors also do a good job explaining how QE (quantitative easing) doesn't create new net financial assets into the system, it just shifts around assets in accounts at the Fed.
All this focus on the Fed seems counterproductive.
> A good aspect of MMT is that it explains how the Treasury spending more than it takes in in taxes means more money is created into the economy than is deleted out of the economy. This is the more important thing to focus on.
This is one of the most absurd claims of the supposedly "descriptive" MMT. Taxation does not delete money from the economy. When the federal government collects taxes, it doesn't take that money and burn it in a giant pit. It turns around and immediately spends that money.
Yes, the federal government does not need your tax dollars. Yes, they technically have the ability to print an infinite amount of dollars. But that doesn't support the claim that taxation removes money from the economy.
> Some of the MMT professors also do a good job explaining how QE (quantitative easing) doesn't create new net financial assets into the system, it just shifts around assets in accounts at the Fed.
This is completely false. The Fed creates new reserves (base money) in order to buy assets.
>>"This is one of the most absurd claims of the supposedly "descriptive" MMT. Taxation does not delete money from the economy. When the federal government collects taxes, it doesn't take that money and burn it in a giant pit. It turns around and immediately spends that money."
I didn't know that idea was so polemic.
So, what you are saying is that government deficits are inflationary because they add money to the economy, but, on the other hand, government surplus don't retire money from the economy?
>>"This is completely false. The Fed creates new reserves (base money) in order to buy assets."
Yes, but the assets the Fed buy (when practicing QE) are in the accounts of the commercial banks in the Fed. After buying them, those assets are not there anymore, and, instead there is money (1). And money is basically a government bond that pay 0% interest.
> So, what you are saying is that government deficits are inflationary because they add money to the economy, but, on the other hand, government surplus don't retire money from the economy?
Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything. A deficit or surplus is merely the delta between total revenues and an arbitrarily defined budget.
Inflation is caused by additional dollars chasing the same number of goods. Printing money does not create goods and services - it merely decreases the value of each dollar relative to everything else. If I had a machine that could create an unlimited amount of gold at zero cost, the price of gold would approach zero if I made and sold enough of it. I don't know why you would think dollars would be any different.
> Yes, but the assets the Fed buy (when practicing QE) are in the accounts of the commercial banks in the Fed. After buying them, those assets are not there anymore, and, instead there is money (1). And money is basically a government bond that pay 0% interest.
Yes, the bank exchanges an asset (like a treasury) in exchange for reserves (base money). The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase?
I'm a little late, but I want to answer for the sake of completeness.
>>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything."
You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject).
Now, it seems to me that we agree also that a government deficit can be inflationary. So, by definition, a government deficit is adding money to the economy.
My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money".
>>" The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase? "
Monetary base increase because that is how it's defined.
I think that the problem here is that you subscribe to the fractional reserve banking theory that, I'm afraid, is false.
I suggest reading this report from the Bank of England (1) about how money creation works. A private bank lending is not limited for the quantity of reserves available in the system, because central banks have to keep the system of payments working and are targeting an interest rate. So, central banks have to answer any request for additional reserves.
The corollary to all this, is that it doesn't matter if the asset of the private bank is a treasury or reserves in the banking system, banks can lend anyway. The central banks sell treasury to the banks for controlling the interest rate, not the quantity of money.
You also seem to be arguing that centrals banks don't create new money, which is an odd assertion, especially for a proponent of MMT. From the article you posted:
> "QE involves a shift in the focus of monetary policy to the
quantity of money: the central bank purchases a quantity of
assets, financed by the creation of broad money and a
corresponding increase in the amount of central bank reserves.
The sellers of the assets will be left holding the newly created deposits in place of government bonds."
> "QE has a direct effect on the quantities of both base and broad money because of the way in which the Bank carries out its asset purchases. The policy aims to buy assets, government bonds, mainly from non-bank financial companies, such as pension funds or insurance companies. Consider, for example, the purchase of £1 billion of government bonds from a pension fund. One way in which the Bank could carry out the purchase would be to print £1 billion of banknotes and swap these directly with the pension fund. But transacting in such large quantities of banknotes is impractical. These sorts of transactions are therefore carried out using electronic forms of money."
>>"You also seem to be arguing that centrals banks don't create new money"
Not exactly. My undernstanding is that all money comes from the government. That is clear with banknotes for instance, it comes only from one place, but the same is true for bank reserves. Reserves originates in the Central Bank that is part of the government.
Now, if the government want to spend into something, let's say to pay a service to a private company, it tells the central bank to credit the appropriate account of the private company bank with the appropriate quantity. Money was effectively spent into existence, and, this will have inflationary effects.
On the other hand, if, for instance, in order to finance a crazy QE program, new reserves are created in the banking system, that money is available for banks to make loans, but that doesn't mean that a loan will be made. It's not until that loan is fulfilled that the new reserves will have an inflationary effect.
That's the reason why the QE programs were not inflationary. They affected the interest rate, but that was not enough because there were not appetite for loans in the economy. I think this has been calling "pushing a string". The MMT perspective would say "those QE programs are not going to be inflationary but they are not the proper tool. If you want to create demand (and some inflation) you need the government to spend, because the private sector obviously doesn't want to".
> My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money".
It's rare for the federal government to run a surplus, but it did have one for four years straight in 1998, 1999, 2000, and 2001[1]. During that that time, the monetary base increased 32%[2] and the M2 money supply increase 23%[3].
No matter how you look at it, despite the government running a surplus, the money supply continued to increase. How do you square that with your claim that surpluses remove money from the economy?
You're forgetting that the government doesn't _control_ the whole money supply. The government only controls how much it itself creates or deletes on net.
Most money is created by commercial banks. As the demand for credit expands the money supply expands, and as credit is repaid, the money supply decreases. This is going on all the time.
My point is that with a government surplus there is less money being spent in the economy, the same way that with a government deficit there is more money spent in the economy. I don't think this is polemic.
Now, in order the government to run a surplus, it has to tax more that it spend. The money that is taxed in excess of the money that is spend, it's the money that it's retired from the economy. Ergo, taxes retire money or "destroy money".
Please, note, that when a government is running a deficit, it's effectively spending new money into existence but, that doesn't mean that all the money comes from the fiscal instance of the government. That's the reason we can see years when the government is in surplus and an increase in the monetary base at the same time.
Where is that money coming from if not from a fiscal deficit? It's coming from the central bank creating reserves. Why the central bank create new reserves if the government is not spending more than it tax? Normally, it would be for only one reason, manage the interest rate.
The credit department of commercial banks doesn't check if they have reserves before given a loan, they check if the loan make business sense (or they should) and then get the reserves in the interbank market. If there are not enough reserves in the system for the demand of credit in the economy, the interest rate will go up (offer and demand dynamics in the interbank market). The central bank has a interest rate target, so, in order to keep it in target, they have to add the reserves necessaries. The central bank don't have control of the monetary base, because if they control the quantity of money, they would loss control of the interest rate.
So, if in years of government surplus, the monetary base grow, that means that central bank had to add reserves to the system. Assuming it was not some crazy QE program, that means that the economy was demanding more credit. Also, we can deduce that in those years, while the public debt was going down, the private debt was going up.
This is related also to the (for me) very interesting concept of sectoral balances (1). If the government is running a surplus, and the GDP is the same or growing, and the external balance of payments is the same, that means that the private debt have to increase.
>>"It's rare for the federal government to run a surplus [..]"
Yes, very rare. It's interesting to think about why is that the case in the context of the sectoral balance model.
> Inflation is caused by additional dollars chasing the same number of goods.
But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation.
> the bank exchanges an asset (like a treasury) in exchange for reserves (base money)
The "monetary base" increases because of the way they define the monetary base. In the old days, the money in reserve accounts was convertible into gold, and the money in the Treasury bond accounts wasn't, so they count the money in the reserve accounts as part of the "monetary base" but not the money in the Treasury bond accounts.
> But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation.
I actually completely agree, but with a caveat. It may not cause inflation in terms of this years price level being higher than last years price level, but it will cause a decline in the purchasing power of the dollar. For example, let's say in the absence of intervention the price level would fall by 2%, but with intervention the price level would stay the same. That's still a 2% decline in purchasing power.
> The "monetary base" increases because of the way they define the monetary base.
The monetary base is defined as the sum of all currency (including coin) plus bank deposits. It increases or decreases completely at the Fed's discretion, because the Fed has the unique ability to create reserves. This isn't some semantic trickery.
Assuming that the fall in aggregate demand will last for several time periods, in the absence of intervention, the companies lay off part of their workforce, since now they don't need to produce as much per time period. So now unemployment is up and overall output is lower. By cutting output, the companies don't necessarily have to cut prices. In short: the lack of intervention doesn't necessarily lead to a fall in the price level.
The point of saying that the Treasury bond accounts aren't counted as part of the monetary base while the reserve accounts are is that it doesn't really matter which account your money is in at the Fed. My original comment was pointing out that QE just moves reserves from one account to the other and that this has little effect on overall economic activity because lending by private banks isn't reserve constrained (MMT people do a good job explaining this as well).
> Printing money does not create goods and services - it merely decreases the value of each dollar relative to everything else.
Consider that during a recession, factories have surplus capacity to produce more goods. But people don't have money to spend, so the factories don't use that existing capacity, or increase their capacity.
Printing money can stimulate demand and thus increase production of goods.
> If I had a machine that could create an unlimited amount of gold at zero cost, the price of gold would approach zero if I made and sold enough of it.
Well, they haven't created an infinite amount (yet). What if the demand for your watches grows as fast as your machine can produce them?
> why does the monetary base increase?
Has inflation kept up with the growth of the money supply?
It is rarely mentioned how deficit spending leads directly to private wealth creation. Increased military spending actually means increased outsourcing. It’s a transfer of wealth from the collective (future taxpayers) to the private (contractors and businesses).
Other than the amount of government money they receive, not particularly. Same thing would happen if we increased deficit spending for education purposes. Schools might bring in more external for mental health, contract out food preparation, provide tablets for all students, etc. Each of those would be a transfer of money from public (taxpayers) to private hands (contractors and companies).
One could argue that investing in a bomb that explodes in another country doesn't create as much economic value as using that same money to invest in the education of an American child.
Eisenhower had some thoughts when he left office [1]:
==This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the militaryindustrial complex. The potential for the disastrous rise of misplaced power exists and will persist.
We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.==
==Another factor in maintaining balance involves the element of time. As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow. ==
These things are not known, actually. There are people much smarter than you or me that would disagree with your sentiment that "we know MMT is a bad long term policy."
> There are people much smarter than you or me that would disagree with your sentiment that "we know MMT is a bad long term policy."
How is anyone supposed to argue against that? You can use that to try and defeat any argument, but it doesn't really demonstrate anything. What people? How do you know they are smarter? Are smart people always correct?
The grandparent made a blanket statement that "we know MMT is a bad long term policy" which the other poster was rightly pointing out is wrong. This is a ridiculous blanket statement, and clearly and obviously false. Such arguments don't deserve detailed rebuttals.
Sorry, let me be clear: by "smart people" I mean economists who have spent their lives studying monetary and fiscal policy and analyzing how it can be used to make the world a better place.
Not sure why the onus is on me to be "reasonable" in my response when we all agree that the person I was replying to was making an entirely unreasonable assertion.
>I mean economists who have spent their lives studying monetary and fiscal policy and analyzing how it can be used to make the world a better place.
This means nothing when they haven't been held accountable for bad predictions. I work in finance, and it's super easy to build a model that looks like it can predict the future, but fails completely when applied in practice, due to some statistical/modelling error. Predicting the future is damn hard; it's way easier for us to convince ourselves that a model is correct than to actuallly produce a correct model, so if somebody isn't subject to a constant process of feedback (a scientific process) it's very unlikely they're producing correct models. Crystal healers have also spent their lives trying to determine how crystals can be used to make the world a better place; it doesn't mean squat because they don't apply the scientific method in their research.
From an economic perspective, if these people really had models that could predict the future, they'd be traders, not economists. Because why settle for a meagre economist's salary when they could be making millions?
I'm not sure what your point is? The comment I was replying to said "we know this is always true" I said, actually, economists aren't really sure about that issue. If your concern is that economists aren't good at making certain predictions, then guess what, we agree. Economists are also acutely aware of this fact and most of the ones involved in actual economic research are careful not to overstate the implications of their models.
Regardless, I simply have to laugh at your comment. The "finance bro says economists are all morons who would be traders if they actually knew anything" trope is pretty great!
I know online arguments can be super frustrating, but can you please not be a jerk in your posts here, regardless of how wrong other people or you feel they are? You posted something like half a dozen swipes in this thread that broke that site guidelines. This is the sort of thing that degrades discussion badly because the toxins compound.
It sounds like you know more about this field than others. That's great—but then the thing to do is share some of what you know, so we all can learn. If you mix it with cheap shots and swipes, that not only breaks HN's rules, it discredits the truth you're trying to advance, which is not in your interests or anyone else's.
The federal reserve owns half of all US debt. We are paying interest on interest to our own Fed that serves as the banking systems perpetual bailout fund with the ability to create unlimited amounts of money.
It is hard to tell if you are supportive or resigned to the eventuality. Just in case it is supportive...
MMT relies heavily on the fact that tracing back who is paying for it is so convoluted that its backers can claim nobody is. That isn't true. At any moment there is a fixed pool of real resources that we have to divide up. It is pretty obvious that a lot of those resources should be given to people who will use them to create more real resources in the future. It is also obvious that everybody needs enough of a share to live.
A State entity can control the money supply and do strange things with the accounting identities, but in real terms it can only redistribute wealth. The government isn't going to turn to MMT to increase the claim of the makers and innovators to societies bounty; the truly inspired ones tend to be a bit eccentric and tend not to present very well on camera at a press conference. MMT will be a redistribution, by and large, to fast talking and charismatic charlatans or pork barrelling to political consituenties. The political process is not very good at assessing technical risk but excellent at pork barrelling. People will use the word 'fairness' a lot.
It is reasonable to say that MMT will do wonders for the accounting identities. GDP through the roof, measured real wages may rise, everyone can be a millionaire, banks will be saved and inflation will be mysteriously low no doubt. The median citizen will also have less actual stuff and a lower real quality of life.
But MMT it's not a policy, but a model, a description of how the system really already works.
For example, many people here is predicting hyperinflation, using the MMT model we can predict that's not going to happen. Many people here are predicting "slave grandsons by public debt", the MMT model tell us that doesn't make sense.
>>"MMT relies heavily on the fact that tracing back who is paying for it is so convoluted that its backers can claim nobody is"
I don't know what that means.
>>"At any moment there is a fixed pool of real resources that we have to divide up"
>> "MMT relies heavily on the fact that tracing back who is paying for it is so convoluted that its backers can claim nobody is"
> I don't know what that means.
Lets jump over the the Wiki page on MMT where it has a helpful comparison to Keynesian economics [0]. First line in that table:
Keynesian: Advocates taxation and issuing bonds (debt) as preferred methods for funding government spending.
MMT: Emphasizes that taxation and debt issuance are not required to fund spending.
Under the Keynesian model I can tell who is paying for government activity - taxpayers and lenders. I can also work out how much, by comparing how much tax they pay or how much they lend. It is reasonably transparent about who the government is distributing resources away from (net taxpayers, current lenders) and towards (net tax receivers, people who are enjoying the latter stages of a bond where the interest is payed back). People could have claimed resources; then they were taxed/saved so they didn't.
How do I do that under the MMT model where neither of those things are necessary? Who is the government distributing resources away from? How do I figure that out? I know where they are going. Where do they come from? When we debate MMT inspired ideas, how will we figure out who will be worse off in real terms and in what proportion?
People aren't interested in MMT because it is a neat model; but because if we use that model then it becomes very hard to explain that policies are wasteful uses of time and stuff. It is very easy to make a taxpayer understand why government waste is bad. Quite hard to make people take an interest when nobody knows if they are net givers or takers.
Well, first, I suspect that Keynes would be ashamed of what post-keynesians have made of his insights.
Anyway, you are implying that the current system is Keynesian, and that there are people advocating to change to a MMT system. But the current system is already MMT.
So, to answer your question, for accountability, you could just keep in place the current way of doing things (or find some alternative) but recognize that "taxation and debt issuance are not required to fund spending". Let's recognize that public debt is irrelevant for instance, and that, yes, deficits can be inflationary, if the economy is already in full utilization but could not be in the proper circumstances.
>>" People aren't interested in MMT because it is a neat model; but because if we use that model then it becomes very hard to explain that policies are wasteful uses of time and stuff. It is very easy to make a taxpayer understand why government waste is bad. Quite hard to make people take an interest when nobody knows if they are net givers or takers"
So, basically, what you are saying is "let's lie to people" so we can have a smaller government.
They say that naming is one of the hard things of computer science, maybe it's also true for economics. Let's change the name "public debt" for "public investment" and discuss then how much public investment can we afford.
>>" People aren't interested in MMT because it is a neat model; but because if we use that model then it becomes very hard to explain that policies are wasteful uses of time and stuff. It is very easy to make a taxpayer understand why government waste is bad. Quite hard to make people take an interest when nobody knows if they are net givers or takers"
> So, basically, what you are saying is "let's lie to people" so we can have a smaller government.
That is not at all what roenxi is saying. That is what roenxi is saying MMT is saying, except for the "smaller government" part.
It also is you putting (incorrect) words in someone else's mouth, which is very much not cool.
It is also coming somewhat close to a personal attack (since many of us consider lying to be immoral), which is against site guidelines.
It was not my intention to attack anybody but, what roenxi is saying is that, people interested in MMT (like me), is not interested in understanding how the system work, but in lying to people. So, yes, very much not cool.
I hope so, but I suspect that the people that is predicting now hyperinflation and the enslavement of our children, will keep doing so despise all absence of evidence.
Unfortunately, economics is a very ideologically charged subject.
The harsh modern monetary reality where most Americans live paycheck-to-paycheck and have zero job security or savings is enslavement in all but linguistic accuracy.
This has been going on since started inflating our money supply (since when we went off the gold standard in 1971 at least), and the economic degeneration won't stop unless we stop the inflation of our money supply too.
Private banks technically own the Fed receive 6% interest on their capital with any net gains are paid to the treasury. They buy all the bad and risky loans from banks and never have to mark them to real value or take a loss. If asset recovers and becomes valuable they sell it back to the banks.
It's true on paper, but the Fed is run by government appointed people for the benefit of the public. The private banks are required to pay some money to get a 'share' of the Fed, and they get yearly interest, but the total amount they get isn't particularly big so it's not something to worry about.
EDIT: The profit from the Fed's assets (after the small interest payments to the private banks) all goes to the government.
It is a false dichotomy, that assumes owners of an organization are required.
There are several kinds of orphan entities, such as trusts, foundations and more.
In the USA at the national level, only Congress is able to incorporate businesses, and they do this in one-off charters, Act by Act. So it was incorporated by a public body - Congress - while the wording of its charter leaves it very autonomous and orphaned. It is not owned by the public, it is not owned by the private sector. Simultaneously, Congress created another public body called the Board of Governors of the Federal Reserve, which is owned by the public, and interfaces between the autonomous orphan entity and the public. It is the one with the appointed Chair, who occasionally reports to Congressional committees.
Congress can amend the charter of both organizations at any time. They don't and it is a line they do not cross. The alternative is the politicisation of monetary policy, which is a heavy distraction for Congress, far more than fiscal policy. It didn't work well before the autonomous central banks and other better alternatives haven't been presented.
To further complicate things - in the minds of those perturbed by the Federal Reserve's role in this country - the Act allows for collaboration with private banks as shareholders, with a 6% dividend. Yes, banks have been earning 6% dividends from their shares of the Federal Reserve for a century. These shares do not convey voting rights. This was to encourage participation in the Federal Reserve system, and any new system would need to be extremely competitive and enticing to encourage banks to participate in that instead. For context, think about America in 1913 when the Act was passed. Banks existed and had their own payment networks all around the country, and the Federal Government wasn't in the business of this at all. The idea of inherent fealty to whatever the US Government represented simply did not exist, the idea of an omnipotent US Government didn't exist. Impressionable children were not taught this in schools and bankers then and now obtain better benefits from not thinking this way. Instead, America was a burgeoning society, that recently got bailed out by JP Morgan himself, now trying to get into finance. It had better be very convincing to the banks!
Like any orphan entity like a foundation or trust, there are people that control it together, in accordance and restrained by the charter. The Federal Reserve is a system, controlled by regional directors who are selected/elected. In each region:
Three directors are selected by the Board of Governors of the Federal Reserve System to represent the public. These directors must reside and conduct business or other activities in the District. They represent the interests of labor, consumers, commerce, manufacturing or agriculture. They may not own stock or serve as a director of financial institutions.
Six directors are elected to the board by the Bank's shareholders, which are the member banks in the District. Of those six directors, three are representatives of the District's banks, and three represent the public (like those selected by the Board of Governors). The three elected public directors may not serve as a director, officer or employee of a financial institution.
Yes, the System is able to purchase certain kinds of securities (or whatever Congress allows, such as the new amendments for direct money to citizens as in the stimulus packages) and whoever it buys from now has newly created money that is diluting the money supply. The System is also able to trade the securities it has purchased for existing money. It is interested in not causing rampant inflation, but this is an inherent possibility, but it is fortunate that it has inherited a larger economy than the rest of the world, and there are people willing to accept its dollars and it just selling them into liquidity keeping the dollar's relative purchasing power amongst other currencies steady.
Read the last few sentences critically. Each regional federal reserve bank (there are several) is owned by private banks. The profits are merely capped.
The ownership is nothing more than symbolic. They have absolutely no control over the Federal Reserve. They can set no policy, they dictate nothing through the 'ownership.' They receive profits in exchange for participating in the system, it's a lure for drawing in private banking participation.
The profit share ("dividends") the banks receive is trivial, a couple percent of the Fed's profits. Typically 96-98% of profit is sent to the US Treasury.
I have no idea why you're being downvoted; anybody should be able to understand that the Fed is independent (from the "government" in the typical sense of the word, but especially from private interests) by simply googling it. Do these conspiracy theorists really believe the Fed is secretly controlled by a cabal of private banks or something?
Not sure why you’re being downvoted. The Board of Governors is an agency, but there are 12 regional Federal Reserve Banks that carry out private operations. Critically, the FOMC, the monetary policy setting function, is a function that is carried out by the private regional banks. Most notably, the bailouts and private meetings back in 2008 were carried out by the president of the NY Fed.
It's not part of the federal government, but it's supposed to be controlled by the federal government. The Board of Governors is an independent government agency that runs the fed. I would call it quasi-public.
This will work out fine until it doesn't. At that point, the US will face many "bad or worse" kinds of choices. It will be like the choice we face today: "close the economy or the morgues start overflowing everywhere." Except it will be every day, more or less forever. Inject still more money into the economy or the entire financial system collapses.
Whenever this balance sheet chart shows up, MMT boosters descend to explain why the Fed's balance sheet doesn't matter. It's interest we owe ourselves. Nobody in the real economy looks at that balance sheet when making actual financial decisions, they claim.
I think that misses the point. The point is that since the last financial crisis, the balance sheet has on net expanded. By a lot. When the current crisis hit, the balance sheet shot up from an already elevated level.
To put it another way, consider the size of the balance sheet relative to GDP (~$24 trillion):
At the current level, the balance sheet is about 25% of GDP. There's every reason to believe the Fed is far from done. It's bailouts as far as the eye can see at the moment. And those bailouts will be monetized by the Fed. We can't possibly pay for them at the current value of the dollar. Ever.
To the MMT boosters, what happens when the balance sheet approaches 1x GDP? 2x? 5x?
Nobody knows because this experiment has never been tried before. The reserve currency printer is also a net debtor. It runs very high, structural deficits with no end in sight. The currency is completely decoupled from gold, and as recent history shows, possibly industrially-critical commodities like oil.
I'd be very curious to hear from the MMT proponents on what signals they's look for that the Fed's balance sheet actually does matter in the real economy. Things that can only be explained by problems stemming from the size of that balance sheet. Problems whose only cure is a massive reduction in that balance sheet.
Of course, the balance sheet isn't going anywhere. Nor are deficits. When faced with such situations in the past, the answer has been devaluation.
The US did that back in the 70s when it closed the gold window. It will happen again. What the MMT proponents I've seen seem to ignore is what form that devaluation will take given the highly unusual circumstances around which it will be occurring.
I would like to clarify that the MMT proponents that I follow are not favorable to the QE type of interventions that we have seen in the last years.
They only pointed(1), correctly, that QE was not going to be inflationary AND that monetary policy is not the proper tool for this kind of problem. Fiscal policy is the proper tool.
You will not find MMT economist defending QE or the buying of financial assets, other that public debt bonds, if it's legally required to finance fiscal policies.
If fact, many are very critical(2) of this kind of programs.
The Bank of Japan has well above 100% worth of GDP on their books. Considering their structural demographics and adversity to immigration, do you think they'll ever unwind that? That's every developed country's future.
Any meaningful reduction in the Fed's balance sheet is going to be untenable. The Fed will end up picking winners and losers through their actions as a "Deus ex machina" market participant, and due to their lack of any meaningful oversight, I hope they act wisely.
MMT doesn't argue that fiscal deficits don't matter, it states that the only constraint is inflation, which is more related to the real economy (eg. supply/demand, trade / current account deficits).
MMT doesn't necessarily condone the Fed's recent round of unlimited QE. Most MMT advocates if anything would probably prefer that money going directly to the people (ie. helicopter money) or to fund ambitious federal programs (eg. job guarantee, UBI, investment) than bailing out mortgage bond investors.
I think this has always been the way we've paid for infrastructure. I remember reading an article about Japan. They've stopped taking on massive infrastructure projects, because the population isn't growing -- they don't want immigrants and people aren't having kids anymore. Without a future tax base to pay for infrastructure, they can't build it anymore. So things like the Tokyo subway system are "done"; no money will ever be available again to build anything.
I think we're beginning to see this in the US. In a few years, you won't be able to live in New Jersey and commute to New York City, or take the train from Boston to Washington D.C. The North River Tunnels will have collapsed, because we can't find any money to repair them.
Ultimately, it's a little disingenuous to say this is "selling your children". Yes, if we keep buying stuff, someone will have to pay for it. If society takes on projects that need to be paid for over 100 years, people that aren't born today will be spending some of their taxes on it. But with the right investments, it's almost certainly worth it. We can look back at some of the achievements over the last century and find that they probably grew the economy more than they cost, which makes them good investments when paid for collectively. In 1920, we didn't have an Interstate Highway System, we didn't live in the suburbs and commute to the city, we couldn't fly to the far corners of the world in 16 hours, we didn't have all of humanity's knowledge available in our pockets. There is no reason to believe that 2120 won't be just as good as long as we keep investing.
> I think we're beginning to see this in the US. In a few years, you won't be able to live in New Jersey and commute to New York City, or take the train from Boston to Washington D.C. The North River Tunnels will have collapsed, because we can't find any money to repair them.
Yea this is never going to happen in our lifetime.
Interesting observation, although it should be noted that in the case of infrastructure, the future generations that are obligated to pay for its construction will also be in a position to reap its benefits.
True. To some extent, even a good mortgage rate trickles down to one's family. Some kid is going to inherit their parents paid-off house. The problem is that people have more than 1 kid, so most of them don't get that benefit and we keep building new homes, I guess.
Only 1 kid can inherit a house, sure, but out of two marriage partners it’s enough that only one inherits it. In this simple model, you only need to build new homes if you have more than two kids per woman, which developed societies are not on track of achieving.
Practically though we build new houses because old houses tend to not be in places we want them to be, and are not large and nice enough to our liking.
Money is just a number in some computer. The important thing is the real economy. Deficits, as any other spending, and depending of the circumstances, could be inflationary, but they don't have to be, it depends of the state of the economy in the moment of the spending.
The public debt is just a number, it's the accumulate of pass deficits and it's not inflationary in itself and it's not a problem.
A mental experiment (not so hypothetical): suppose that in order to fight an economic crisis the government decide to spend a big deficit and, in order to do it, they emit bonds. Suppose now, that the Federal Reserve buy all those bonds. Who is that money owned to? who receive the dividends of those bonds?
A second mental experiment: in order to not increasing the public debt and "save for our children" the government don't spend in infrastructure or investigation. In 50 years there is not infrastructure left or new technologies but the public debt is zero. Are the children rich or poor?
Whether money or debt is 'just a number in a computer' or not is besides the point. We built the system that way deliberately because bartering is not efficient, doesn't scale, and doesn't easily allow creating debt that needs to be settled in the future.
What we ended up with is a situation where almost all the wealth/value we (governments, businesses, the people) have built is represented in terms of 'monetary units' (the numbers in the computer), but it's increasingly clear that in the future, these positive and negative numbers will never add up to zero anymore, and we're not going to 'grow our economies out of debt' as was originally the idea of taking on debt now to invest in the future. This means someone is going to lose big time sooner or later.
Printing more money to take some negative numbers from the economy and infusing it with some positive numbers is not a strategy that can save the system in the long term as there are exponential terms involved because of interest. There will be a point where diluting the the money supply (which is exactly what QE is) will result in a loss of confidence people have in the 'numbers in the computer' being a reliable proxy for their wealth. Governments will have a hard time selling treasuries when no-one expects them to have any value in the future. When that happens (which IMO is just a matter of time, how much time is not clear but most definitely not 100+ years) all value that is not recorded in tangible, useful assets or skills will simply disappear, and it will not just mean the 'numbers of the computer' have to be adjusted or reset and everything can go back to normal...
>>" [..] We built the system that way deliberately because bartering is not efficient"
Not really, the history of money doesn't support that theory.
>>"[..] it's increasingly clear that in the future, these positive and negative numbers will never add up to zero anymore,"
They don't add already, never were suppose to add. Where is the dollar coming from if not the deficits of government? The spending of money in the economy is what creates money. So, it's the debt of the public sector what create the money in the first place. You are complaining that excessive deficits are creating too much money, so you already agree with that.
>>"[..] Governments will have a hard time selling treasuries when no-one expects them to have any value in the future. "
That makes zero sense. The Central Banks can, and frequently do, determine the interest of the public bonds. Japan is the main example, but there are many others.
>>"[..] all value that is not recorded in tangible, useful assets or [..]"
A government tax every transaction in the economy, and can do it because it has the monopoly of force in that country.
If the USA government only accept dollars for paying taxes, there will be always (while there is an economy and they keep the monopoly of force) demand for the Dollar. The same is true for all the other countries.
> Suppose now, that the Federal Reserve buy all those bonds. Who is that money owned to? who receive the dividends of those bonds?
To Federal Reserve of course, which will receive the coupons. To be sure, taxpayers will pay the principal and interest down the line.
> In 50 years there is not infrastructure left or new technologies but the public debt is zero. Are the children rich or poor?
Lack of government-built infrastructure is seen. What is unseen is all the other things that the money saved on government-paid infrastructure paid for.
Money is a claim on resources in the economy, and if the government doesn’t claim its share and use it to build infrastructure, these resources do not disappear. Something else uses them.
I'm being tongue in cheek with the "selling your kids" bit, I hope you don't mind.
But I'd be less worried if these debts were to build infrastructure (and we'd have some incredible infrastructure). That's my real concern here: we borrowing to maintain lifestyles not to build useful things.
Your point about Japan is really interesting. I heard things were moving that way but I didn't know they were so up front in recognising it. I love the Japanese. Here in Europe we're in a similar position but no one quite wants to admit it. And we borrow still, we just give it all to OAPs :(
> There is no reason to believe that 2120 won't be just as good as long as we keep investing.
Only if you squint _really_ hard, have near-religious faith in technological advancement, and ignore all the ways we're making the planet increasingly difficult to live on.
This is extremely disingenuous. The reason we aren’t having kids is we can’t afford it. All of my friends want to have kids but can’t. The few who have done so anyways are hurting.
It’s really strange how it is that we cannot afford having kids, but our parents and their parents etc, who almost universally have been poorer than us, managed to do that.
The government gives you money(low taxes)/buys something, and does so by borrowing the money for a long time. Now future generations (their children) are on the hook for the payments, having to pay higher taxes in the future for benefits in the present.
This is fine if you are using that money to invest smartly, such as in needed infrastructure. This is not good if you are doing it to lower taxes to win elections.
This is how you can "sell you children", though I prefer the more correct language of saddling them with debts.
Except the page linked is the FEDs balance sheet of assets they bought with printed money which is predominately used to buy our government's debt so they are actually basically reducing our governments debt assuming they never sell it like japan. Considering they barely sold any assets from QE during the longest expansion in the history of our country, I'm betting we are going to follow japan on this.
That's not how it works, but even if that was the case, if that debt was owned by the Federal Reserve, who get the interest of that money? and who is the owner of the debt?
If you really want to get into the complexities of who holds US debt and what happens if some of it is cancelled or whether than can happen, that's a huge discussion taking weeks of work and requireing PhDs to answer.
I'm just making quips about how much debt has been run up since 2008 and how little the US (or other nations that have followed the same policies) actually has to show for it compared to what it will take to pay it off...
With a sample size of 1 based on 2008 you'd probably never expect the total to be back below $5 trillion, in the same way it barely got back below $2 trillion after that first spike. Based just on the graph it's probably more likely to go above $10 trillion than below $5 trillion in the next few years. These numbers are completely ridiculous to think about, how would you interpret this in practice?
The way to interpret this is that there is wide latitude in the market tolerance of US dollars.
Think of it like share dilution. For example, without corresponding demand, Tesla can issue 20% more shares arbitrarily, and the price of a share will drop 20%, or Tesla can wait for excessive demand and issue 20% more shares and the price of a share will stay the same because the market clamored for them. Maybe the price of Tesla would have gone 20% higher if they didn't issue those additional shares? Or maybe interested buyers were waiting for a moment to purchase many at once without affecting the market.
Fiat currencies are in the same place. Forget about the cognitive dissonance where currencies are tied to your national identity and comparisons to private shares therefore cause trepidation. The functionality is similar, we just use different terms. Share dilution = inflation.
As long as the relative purchasing power of a dollar, compared only to other currencies, is managed, the Federal Reserve can purchase as much as it wants. When the Federal Reserve purchases things, each transaction creates new dollars. The recipient has dollars that didn't exist prior and are just as fungible, slightly diluting the value of all other dollars (causing inflation). The Federal Reserve is fully capable of selling assets on its balance sheet, for existing dollars. Just options and choices that other market participants don't typically have.
The wide latitude in the side of the Fed's balance sheet comes from the weakness of other currencies. Central Banks around the world are doing the same thing, weakening those currencies, simultaneously actual people are selling their currency for US dollars. This increases the strength of the US dollar, and means the Federal Reserve can dilute it to weaken it. The long-standing predilection of the Fed, the President and Congress has been to not have a strong dollar, so you can predict what the Fed will consider doing based on macroeconomic events.
As long as all currencies are being massively created, the Federal Reserve can do the same proportionally. The amounts don't matter in that regard. You just want to pay attention to the constraints on what it can buy, and if those constraints are being followed, and if there is enough things for it to buy to accomplish its goals (otherwise massive de-flation is likely, and harmful in our ability to predict our purchasing power or investment decisions)
Protecting my purchasing power and accumulating wealth has worried me since 2008.
I initially looked long and hard at trying to implement my own copy of Ray Dalio's "All Weather Portfolio". I really recommend reading up as much as you can about Ray Dalio and this portfolio. To create this portfolio for US investors you can follow this website: http://www.lazyportfolioetf.com/allocation/ray-dalio-all-wea...
Having done all that research, I've started to modify my approach according to Chris Cole's "Dragon Portfolio". You can learn about it here: https://youtu.be/SkfgEZtJ9LA and read how to implement it yourself here: https://docsend.com/view/taygkbn
Just to be clear, I have no connection to any of the people and companies mentioned. Also, you may have higher risk tolerance, and want a higher level of return, so these portfolios may not be for you. Either way, you should always seek the advice of multiple fiduciary financial advisers before deciding what to do.
The $1200 money isn't free, it is borrowed from future taxpayers.
The money the Fed prints doesn't go to Joe Average. It goes to investors who are selling the Fed junk bonds. (They then turn around, and buy stocks with those dollars, which is why the market is soaring.)
It isn't free, but that isn't really true. The $1200 comes out of inflation, which decreases the value of accumulated wealth (at least to the extent it sits in cash).
If you're sitting on a retirement fund, that hurts you. If you're sitting on debt, that helps you. So it's much more past tax payers than future ones who are hurt by this.
On the other hand, decreasing the value of accumulated wealth is exactly what ought to happen here. We're not producing very much, and everyone will have less actual stuff. The question is how the banking system adjusts.
If we see deflation (prices go down, salaries go down, revenues go down), people will default on debts and other fixed obligations, and the whole thing blows up in structural damage from bankruptcies, mortgage defaults, layoffs, etc.
If we see inflation, a lot less structural damage happens.
COVID19 is destroying value. What the fed is doing -- inflation in the stock market to keep prices where they were -- is exactly what ought to happen. Inflation will continue to happen elsewhere in the system. The flip side is you don't want starving, homeless people in the streets -- that will destroy massive wealth. We'll deal with that with inflation too, most likely.
No, that $1,200 didn't come out of the Fed printing press. It came out of the general budget, so taxpayers are going to be on the hook for paying it back, in the future.
The trillions the Fed is printing aren't being sent out as stimulus cheques. They are being used to provide short-term liquidity (Which does not cause inflation), and to buy junk bonds, (Which does cause inflation, and also happens to prop up the stock market.) Some of that money is also being lent to the government - if those loans are paid back, they will cause net zero inflation. (Because once the money is paid back to the Fed, it is destroyed.)
This is precisely why we have central banks that are independent of government budgets. It creates checks and balances against a government choosing to print its way out of budget troubles.
In the very short term, that's true. In the medium-to-long term, they're kind of the same thing. Fiscal and monetary policy are handled by independent bodies, but they're not entirely uncoordinated. They're both different hands of the same overarching body too: the US government.
> No, that $1,200 didn't come out of the Fed printing press. It came out of the general budget, so taxpayers are going to be on the hook for paying it back, in the future.
Government debt does not really get payed. Old debts are payed off with new ones.
Public debt is just a number that express the accumulated of pass deficits. In order to reduce that number you need a government that, instead of a deficit, have a surplus.
If the government has a surplus, less money is spend in the economy.
If that reduction in spending is not compensated somehow, necessarily, the GDP has to fall.
The only things that can reduce that fall in government spending are a positive balance commerce or an increase in private debt.
Now, an increase in private debt, instead of public debt, that's a real problem.
Bankruptcies are not "structural damage" they are economic progress that transfers assets to stronger or more nimble players. The bailouts are fighting creative destruction and this will reduce the dynamism and long term growth of the economy.
"The $1200 money isn't free, it is borrowed from future taxpayers."
That is debatable. They say this but at some point you have to wonder, will they have the capacity to take it off the balance sheet without massive inflation? Historically, there are two ways governments went out of huge debt: default or massive inflations. I doubt the USG will ever let itself default so inflation is more likely. One advantage that the US has is that it has the world reserve currency.
I think that's more a disadvantage. If the US starts to inflate too much, it may be dumped as the world's reserve currency. A global run on the dollar could convert modest, manageable inflation into hyperinflation.
If dollars are worth 1/2-1/10th of what they are now in three years, that's kind of okay, and in-line with the damage of COVID19. If they are worth 1/1000th, we're looking at a serious, structural collapse.
I agree, but I think that is more of a long term concern. The USD will be dumped as the worlds reserve currency but I presume this will be a long and volatile process. There are 2 reasons why I think the USD will slowly be dethroned as the reserve currency: 1) the US has made the USD their weapon in punishing opponents and many countries have already started to think about alternatives. 2) the USG has very big long term unfunded liabilities which will need to be inflated away. China and other big holders of US debt know this, hence, they are trying to slowly come up with alternatives. The good part for the USD is that the alternatives, at the moment, are shit.
Yes. It is. It's frighteningly high, but likely necessary: We have a massive crisis. It seems like the least of all evils, unless we somehow are able to act with focused intelligence.
On the one hand: Look at unemployment rates, business failure rates, mortgage defaults, people unable to pay for food/medicine/shelter, or any other economic metrics, and plot even conservative predictions even a month or two out. The economy will be dead very quickly if we don't do something drastic.
On the other hand: If we let it burn: look at COVID19 mortality rates, and multiply by a significant fraction of the US population. You land on numbers greater than WWI casualties, and likely greater than all previous wars combined. Heck, looking at permanent lung damage alone, we're already tanking our economy.
These are exceptional times.
They take exceptional measures.
The metrics I care about are: (1) Structural damage to the economy (layoffs, defaults, bankruptcies, etc.). (2) The number of people working (likely in pandemic-adapted industries) (3) Deaths. To minimize those, we'll either need to be clever or to inflate. So far, we've been really bad at clever.
Hard to say. It's easy to identify safe investments, but if you look at markets, money has flooded there already. People get paid to think about this sort of thing day-in-day-out.
People need food, shelter, and medicine, so those are well inflation-protected. But housing prices would collapse if everyone is unemployed for long. Food producers may get sued of COVID19 outbreaks which are happening at plants already (essential workers, no PPE). And hospitals may be overloaded for a long, long time in ways which are quite complex.
And you can't eat gold. It's as fiat as anything else.
We're looking at a potential major collapse. It's hard to shield yourself from that.
Education is always a good investment, I guess. Schools are desperate for students and tuition, and not a bad place to weather a crisis.
> And you can't eat gold. It's as fiat as anything else.
It's a good way of inter-generational wealth storage still. Also it's useful along with a basket of currencies to diversify with especially in countries with high inflation or value volatility e.g. Venezuela. It's highly regarded in 2 of the most populated countries in the world (India and China) and that is not apt to change any time soon.
Sure, in a full grid-down situation it's useless and "junk silver" would be more useful as a temporary currency but that is a slim possibility.
Only if the economy is at full utilization. The reason for the stimulus is that the economy it's not at full utilization, ergo, there will be not accelerated inflation.
This may not be the most popular opinion, but Satoshi Nakamoto invented Bitcoin precisely because he wanted to separate money and state. The main purpose of crypto has always been to be hard money in the age of the internet and institutionalised money printing.
So I'm hearing the " the dollar is over, throw everything into gold, fiat money is doomed" in other forums. Can anyone give some conterpoints to that narrative?
My counterpoint would be: do you think that anonymous comments on the internet are a good source of information? Now that we're living in an age where national governments have large teams of people dedicated to spreading propaganda?
It doesn't really need much of a counterpoint, given how silly it is.
Regarding the USD, the same doom cults say the same things during every major global problem / event / disaster going back generations. The dollar was supposed to go away with the great recession; the dollar was supposed to go away with the intense inflatation of the 1970s; the dollar was supposed to go away with Nixon's abandonment of what was left of the gold standard; the dollar was supposed to be doomed with FDR's various moves.
There is zero evidence the dollar is under meaningful risk here.
It's fine to utilize gold as a store of value, there is absolutely nothing wrong with that. And that's an entirely different matter than whether governments will abandon their fiat currencies. The US, Eurozone, China, Japan, Russia, India and so on have absolutely no interest or willingness to give up control of their present fiat + central bank systems. They dictate whether fiat money is doomed or not, via their enforcenment capabilities.
Take one blatant example. Russia has de-dollarized itself heavily, has accumulated a lot of gold lately (relatively speaking), and still has zero interest in giving up the power, flexibility and convenience that controlling the national fiat currency provides. For Russia, gold is just a diversification opportunity that backstops some of their national financial condition. The same is true for China, another accumulator of gold reserves.
> the dollar was supposed to go away with Nixon's abandonment of what was left of the gold standard; the dollar was supposed to be doomed with FDR's various moves.
The value of the dollar in 1968 was - roughly - (1/40)th of an ounce of gold. The dollar today is roughly (1/1660)th of an ounce of gold.
That is a >95% reduction in value over less than a lifetime. The people who argued the dollar was going to undergo intense inflation would probably be confused about why people argue they were wrong. Some of the young ones (~30 in the 1970s) are probably still alive to argue that point although not on HN. Anyone who stuck with gold rather than dollars when Nixon closed the gold window has been making ~7.7% per annum nominal investment return from holding on to a rock.
Yes, but wasn't gold still pegged to the dollar in 1968? That means that the comparison is artificial, because none of the inflation from 1935 (or whenever the price was set to $35/oz) to 1968 has been allowed to show up in the gold price.
People were saying that moving off the gold standard would destroy the value of the dollar. They were not incorrect. After moving off the peg the dollar has effectively lost all its value.
The major thing they got wrong was thinking that people would stop using it after it lost whatever % of its value it did. 97% or somesuch so far. Turns out not.
I would say that the dollar had already lost a bunch of its value by 1968. It's just that the gold peg hid that when you measure the value of the dollar in gold. But if you look at inflation during the 1950s, the dollar was losing value then as well.
Now, sure, the dollar lost a lot of value between 1968 and now. I don't deny it. But it also lost value between 1935 and 1968. Measuring the value of the dollar in terms of gold makes it look like all that happened after 1968, which makes the rate look higher than it actually was.
You have to fairly compare time frames. If you're going to compare 1935 to now for dollars, then you need to also do so for gold.
But regardless, when people say "collapse of the dollar", they're not necessarily saying the dollar is going to vanish. They're saying it's going to lose its value. Whichever part of history you look at, history shows it's a poor store of value as we just print more of it than goods. Nearly any asset is going to look good next to it if we continue the status quo...
It was about ~$20/oz when it started around 1900 and the government claimed ~$35/oz at the end. That is about 50% value loss, maybe a bit worse, in the 70 years of the gold standard.
$35 to $1,650 looks a lot more like a collapse in value. And that is after the demand for gold presumably plummeted because it wasn't official money any more, and mining got a lot more efficient through the 70s to the 90s. Maybe the Asians made up for that with new wealth and demand or something. If I'd been alive in 1970s, arguing that the dollar would collapse in value, I wouldn't feel like I'd lost the argument looking at how history played out. I'd probably have gotten the timeframe wrong, but the mechanisms are playing out as expected.
The thing that really stuns me is that countries are willing to hold US dollars as a reserve currency. It is a terrible move for value preservation. They aren't aiming to maximise their savings.
OK, let me try this again: You can't measure dollar inflation by the gold price when the dollar is pegged to gold.
And, gold was pegged to $20/oz. Then at some point in the Depression, it was moved to $35/oz in a step function. It wasn't gradual.
And I argue that the actual value of gold wasn't $35/oz at the end of the gold standard. That's why the value shot up so quickly when the market was allowed to determine the price - because $35 was the wrong price on day one. There was a lot of inflation between 1935 and 1968 to catch up for that was not reflected in the $35 price, because $35 was never a market price.
How do I know that $35 was the wrong price? Because the US was bleeding gold. Other countries were buying gold from the US at $35, and the US could see that the official price was unsustainable.
If I had $35 US dollars I was entitled to an ounce of gold. The same amount would now buy 2% of an ounce of gold.
I'm more than happy to agree it is not a precise comparison. A lot has changed over the last 50 years. But even after leaving a reasonable allowance for that, someone arguing that the move off the gold standard would destroy the value of the dollar appears to be (100-2)=98% correct. If you like we can agree that the starting price was $150/oz in market prices, in which case we can agree they were 90% right.
The US government has an inflation policy; they explicitly want to reduce the value of the dollar at a rapid pace. The government is publicly on the record as thinking that is a good outcome. So maybe they would have destroyed the value of the dollar even if it was on a gold standard. That seems likely to me.
If someone was arguing that the unit of trade wouldn't be called the US dollar they were wrong. If they argued it wouldn't be used as the international unit of account they were very wrong. If they argued it would be quick then they are laughably wrong. By pretty much any other measure they were mostly right. Whether this was a bad outcome or not is debated, but given the collapse of real wage growth vs steadily growing productivity after 1970s I don't see how it can be argued that inflation is working. Working to do what, get everyone indebted to banks? High real GDP growth is good for the averages but hasn't done very much for real median wages for example.
> If I had $35 US dollars I was entitled to an ounce of gold. The same amount would now buy 2% of an ounce of gold.
If you had $35 US, you theoretically had the equivalent of an ounce of gold. You couldn't actually buy the gold, though, not until (IIRC) 1965.
> I'm more than happy to agree it is not a precise comparison. A lot has changed over the last 50 years. But even after leaving a reasonable allowance for that, someone arguing that the move off the gold standard would destroy the value of the dollar appears to be (100-2)=98% correct. If you like we can agree that the starting price was $150/oz in market prices, in which case we can agree they were 90% right.
Sure, I'd go with that. But that also means that there was (150-35)/150 = 77% destruction of the value during the time when we were nominally on the gold standard, but people couldn't actually use the dollars to buy gold.
If you wanted to argue that it wasn't a real gold standard when people couldn't use the dollars to buy gold, I would agree with you. I wouldn't even complain about "no true Scotsman", because the difference seems to me to be a crucial one.
> The US government has an inflation policy; they explicitly want to reduce the value of the dollar at a rapid pace. The government is publicly on the record as thinking that is a good outcome.
Well, they say they're targeting 2% inflation. To me, that's eroding the value of the dollar, but not "at a rapid pace" - I saw 14% inflation in the late 1970s. I will admit that even 2% inflation adds up rather shockingly when you look at 50 years, though.
> So maybe they would have destroyed the value of the dollar even if it was on a gold standard. That seems likely to me.
If they had a real gold standard, I don't think they could have - they would have hemorrhaged gold until they had none left, and then they would have had to give up the pretense. But a "gold standard, but you can't actually convert" let them inflate while pretending that they weren't.
> Whether this was a bad outcome or not is debated, but given the collapse of real wage growth vs steadily growing productivity after 1970s I don't see how it can be argued that inflation is working. Working to do what, get everyone indebted to banks? High real GDP growth is good for the averages but hasn't done very much for real median wages for example.
I see it like this: After World War II, there were cycles of prosperity and recession, but each cycle was at a higher rate of inflation than the previous (comparing the same points in the cycle, obviously). Then in 1979, the Fed changed strategy. Since then, each cycle has had lower inflation, but also a lower fraction of the population employed. I think (but cannot prove) that the lower fraction of employed workers has something to do with the lack of wage growth.
As to what the Fed should do differently... that's way past my level of understanding.
It gets a bit awkward there because the interest return is afaik taxed as it is earned through income taxes while the gold return is capital and taxed at sale.
I know in Australia if you are looking for wealth preservation it is a hands-down win for gold but I don't know enough about the US tax system to comment on what would happen. I suspect the returns are a lot less rosy and it turns out most of the real wealth ends up being transferred to the government.
Look up Peter Zeihan. He’s bullish on the dollar mostly because it’s the world’s reserve currency and there really isn’t a good alternative. That said... I’ve heard the dollar referred to as the best looking horse in the glue factory.
That doesn't mean you shouldn't buy gold & other hard assets. Even if the Euro and others decrease in relation to the Dollar the Dollar might decrease in relation to gold/hard assets & in my opinion likely will in the next 2-3 years.
I’ve been hearing the same exact thing, minus bitcoin/fiat money comment, since the 2000 crash. The dollar is doomed, China’s going to collapse the dollar, buy gold, buy non-fiat money.
Gold is currently lower than it was at its peak and subsequent crash in 2012. There's no evidence it will ever come back to those all time highs, and definitely not fast enough to outpace total market investments. There's no "trend" to see here.
Of course it is lower then it's peak, that's why it's called a peak. It's true for every asset. At the same time good luck finding a real gold bar at that price right now when COMEX and LBMA just added unknown, secret ,,market makers'' to ,,increas liquidy'' of the futures contracts. There are lots of strange things going on right now.
OK, but the peak was 8 years ago. So you can say that gold outperformed the S&P over 20 years. But you can't say that over any span less than 8 years, and maybe not even over 10. So, when you say "I don't expect this trend stopping", I see a trend that already stopped - that stopped 8 years ago, in fact.
Gold is an asset that was able to keep its value for 5000 years (unlike fiat currencies), and it has to be mined, it can't just be created in an excel spreadsheet in the FED. If you put these things together, it makes sense, that having a new high every few years is normal (just like with stocks).
Gold performs well in highly inflationary environments, so the question is whether the FED stops printing money, or it will just print much more than it did recently (about 4T). To me it looks like it just has gotten started.
Also important to consider what it's being valued in. The USD index is based on a basket of several other currencies, for example. Finding an objective comparison point to determine what is pegged to Things of Real Value to Most Humans is multivariable to say the least. Gold seems to be more stable over the long-term with regards to things like houses, suits, food staples and such.
Well easy fix instead of giving money to the top, give it to the bottom. That will surely drive demand as more money is available to spend. It will boost confidence in local economies further growing demand and supply caps.
What we see now it large parts of the stimulus package are devoured by the top level bureaucracy never doing anything but being transferred to Cayman islands as performance bonuses.
> How about we try the trickle up economy for once?
We are. The vast majority of the stimulus so far has gone to benefit the bottom 3/4 of the US economically.
Here is some of what's in the $2 trillion recent stimulus:
- $268b to extend & expand unemployment benefits.
- $293b one time check (which won't be one time)
- $377b small business loans & grants; this has been more than doubled since then
- $150b aid to state & local governments
- $153b boost health related spending
- $42b boost to smaller social safety net programs, such as SNAP
- $45b boost to disaster assistance
- $40b boost to education spending
People will attempt to retort that: well, but big corporations have improperly taken some of the small business loans; they'll try to use a rare edge case to attempt to nullify the overwhelming point that in fact most of the stimulus is going to the bottom 3/4, not the top 1%.
Further, we'll do more stimulus programs yet around sending direct checks to individuals, which will continue to tilt this scale in the favor of the bottom 3/4.
The small business loans, unemployment benefits boosters and individual checks also do not have to be paid back, unlike the big business bailouts (such as with the airlines).
Most likely direct checks alone will cost over a trillion dollars before this is over. There is very little capable resistance to doing more in that regard, it will happen.
This was tried in the past. Bottom up stimulus typically results in inflation in consumer prices. The fed prefers pumping money in at the top, which typically results in inflation of stock/asset prices.
>The main counterpoint is that this stimulus would be needed to counter massive demand-side deflation.
The gp you're responding to sounds like he/she is talking about personal investment advice to protect an individual's purchasing power (i.e. micro economics).
However, your response is about a macro economic government policy.
This is true for short term store of value. Both gold & Bitcoin are doing terrible. In the medium/long term gold & Bitcoin have been historically very good store of value assets
As long as the relative purchasing power of a dollar, compared only to other currencies, is managed, the Federal Reserve can purchase as much as it wants. When the Federal Reserve purchases things, each transaction creates new dollars (unless it had previously sold an asset for existing dollars and wanted to use those dollars instead).
The wide latitude in the side of the Fed's balance sheet comes from the weakness of other currencies. Central Banks around the world are doing the same thing - creating currency - weakening those currencies, simultaneously actual people are selling their currency for US dollars. This increases the strength of the US dollar, and means the Federal Reserve can create more dollars to weaken it, avoiding deflation. Currencies based on scarce commodities have deflationary economies as the economy grows, which hampers liquidity and investment, the US has had that before and moved away from it because it wanted liquidity and investment. So you can predict that it will avoid deflationary environments.
All fiat currencies are in the same boat, but the dollar is not in that boat in isolation. Coordinated central bank accounts allow this to continue into perpetuity. Ie. If the European Central bank diluted their currency by creating trillions of Euros, the Euro might trade down to parity with the US dollars (at time of writing the 1 Euro can be traded for 1.09 US Dollar), instead of that happening in isolation, the Federal Reserve can also create an offsetting amount of dollars, weakening the dollar enough to force the Euro to still trade for 1.09 us dollars, while both banks have accomplished their goal of adding liquidity to their economy.
So for massive monetary unions, it is much harder to "fail" or enter into a hyperinflationary environment.
But yes, if that a lot of the newly created currency was being used to buy gold, then the price of gold would be expected to go up. It is just a much harder environment for the narrative of it becoming a replacement for the dollar to be there. Other fiat currencies outside of large monetary unions might have utility in switching to a commodity again.
Short term, the USD will probably strengthen because of huge demand from emergent markets and other places that have USD denominated loans. For more info you can watch the Dollar Milkshake theory [1], or some of the work Raoul Pal has done. Long term, I don't know, but I think the USD will weaken.
> So I'm hearing the " the dollar is over, throw everything into gold, fiat money is doomed" in other forums.
Broadly speaking, these people distrust a money supply that can be influenced by governmental powers. They're always making noise about fiat money, gold, and sometimes cryptocurrencies like bitcoin in internet forums. They tend to become extremely vocal whenever the government intervenes in financial markets, such as the current financial crisis.
The first counterpoint would be that the anti-fiat crowd has been declaring fiat dead ever since the gold standard was abandoned ( https://en.wikipedia.org/wiki/Gold_standard#Abandonment_of_t... ). They made the same claims in the recessions of the 2000s, the 2008 housing crisis, during the low interest rates of the 2010s financial boom, and now in the 2020 crisis. Maybe they'll be right one day in the future in the same way that a broken clock is right twice a day, but are you sure this is their time to be right?
The second counterpoint is that outside of very specific windows, gold hasn't performed very well against traditional investments. The gold proponents had a good run for a few years after 2009 when gold was a hot topic, but it generally hasn't been the home run investment that the proponents expect. You can view long-term gold vs S&P trends here: https://www.longtermtrends.net/stocks-vs-gold-comparison/ Drag the bottom sliders to set different start/end dates. It's possible to find periods of time where gold outperformed the S&P 500, but generally you'd have to get both your buy and sell dates just right to come out ahead. That is, market timing. If you bought gold in 2009 and held you're doing okay. If you bought gold in 2012 and held, you just barely came up to net positive returns after 8 years.
The third argument is that it's not a great idea to bet against the weight and power of the government. People declaring fiat dead are assuming that the government is going to destroy the value of money via manipulation, but most of them can't put together cohesive explanations for how the Federal Reserve operates. The Federal Reserve is a complicated system that can be difficult to understand. If you misunderstand the function or purpose of certain steps, it's easy to get the wrong impression that the government is printing money to buy stocks like all of the memes say. In reality, the system is much more complicated than that and you're unlikely to find unbiased explanations in internet forums, especially if they're coming from people who are heavily invested in gold or bitcoin and would like to see everyone else prop up the price of their chosen investments. It's best to spend an hour or two reading up on the Federal Reserve, why the gold standard was abandoned, and what the Federal Reserve is actually doing with their balance sheets. Wikipedia actually has decent articles that explain the high level details well enough: https://en.wikipedia.org/wiki/Federal_Reserve
We need to separate the accounting of ‘financial flows of money’ (money spent on financial instruments) from money spent on goods and services that are not financial. We need to be able to compare the gross financial product with the gdp. This way we can speak more precisely about inflation that affects the real world of Adam Smith vs the world of imaginary values and wealth.
The money the fed injects into the financial system is staying in the financial system. Too many dollars chasing too few equities could result in ‘equity inflation’=stock market bubble. (I am using the word equity as a symbol for any financial instrument) But none of this money ( or maybe just a token fraction of it) is reaching the real world. The purpose of this quantative easing is to prop up values of the warehouses of wealth. We still have massive unemployment but the firms doing the layoffs have stable stock prices . What is really amazing is that we live in a world where Marie Antoinette can flaunt her wealth and at the same time use that as an example of ‘free speech’
The markets now firmly believe that any real reductions in asset prices are impossible. The fed will always rescue them with bailouts. That’s Just incredibly dangerous and can only lead, in one or two more cycles, to the collapse of the US dollar. That sounds incredible but it we keep on this way I just don’t see any other way this could end.
I see a 30% drop in the Dow in the last two months. I see a very real reduction in asset prices, here in concrete reality.
You could argue that that wasn't a real reduction, that a real reduction would be 50% or some other number. If that is your argument, it looks to me like moving the goalposts.
Right but my point is, as soon as it happened the fed went into a panic and printed trillions of dollars and started buying junk bonds, giving the impression that they will do whatever it takes to make the market not drop. No matter the cost. And the market shot back up even though there are 26 million people who just lost their jobs. But you know, this is still an unfolding story so who knows, maybe all the free loans in the world won’t help. We’ll find out.
Or, maybe you're right, and the market would have fallen a lot further (or at least not recovered) if the Fed had done nothing. And, on that one, we won't even find out, because that's not what the Fed did.
And I can see the point too that in the short term in the middle of a crisis, they did what they had to do for the economy to survive. It’s after the crisis is over, and things start recovering, that they are really going to have to make unpopular decisions or reinflate the bubble.
They can't even label a chart so it isn't misleading. How about they label that axis with T (trillion) instead of M (million). I know, I know, somewhere it probably says "(in millions)" somewhere in the fine print.
I've said it before, and I'll say it again. Central banking is the greatest scam in the history of mankind that cartelises the banking sector, gives them the privilege of access to the printing press, and is the root cause of the boom-and-bust cycle. It has managed to convince people (particularly mainstream economists) that its institution is necessary for "financial stability" but what it really does is absolves banks from any form of financial responsibility as they will always be able to receive a bailout if they act irresponsibly, allowing them to always make a profit regardless of risk. This is not free market capitalism but a system that enriches those closer to the central bank (and who get freshly-printed money first before inflation hits the rest of the economy) and punishes those who are relatively further away like manufacturing workers and salary earners. This is the reason why salaries at SV startups (bankrolled by VCs and soaring stock prices leading to valuable RSUs) are so high, and why wealth inequality has notably increased dramatically since we went off the gold standard in 1971[1].
I believe this topic is among the most important things we need to discuss and is arguably more important than climate change (what else is driving consumerism and throw-away-culture but inflation?), but economists have overcomplicated things and made it inaccessible to the average person when it really is so simple that a five-year old can understand it: printing money enriches the few who have access to the printing press at the expense of the many.
End central banking and the economy will be stronger, more resilient, fairer, and will reward those who create real value rather than the well-connected.
When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.
The important thing to keep in mind is that we are intentionally shutting down parts of the economy. But some of those parts include mechanisms (jobs) that we normally rely on to supply spending money to consumers and businesses.
Due to the partial shutdown, the economy's productive capacity has taken a hit. But even so, our economy still has the capacity to provide a decent standard of living for everyone. We don't want to compound the crisis by failing to ensure that consumers have sufficient spending power to activate the remaining capacity.
It would be scary if the Fed's balance sheet weren't expanding like this right now.
http://www.greshm.org/blog/printing-money-cures-the-covid-19...
http://bit.ly/intro-to-cmt