What does it even mean for The Fed to have "negative equity capital"? Firstly, is this "equity" a short term book value vs long term book value thing? Secondly, they can literally print money.
> the Federal Reserve has suffered operating losses of about $42 billion since September 2022
Between 2020 and 2022 they quantitatively eased $2TT+, and then over the last 12 months have actively quantitatively tightened $0.500 TT [0].
$0.042 TT is literally change to them. They can chose at any time to pay it off by stopping the quantitative tightening. Even a quantitative easing at this level would be inconsequential.
Who is benefiting from a scary headline like this? or am I totally misunderstanding something?
>Who is benefiting from a scary headline like this?
My wider, lay understanding of this is that the powers-that-be (hereafter "PTB") do not like the FRB's interest rate hikes, so from the PTBs' perspective:
1. Create fear and more fear and further fear among the public in the hopes of triggering further bank runs ("ohnoes the gov can't bailout savings no more!") and other fiscal destruction.
2. FRB is eventually forced to reconsider their current (read: undesirable) fiscal plans. Ideally go back to zero interest rates?
3. ????
4. PTBs PROFIT once more?
All journalism is propaganda and exist strictly to benefit someone out there, so I would be particularly skeptical if that propaganda is also fearmongering.
Such a derogatory statement detached from reality. It's like saying all health professionals are out there to get your money by keeping you as sick as possible. Or all teachers are out to indoctrinate your kids. Or all firefighters are arsenists.
I have quite a few journalists as friends or acquaintances, and many of them are the most honest people I know, with strong ethics and admireable ideals.
Of course there are bad apples out there. In any profession. But your statement is just ridiculous.
A few bad apples spoils the bunch. You can have thousands of apples in a barrel, but a couple of bad ones can quickly make the whole barrel worthless.
For example, the New York Times makes the right call on integrity vs profits, access, etc dozens of times a day for years. Then one time 20 years ago they make the wrong call vis a vis Iraq weapons of mass destruction, and they've almost completely destroyed their integrity. Seems unfair, but as a consumer we can no longer trust them, and probably never should have.
> Then one time 20 years ago they make the wrong call vis a vis Iraq weapons of mass destruction, and they've almost completely destroyed their integrity.
If you think about the Iraq war whenever your read a piece by a journalist in the NYT, even if that journalist wasn't even out of their diapers at that time, then you may need to re-adjust your grudges.
This is probably one of the most commonly-used fallacies I see people used to deal with cognitive dissonance caused by information that might make them uncomfortable.
I mean to get through life without having to run every single thing down you use heuristics to evaluate whether it is worth pursuing the details or not. My heuristic wrote off whether looking at pursuing his perspective is worth it or not based on the comments in his twitter feed which seem to match up perfectly with his charges. It's why credentials have value.
I don't know what's on his twitter feed, but I've yet to see a single rebuttal to any of the main highlights of that book. Don't be blind to the truth because of your own personal biases.
I just scanned his twitter feed and I don't see anything terribly problematic, so I'm not even sure what you're referring to that would make you ignore him.
Are there any large orgs that haven't made a significant misstep in the past 20 years? It sounds like this could be shortcutted into "don't trust any organizations" which rounds to ... not useful? Some organizations can be trusted more than others, and "trust" should be multi-dimensional.
> but as a consumer we can no longer trust them, and probably never should have.
This doesn't follow. I'm not a fan of the mainstream media by any means, but trust is not an all or nothing thing. It is entirely possible to develop a relatively sophisticated relationship with news media and to assign different levels of trust to different elements of what is encountered. Indeed, one might even vary their level of trust on a sentence by sentence basis!
The idea that the media must be entirely correct and entirely unbiased is jejune. It isn't the world we live in, has never been the world we live in. Take a little epistemological responsibility.
And that 99%ish of them realize that they need to at least look like they have integrity to be paid.
And if asked, I’m sure 99% of them would admit that the best way to keep getting paid and look like they have integrity is to actually have integrity.
usually where the problems happen is when they can’t see the disconnect between their day to day actions and the long term goal, or when they hit a challenge where they can’t do what they need to do - and then can’t take ownership of what they did and instead hide/project/deny, etc.
I’m guessing less than 90% would really have actual integrity, and the rest should hopefully be kept in check by fear of discovery or whatever. But things slip through regardless.
The problem isn't with the individual journalists, it's that the structural incentives of for-profit journalism require that editors, writers et al. bias their thinking to assume that the current structure is valid and generally whomever the highest bidder over the longest term determines what the structure is.
That is to say, every human act is political whether you acknowledge it or not because it either maintains the current system or attempts to change it. So we should question the motives of anyone who is structurally incentivized to give you information that benefits the owners of the periodical.
Propaganda is just information released to push a particular point of view. Propaganda is far more derogatory sounding than it should be. The analogy to healthcare is way too extreme.
Then you are halfway to realizing how extreme the claim is that all journalists actively push a particular point of view, i.e., are engaging in propaganda.
I wonder if the bank run on SVB wasn't planned or coordinated in some way by VCs & private to create a scare in the financial system to force rate hikes to stop or slow down as VCs and Private Equity did very well in the era of free money and now are facing headwinds. It is not as if the VCs who triggered the collapse are not very smart people who would not have understood the exact implications of what they were doing.
The powers that be love them. They raise the rates whenever they think they can afford to.
Money is like equity. Raising the rates is essentially a way for them to consolidate more equity. They distributed more equity than they were comfortable with as stimulus during covid, and now they're calling it back. The pattern has been going on since the 70s at least. They made up the BS idea of "natural rate of unemployment" to justify it and gave a nobel prize to the guy who said to keep the unemployment at 5% to keep down "wage inflation"... a.k.a.. people getting paid more. Pay hasn't tracked productivity ever since. Look at the unemployment vs fed rate charts.
Letting your currency inflate is a populist move for a reason. It's not because people are dumb, it's because while it devalues people's savings, it puts money in the pockets of people without savings, and devalues debt as well. It was used previously in Portugal, Italy and Greece to spur exports whenever the economies were hitting a rough spot. Once they got on the Euro and the powers that be wouldn't inflate, they were screwed, and Germany was able to buy up a bunch of their assets and essentially takes tribute via interest rates on their loans now. It skims off the productivity of their economies. Raising the rates helps them skim more.
Libertartian types tend to have savings. They like to spin a story that justifies what they sense... that raising rates is good for them. It is good for them. People are really good a sniffing out their incentives, even if they don't quite know why. It's also good for the powers that be though.
Whilst it devalues debt, I'm not sure I follow it being populist? Since it results in higher food, energy, rent prices etc and wages do not typically keep pace.
The federal reserve defines the "natural rate of unemployment" as being around 5%. This is just a number they made up that happens to be high enough to continuously erode the power of labor. If unemployment starts to dip below that, they raise the rates as quickly as possible. You can look at historical graphs of fed rate vs unemployment to verify. The rates are jacked up, it causes a recession. Unemployment increases. They reduce the rates, we recover from the recession, then they raise them as quickly as possible to stem "wage inflation" (a.k.a. people making more money) and within several months, the next recession starts.
The reason the wages don't rise with the prices is because that 5% are getting hired, and the under-employed are getting more hours, and they jack up the rates as quickly as possible as soon as they sense that wages are rising. However with the increased hours, and fewer under-employed there are people who couldn't afford toilet paper who are finally able to, and that increase the prices. That's not a bad thing. More overtime has a much bigger effect than increased egg prices to most people in low wage jobs. And lower unemployment improves their working conditions as well. It's still essentially a transfer of shares to the broke, even if the wages don't directly increase. Also, a lot of the inflation that was happening this go-around was due to rich people with their PPP loans being able to speculate. Taxing the rich at a more progressive rate as was done in the 50s and 60s would be an alternative way to stem inflation besides using the fed rate. But of course they haven't touched that one in a while.
It's not just trump and sanders that are populists looking for lower fed rates from the central banks. In most countries I think you'll find that the populist parties (i.e. the party with most representation among the poorest) tend toward pushing for lower interest rates and more government spending. You'll also find that those representing the rich tend to push for austerity. There's a reason for that. And it's not that the populists are all working together. You can tell they have much more disparate values than the centrist globalists who want high rates.
Great clear-eyed and cynical take here, I like the spirit of this comment if not all the details/conclusions, but can you provide a link/source for "You can look at historical graphs of fed rate vs unemployment to verify" and the "federal reserve defines the "natural rate of unemployment" as being around 5%" claims?
I think both of these are probably roughly true-ish but by brief Googling I couldn't verify either one.
https://commons.wikimedia.org/wiki/File:Federal_funds_rate_v... <-- that's a graph like what I'm talking about. Notice how the blue tends to go up sharply before the grey recession bars. And this tends to happen right as the red line starts to approach 5%. There's an exception recently because trump was in office demanding that they keep the fed rate low, and I guess they decided to listen to him because he was cutting their taxes. But you can tell they didn't love the guy by the way the media covered him. I'm no fan either, but for different reasons.
That wiki graph does not show what you say. There are multiple place in the curve that don't follow your theory. And by places, I mean for example the stretch from 1980 to 2000.
Right, they use their super scientific model that was definitely arrived at in a very scientific way that just so happens to keep the number hovering at 4 or 5%. There's nothing real stopping us from cruising around with unemployment at 2 or 3%. Other countries do it. It's been like that in the past in the US. And the invention of the concept just so happens to coincide with a complete de-correlation between productivity gains and wage gains. It's also based off of a dogmatic assumption that you can't have low unemployment and low inflation, and a failed economic model.
Anyway, as for a source, the 2nd paragraph of the wikipedia article on NAIRU states it's generally 5-6%. You can pretty readily google it and see that it's been between 4-6%.
https://www.ft.com/content/facf6989-7cd2-3724-a6d4-dfe7c7551...
"Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent." Guess which one they picked. Economics, as it intersects with politics, is not a science at all. Not even close. It's the result of people with agendas funding grants with hopes that someone will show the results they want, and then them cherrypicking those results. If you throw enough money into it, you can find a "scientific" justification for anything. The more academic side of it has some merit... but for the most part it gest brushed aside because it's not telling the people making the policy what they want to hear.
Or you simply are inverting cause and effect. Or at least cause and multiple independent effects. When the inflation goes up, both interest rates and unemployment go up.
It's akin to saying that coughing causes lung cancer. Smoking causes coughing and lung cancer. One cause, multiple effects.
Libertarian types don't have a preference for high interest rates because they have savings. They have a preference for the interest rate to be set by the market freely, instead of being intentionally manipulated up and down by central planners and causing havoc in the economy.
The reason they currently support higher rates is twofold: 1) The Fed has kept rates artificially low for an irresponsibly long period of time, leading to inflation and other economic distortions, and 2) The only way to get inflation (which is pernicious) under control is with higher rates.
You can control inflation with taxes, and it's a more fiscally responsible way to do it.
As for "irresponsibly low" and "(which is pernicious)"... these are your value judgements that you've arrived at based on your perspective. That's fine, but other people have other perspectives. To someone with debt who wants a well-lubricated economy, or to someone who makes money off of exports, it's not irresponsible at all.
If you look at the history of fed rates vs unemployment and recessions, it's a very clear trend that the fed rate has to stay lower longer for a recovery, and it takes less raising of the rates to put us back in a recession. Why would this be? Maybe because it's not the appropriate tool to be using to control inflation. Maybe it's not because the fed is being irresponsible, but it's doing what it has to to keep the economy afloat and that's less and less effective because the country refuses to do what it has to, which is raise taxes on the rich.
"You can control inflation with taxes, and it's a more fiscally responsible way to do it."
There is an interesting and compelling theory that you can control inflation with taxes (broadly, MMT[1]) but the cautious and (in my opinion) warranted skepticism that you voice, upthread, about prevailing economic theories should be extended to MMT as well.
We don't really know if money supply creation via "printing" and the corresponding destruction via taxation will work just as MMT suggests it will.
"What field of economic thought leads you to claim that inflation can (and should) be controlled by taxing the rich?"
Not "the rich" per se, but he is speaking of MMT[1] which maintains that the government of a sovereign printer (sorry, Argentina) does not need taxes at all because they don't "need" the money.
MMT purports that money is created by "printing" it into existence and money is destroyed by taxing it away.
Even Fisher Black admits that there is a currency trap at 0% and he doesn't mean that the problem is that the interest rate is too low but rather that the zero lower bound is like a minimum price control that constraints the formation of interest rates and he basically predicted what the IMF blog Said about this resulting in cash and electronic bank accounts ending up with an exchange rate between them.
My smart friends - rich and poor - universally approve of the rate hikes, because they understand, like me, that price stability is their primary mandate. Many also believe, like me, that the Fed really screwed this up in the last few years.
If by "PTB" you mean the market, then of course it hates rate hikes. Also just hates uncertainty.
Seems like a convenient coincidence that all your "smart" friends agree with you lol.
Actually the fed has a dual mandates: price stability and unemployment. Price stability can also be achieved by taxation.
And in this case the massive inflation we saw was mostly due to supply chain issues. So many businesses shut down during the pandemic. Others were hanging on by a thread. Which sounds like it will help supply chains recover? Increasing interest rates for loans? Or keeping access to lots of liquidity? Hmmm, seems like if we're wanting to expand capacity again, we want liquidity. Then prices can go back down due to capacity going back to normal, rather than artificially reducing demand by getting everyone fired.
If we need critical immediate measures to stem inflation, then we can raise taxes. Get some of that PPP money back. Make everyone who was speculating on housing sell their investment homes. That will drive inflation back down without starving the recovering supply chains.
I did say "primary mandate". I don't think that is controversial.
>then we can raise taxes
I totally agree that raising taxes is the right thing to do (as do my smart friends and most economists ;) ). But that's not the lever the Fed has. And of course it's politically untenable.
> Make everyone who was speculating on housing sell their investment homes.
Agree there too. But that's not the lever the Fed has.
I don’t understand this comment so may have this completely wrong.
But using Jewish stereotyping in articles about a kind of banking conspiracy theory is something I would avoid though.
The Fed operates like any other investor, except it gets to spend money that doesn't technically exist. This actually has worked out great for the Fed because despite creating money from thin air, the US economy has been growing so quickly that the assets they have bought using this thin-air money has increased in value.
Now, with the economy slowing, inflation taking value out of investment vehicles, and interest rates being hiked, their assets are no longer increasing in value. This is just another window into the current inflation/interest crisis.
One should assume that such a risk should be either baked in or avoided. But even if it was calculated it could still mean the Fed behaviour is disconnected from the reality of public markets which they ostensibly serve.
It's a losing battle to fight this on some basis that these Fed/admin hires are just dumb villains and the whole scheme was poorly thought out by their well connected/educated revolving door who runs it.
The fed propping up stuff like mortgages and Wall St bankers gambling then repeatedly using the financial might of the general US market to stabilize it in the short term doesn't necessarily mean the markets they manipulate (ostensibly for the public's benefit) is better off long term. But it does make rational sense when everyone these people speak to is losing their shirt in the short term, and the FUDy doomers come out in the obedient media to say there’s no other choice but propping up the last decade’s status quo.
But once you start looking at historical interest rates, critical markets like mortgages/the many markets run by well connected pet oligopolies/etc, with all the subsequent risk glossed over via eliminating moral hazards... Ultimately critiquing the fed as if their economic structure is not well calculated is not the best strategy.
Like a lot of more extreme political opinions the reality is much more boring and harder to confront if all you do is invent caricatures disconnected from reality. The enemy is much more informed and adaptable than some conspiring backroom dealing elite we all just need to expose and it will all be over.
America’s historical stockpile of wealth and talent can be leaned on for only so long… just like Russia leaning on their Soviet arms stockpile the first time they confront a real threat (aka themselves).
When I think of an investor, I think of someone who picks and choses specific companies or sectors of the market to invest in. I'm curious what the Fed's tools allow it to invest in specific companies or sectors other than the economy as a whole. Can they get more targeted than an individual bank? Or is that the limit of their targeting power?
The GP asked "how does the Fed go about buying things?" You are arguing that they don't meet the definition of an "investor" because they aren't "focused" on profit. To your point here's a graph of the Fed's profit they they've given to the Treasury since 2012: https://i0.wp.com/www.brookings.edu/wp-content/uploads/2022/...
I'd argue that while the fed is not solely or primarily focused on profit, they very much do profit in their operations. That graphic comes from an article where some speculate what would happen if the fed didn't profit:
I think you got hung up on the word "investor" and missed GPs actual question "how does the fed buy?"
From the page I linked:
"The New York Fed's Open Market Trading Desk (the Desk) purchases agency MBS to sustain the smooth functioning of the agency MBS market, thereby fostering effective transmission of monetary policy to broader financial conditions."
They have a group of people that are going into the open market and buying and selling. I dunno what those people are optimizing for in their purchases when it comes to MBS, but The Fed interact with "the market" exactly like others do in this case.
These are the companies the fed chose to buy in 2020 when Covid was peaking.
And to be clear those were not purchased by the "trading desk" the Fed isolated those purchases into a separate entity which they called "SMCCF": https://www.investopedia.com/secondary-market-corporate-cred... (The result is the same: some humans at "The Fed" went out into the market and selected some securities to purchase based on some criteria)
It is important, even very important, to realize that this merely changes the laws of economics to which they are subject, at least as people generally imagine them. It does not immunize them against the laws of economics. It does not mean they can just do anything without consequence, or with the full power to select the consequences.
This is in the class of "things that sound obvious when I say them", but I can see that a lot of people seem to throw an exception here and terminate all execution. Having negative equity matters, even if you can print money. It just may matter differently.
"or am I totally misunderstanding something?"
I would say, you're not so much "misunderstanding" something as not realizing that there's a whole complex of interacting systems hiding behind your "but they can just print money" that needs understanding. Whether those systems are deliberately obscured is a matter of some debate, but they certainly don't go out of their way to educate you about these systems. Everything is far more complicated and interconnected then you appear to be seeing.
I'm not an expert on economics, but I think it's obvious on first principles. The constraint on the ability to print money is its devaluation. If the Fed is in a position it would want to both tighten the money supply and print money, this seems like the central bank equivalent of a chess position with the King in check.
This keeps getting repeated all over the internet... but the FED doesn't just "print" money. It creates money, loan it to some counter-party, and that counter-party has to return it. If the counter-party doesn't return the money, the FED losses money. They can print money to themselves, but that doesn't offset the losses.
This is not correct. They distribute interest to 'depositors'. See reverse repo market. They're printing citizens' money and giving it to rich people just for being rich.
Also, if banks go bankrupt and then the individuals and businesses which they made loans to go bankrupt (which is actually not that uncommon; see SVB), the Fed cannot get that money back, the average citizen is the loser again...
So as you can see, the money is not always paid back.
The Fed just prints money, that's a fact. The "it's just loans" narrative is false rhetoric.
If there was no such thing as bankruptcy and debts were always passed on to borrowers' children and the government couldn't just keep taking out bigger loans to pay back their old loans and give huge contracts to big corporations ad-infinitum, then we could talk. Anything other than that and we have money printing going on; paid for by regular, honest, hard-working citizens through inflation and taxes.
> distribute interest to 'depositors'. See reverse repo market
You're thinking of interest on excess reserves (IOER): interest paid to banks (as the Fed's depositors) to encourage them to hold excess reserves and not lend them out. Reverse repos are open-market operations; they're the Fed borrowing money against its collateral, thereby sucking liquidity from the system.
How does that change fundamentals? The banks get free money from the Fed which gives them more money which they can use to pass on the interest payments to their own rich depositors. It also allows wealthy people to borrow more money against their substantial collateral to further prop up the value of their assets. Then when the bank goes bankrupt and a bunch of shell startups which it loaned money to go bankrupt, their failure and fat severance packages have been paid for by the people through cost of living increases.
Let's not forget that some of these bankrupt startups were basically tossing suitcases of advertising money at big tech prior to their bankruptcies. This is the people's money they were tossing at Big Tech. Then if they avoid jail (common), the founders of these failed startups will go on to get more funding 'a second chance', then a 'third chance', etc.. from the big VCs as a thank you for propping up their corporate stocks with 'borrowed' money which was never repaid.
Because with IOER, the Fed creates the market. No Fed, no IOER. In reverse repos, the Fed participates in an existing market. There are plenty of people willing to make overnight loans against Treasuries. That's what a repo is.
The Fed is currently participating in that market to raise the cost of borrowing. If it's helping the rich one way, it's hurting them the other.
(I'm not arguing the Fed is an egalitarian institution. But it's inaccurate to describe its operations, particularly reverse repos, as "printing citizens' money and giving it to rich people just for being rich.")
> when the bank goes bankrupt and a bunch of shell startups which it loaned money to go bankrupt
This is a non sequitur. (Also, if you borrow money from a bank, they don't go away if the bank goes under.)
>> There are plenty of people willing to make overnight loans against Treasuries.
It misses the point of why Reverse Repos were created. IMO, it's to allow the biggest banks who cannot find a way to effectively and safely put their enormous pile of money to work in the economy to still get a return on it. A risk-free (and literally free) return paid for by citizens.
It artificially props up the entire system and all of its zombie companies. Not to mention the anti-competitive forces it creates.
>> Also, if you borrow money from a bank, they don't go away if the bank goes under
They do if you go bankrupt. Why do banks go bankrupt? Well often it's because a lot of their borrowers went bankrupt. That's literally what 'subprime mortgages' entail. They literally assume that some percentage of the loans will never be repaid.
But in any case, the main issue I have is that the flaws of the system are hidden under layer upon layer of complexity; seemingly designed precisely to avoid scrutiny.
> misses the point of why Reverse Repos were created. IMO, it's to allow the biggest banks who cannot find a way to effectively and safely put their enormous pile of money to work in the economy to still get a return on it
The history is more complicated [1]. Modern repos are also all about finding non-bank channels through which the Fed can influence the economy. (When done with banks, it's to induce them to not lend their reserves to each other.)
Again, your complaint is much more apt for interest on reserves. Repos aren't unique to the Fed. IOER pays banks for parking money in an account at the Fed.
> seemingly designed precisely to avoid scrutiny
I'd argue it's more about competing interests and anachronisms. (The Fed is, almost to a fault, tremendously transparent.) Why does the Fed have private bank shareholders? Because of irrelevant details from a hundred years ago. Is it confusing? Yes. Is it a priority to fix? No.
> Why do banks go bankrupt? Well often it's because a lot of their borrowers went bankrupt.
I read into the SVB as fundamentally different from the traditional borrowers bankrupt issue.
> But the root of its demise goes back several years. Like many other banks, SVB ploughed billions into US government bonds during the era of near-zero interest rates. What seemed like a safe bet quickly came unstuck, as the Federal Reserve hiked interest rates aggressively to tame inflation. When interest rates rise, bond prices fall, so the jump in rates eroded the value of SVB’s bond portfolio. The portfolio was yielding an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%, Reuters reported.
> At the same time, the Fed’s hiking spree sent borrowing costs higher, meaning tech startups had to channel more cash towards repaying debt. At the same time, they were struggling to raise new venture capital funding. That forced companies to draw down on deposits held by SVB to fund their operations and growth....While SVB’s problems can be traced back to its earlier investment decisions, the run on the bank was triggered Wednesday when the lender announced that it had sold a bunch of securities at a loss and would sell $2.25 billion in new shares to plug the hole in its finances. That set off panic among customers, who withdrew their money in large numbers.
From [1]
Instead, lock in $ at extremely low rates on bonds improperly laddered, then firesales turned theoretical losses into actual losses, which then triggered a loss of faith and a liquidity crisis simultaneous to startup cash withdrawals just for payroll. The bank run on it meant there was no way to make customers whole.
Most banks would have a variety of bonds, long and short term, with varying yeilds. Esp. given the rise of inflation took a little while and it wasn’t unlikely rates would rise.
SVB putting so much into long-term, low-yield treasuries was a major failure of its risk management.
Reserves are assets of banks that can only be held by banks. They can't get rid of them in aggregate.
Loans are also assets of banks, and are created against supplied collateral along with the corresponding advance. The amount of reserves a bank has is irrelevant to that operation.
Didn't they lower the reserve requirement to 0 at the start of the pandemic?
The private banks borrow money from each other and also (especially the biggest ones) from the Fed and loan it out to people, companies or other banks with extra interest added on top. Reserves don't matter until there is a shortage of liquidity and in that case, there are bailouts. In the meantime, banks will just loan however much money they can to however many borrowers they can find who appear to be able to afford it.
Reserves are one (largely unimportant) brake on lending. Many western central banks have never had a reserve requirement.
The more important limits to lending are regulatory capital controls which measure both the asset to liabilities mix but also the credit and interest rate risk of the asset mix and loan to deposit ratio.
The latter is a commonly tracked metric by bank investors and they typically view a ratio of higher than 0.8 with suspicion (down from 0.9 post 2008).
The US banking industry ratio is about .63 right now which is up from a pandemic low of .57 but still down from the pre-pandemic ratio of .75.
That banks were not lending enough was the reason the fed removed the reserve requirement.
>This keeps getting repeated all over the internet... but the FED doesn't just "print" money. It creates money, loan it to some counter-party, and that counter-party has to return it.
That sounds like a pointless nitpick to me "ackshually the fed doesn't print money because everything is done digitally and no printing is actually done". What you described can be pretty much summed as "the fed prints money which it then uses to buy assets".
I provided the link with minimal commentary because the concept of money is one of those black magic things that is difficult for me to explain because it does put me out of my depth trying to keep the technical jargon straight and I’m never 100% sure about my own grasp; but making my best effort in good faith to try and explain it and keeping it as simple as is possible for me: a printed dollar is just a representation of $1, specifically it is a $1 Federal Reserve bank note documenting a dollar that is backed by the financial assets that are pledged as collateral by the Fed’s owners. Wikipedia says this is mostly Treasury Notes (debt instruments of the US government) and mortgage agency securities (relying on Wikipedia again, these are securities issued by Ginnie Mae, Fannie Mae, Freddie Mac or the Federal Home Loan banks).
What’s important to understand to make any sense of this is that when the bank issues you a loan, that sits on their Balance Sheet as an asset, and on your balance sheet as a liability, so when the bank issues you say $50K in the form of a Loan so you can buy a car and it is deposited into your account, USD$50,000.00 was created as money, but that doesn’t mean $50K of notes was printed. What changed is the following: the Bank’s assets increased by $50K balanced against its liability accounts, and your liabilities increased by $50K balanced against your asset accounts until you pay the money back.
There’s a lot more money than there is currency in circulation, and currency represents one type of money. It’s not a difference of one being physical and one being digital because all of it is documented somewhere whether it’s a PDF of a loan agreement and resulting statements or the cocaine-coated bills and coins in your pocket; they’re subtly distinct concepts of put another way, money is intangible but can be created and bank notes and promissory notes are tangible forms of it documenting money and can be printed. Taking it back to the Fed, actual paper money in circulation is considered a liability against the Fed’s assets which are other people’s (well, institution’s really) debts to the Federal reserve, and I think this is the point where I have to stop because I’m already out of my depth and taking it much further will put me way out into the deep end. Corrections and expansions from others welcome.
Also note that somebody replied to me above with a link to the Bank of England talking about money creation. I haven’t had the chance to read it, but it’s probably worth checking out as well.
Well as a simple matter of fact, banks don't have the right to print banknotes, they merely create electronic deposits and then if someone wants to turn those into banknotes the banks have to borrow them from the Fed (or local equivalent). The more important difference this represents is that money is "created" as loans, with the bank's profit being the difference between the total amount that gets repaid to the bank by some creditworthy private person or organization and the amount the bank owes the Fed. So (i) the bank doesn't get to spend the money it "creates", it's actually reserves the bank owes to whoever's deposit account the money ends up in and (ii) it's a market-driven process where the bank is only incentivised to create money if prospective borrowers are demanding loans and the bank believes they will be able to repay them. (And the Fed in turn, "creates" and "destroys" money to the extent necessary to ensure the market interest rate is at a desired level, not to make profits or pay bills)
The uninformed school of internet libertarianism likes to conflate this process of credit creation with the practice of unstable governments realising they'll never be able to raise enough money from taxes or oil sales to pay for the mansions and five star generals they'd like to buy and so printing some more banknotes (not owed to anyone) to be a bit richer.
The most pedantic rebuttal I’ve encountered online when I mentioned that “The Fed prints money” was “No, the Bureau of Engraving and Printing prints money”.
> the counter-party doesn't return the money, the FED losses money
Fed loans are collateralized. So the counterparty has to not return the money and the collateral has to lose more money than the bank has reserves. This would be a credit loss, and the law requires the Fed to avoid it. (It has.) This article is about something else.
The FED does not loan money. It gives it away. That's what QE is: The Fed buys bonds for more than they're worth on the open market. This disparity creates excess money in the system that wasn't there before.
> the FED doesn't just "print" money. It creates money ...
Accuse me of cherry picking or paraphrasing to miss the subtlety of the distinction, but the subtlety makes little overall difference, as far as my, admittedly limited, understanding goes. And that snippet just ... works so well.
> What does it even mean for The Fed to have "negative equity capital"? Firstly, is this "equity" a short term book value vs long term book value thing? Secondly, they can literally print money.
My interpretation of "the fed losing money" is "the fed bought some bonds when interest rates were low, interest rates went up, and now they're worth less, so they took a loss". It's true that they can print more money and therefore won't ever go bankrupt from this, but irrespective of that they're still losing money in an accounting sense.
>Who is benefiting from a scary headline like this? or am I totally misunderstanding something?
The headline is "the fed losing money", not "the fed is going bankrupt". You'd really have to be hysterical to think that the headline is scary.
As a layperson, "For the First Time, the Fed is Losing Money" as a headline from the Wall Street Journal is concerning. A lot of people are going to see that headline, and read just the first couple of paragraphs - not gonna pay for a subscription - and their takeaway in what they perceive of this economic climate is going to be that the Federal Reserve is on its way to insolvency. It doesn't really matter if that's even possible. Is it possible? I don't know if it is or not.
I agree with the GP that it's a scary headline. I wouldn't call myself hysterical; I'm not hyperventilating or anything.
The issue with the headline is not with people who understand finance, it's with people who don't but know enough to see the WSJ as an authority. They won't notice that it's an opinion piece, and they don't really know enough to understand if this is actually a problem or not.
It absolutely can happen. Not necessarily that they become insolvent to the point of closing up shop because they can borrow from the treasury (so long as the debt ceiling gets raised sufficiently) but they are basically already there.
They are paying more than they are taking in and are having a shortfall to the treasury.
It’s more complicated than that. They don’t just hold bonds that have diminished in value and are underwater, they are borrowing money through the reserve program at higher interest rates than they are collecting. It’s the exact thing that sank svb but on a much larger scale. In a normal environment they lend at a higher rate than they borrow and remit the excess to the treasury. Now they are having to borrow.
This is another interesting dynamic in the Fed’s fight against inflation because ideally they’d like to actively sell some of their portfolio to increase QT but I’m not sure they can because of the losses they would be forced to realize. This is largely why they have taken a “passive” approach to balance sheet drawdown.
For two years everyone bragged about getting 2.5% mortgages and now are loving collecting an easy 4.5% on six month bonds. But people forget there’s always someone on the other side of a trade and now that the tide is going out we are seeing exactly who they are.
The fed has a balance sheet that consists of bonds of varying maturities mostly. During covid the balance sheet exploded as they bought all sorts of mbs securities and bonds to loosen liquidity. By definition that was basically the exact opposite of what a rational person would do acting in his own best interests, but it’s what they did at first to restore order to credit markets and then after that because they thought that’s what people wanted them to do.
But now those bonds have gone massively underwater because of their own policy- they have drastically raised interest rates on shorter duration bonds while simultaneously stopped buying bonds. So the value of the assets they hold is drastically diminished.
But the fed also borrows money on the short end from banks through the reserve program. Banks keep excess reserves at the fed and the fed pays them interest. In a normal environment that’s not a problem because long bonds usually yield more than short bonds. But because the fed loaded up on low yield bonds they have a negative carry so they are losing money now. Normally they would pay the excess to the treasury but now they have to borrow from it.
The interesting thing is that this is basically what sank svb but on a much larger scale. The difference is obviously that the government can print its own money.
Negative equity capital simply means that on the Fed's balance sheet, equity (assets - liabilities) is negative. The Fed's operates on the same fundamental accounting principles as any other organization, so it has assets, liabilities, and equity ("book value"). Its total assets (such as government bonds) is actually slightly higher than its liabilities (e.g. the value of deposits by other banks), but not by much, so it's book value tends to be quite small.
The book value represents the net investment made by the owner of Federal Reserve banks.
Your blog just has a bunch of charts showing that high interest rates are correlated with high inflation and gets the direction of causality wrong. Has it ever occurred to you that maybe the correlation exists because governments respond to high inflation with high interest rates? Not because the latter causes the former?
Is there a name for this general type of fallacy where defect A results in mitigating response B, but people see the correlation and wrongly conclude that B causes A instead? Examples:
You claim without argument that Blair Fix gets the direction of the causality wrong. In fact he talks about both directions and argues for his interpretation.
Nope, he has correctly identified that the author has committed the fallacy of confusing cause and effect. Countries literally have formal policies of raising interest rates when inflation rises, ergo interest rates tend to be high when inflation is high. Why do they do this? Because higher interest rates are prescribed as a cure for inflation. And because it has repeatedly succeeded, over time, in bringing inflation back down again.
So his cargo cult "experiment" proves absolutely nothing because his results are exactly what is expected, just as a doctor would also be unsurprised to discover that a someone with a snide tone about medicine and a middle school grasp of statistics had reached the remarkable conclusion that patients with prescriptions tended to be less healthy than those without.
That blog's not exactly an improvement to his argument. He tries to dismiss the evidence that [nominal] interest rate changes have a lagged effect on inflation by positing that the interest rate drops are instead caused by a secular "inflation cycle"[1]
Trouble is, there hasn't been any secular "inflation cycle" in the last 30ish years in developed countries that have adopted the policy of managing inflation by downregulating it with interest rate changes. Either you accept that the orthodox policy of announcing that inflation will be managed with interest rate rises has been remarkably successful at containing inflation, or you're scrambling for an alternative explanation for why it appears to have been so successful that doesn't use "inflation cycles". It's certainly telling that he uses hypothetical data to illustrate this theory, and then since the real world time series are so unhelpful to his argument he has to chuck hundreds of data points from different countries, years and interest rate policy regimes into a graph where most of the data points sit near the origin[2] and draw conclusions from the outliers!
I'm going to go out on a limb and suggest that Blair Fix hasn't disproved pretty much the one thing economists who fiercely hate each others' theoretical models and policy recommendations came to consensus on as established fact with a graph which showed exactly the results people familiar with the literature - which Fix clearly isn't - would all expect to see.
As the patient group all went into remission for three decades, it's not even as persuasive a statistical argument as the one for drugs being the cause of terminal illness
[1]ironically, the most plausible explanation for a tendency towards inflation being cyclical as opposed to steady or tending to accelerate would be countercyclical downward pressure on money supply from the Fisher Effect on market credit prices
[2]the key bit being that most of the points sit near the origin because the policy has been so successful...
Dollars are a liability of the Fed. If they were to print dollars and keep them then that would increase both sides of the balance sheet without changing the amount of equity.
Not really. Reserves are a liability of the Fed. The only way a private citizen gets a hold of them is Federal Reserve Notes. Private citizens can also hold dollars in coins, which are not a liability of the Fed. And of course the money deposited in a bank account isn’t reserves either. In that case reserves don’t even enter the picture unless you withdraw notes or write a check that’s cashed at another bank.
And that last point is the 10,000 pound gorilla in the room that almost everyone ignores. The Fed’s primary mandate is not, as is commonly stated, to control inflation and unemployment. Rather, it is maintaining the operational integrity of the payments system. And they absolutely have to do that or people will not be able to transact in dollars. And of course the party that transacts more dollars than anyone else by far happens to be the one that created the Fed and can reorganize or destroy it if the Fed is foolish enough to create the political will to do so.
The headline is a simple statement of fact. And I think the article does a reasonably good job of stating facts without too much speculation about the potential consequences. I think most educated adults would agree that the facts being reported here are indeed newsworthy, especially considering all the other things that manage to make the editorial cut.
In order to affect monetary policy, the Fed now pays 4.9% interest[1] on $3.03trn of reserve balances[2], which is now costing them approx $150bn/yr run rate. Just 12 months ago they paid 0.15%.
This $150bn cost is a consequence of quantitative easing massively expanding reserve balances, and those reserve balances still existing in a period of high inflation which is being fought with high interest rates. The obvious solution is quantitive tightening to shrink the quantity of reserves, however there's justifiable concern about the effects this could have on the still-fragile banking system.
This is real money to the US taxpayer. The Fed used to remit $100bn a year to the US treasury, which it has now stopped doing. Instead, the Fed is sending this money to the US commercial banks which hold US reserves.
And all that money they're paying in interest... how do they argue that those interest payments won't find its way back into the economy and further fuel inflation?
Those are interest payments on reserves. Reserves can only be used in bank-to-bank settlements, and not useable by any institution that isn't part of the Fed's system.
Likely because its being held at the top at one of the primary dealers until they choose to use some of it. Maybe there's an agreement that they won't use it?
following this statement to its logical implications, if they lower interest rates even further below a Taylor Rule, then that would be deflationary since less money would find its way back into the economy and fuel inflation?
by not printing money they are printing money or something..cough...tell me you don't understand monetary policy without telling me you don't understand monetary policy.
the money they lose when rates go up is of no more significance than the profits they make when they create high-powered reserves. everything on the Fed's balance sheet is outside the real economy. what matters to the real economy is the current nominal and real interest rates and the expectations for where they are going.
net income (as opposed to cash flow) is mostly a fiction in general but all the more so when it's the Fed.
> Fed losses from its interest-rate-risk exposures—unrecognized taxpayer losses—are now being realized in ways Congress never intended and at magnitudes neither the Congress nor the Fed ever expected.
When things happen that congress or the Fed never expected (aka the 'experts' and 'planners' in all this)... that should ring alarm bells. Those saying 'nothing to worry about' are putting on a brave face. Shouldn't need to understand economics to see that much.
like an army of MIT PhDs didn't model obvious 1st-order effects
literally everyone who knew anything expected it, it's built into every model
what is supposed to happen if the Fed reports book losses or negative equity. hard to go bankrupt if you can literally print money. stupidest FUD and agitprop and unfortunately typical of the WSJ opinion section
Let me preface this by stating that I am not a crypto enthusiast and do not own any crypto.
One thing that’s been fascinating to me as this banking crisis has unfolded is that the same people who swear cryptocurrencies have no intrinsic value and are therefore worthless continuously say “there is no problem because the government can simply create as much money as it wants out of thin air.” So they are implicitly saying that any currency has value because people believe it has value but don’t extend that generosity towards other assets where there is a clearly demonstrated group ascribing value to it.
It’s also somewhat disconcerting that the government seems to show less and less restraint in exchange for instant gratification and short term benefits and as holders of its currency you really have no say as to how it is managed.
Emergency measures are there for just that, emergencies, but it seems the bar for what qualifies for an emergency gets lower and lower.
A major part of the value of any fiat currency comes from the fact that the institution with a monopoly on violence collects its dues in that currency. If you don't pay your taxes and fines in your nations currency, you go to jail or worse. The desire to avoid this creates the demand for the fiat currency. Other similar laws mandate businesses accept the fiat for discharge of private debts with consequences for not doing so etc.
The other piece that folks often conflate to extrapolate their intuition of how a household or a small business budget operates to how a country budget operates (the comment above on instant gratification). As a household, if you face a risky economic situation (economic depression, loss of jobs etc), the natural response is to reduce spending and increase savings. If you aggregate across households at a country level, this leads to lower demand, so reduction in jobs as less consumption which leads to further economic downturn, reduction in willingness of banks to lend, lower government income (as lower taxes) etc. The right government response is to spend more countercyclically and help create jobs to spur back demand through deficit spending. Then as economy improves, tax receipts go up and deficit goes down.
People are not against government spending because they are misguided, or because they are extrapolating a "wrong" intuition. They are against it because as you said, the response are supposed to be cyclical, and at this point it is looking like a straight line. When was the last "spend less" behavior of the cycle?
Or are you claiming that the US has been in the situation of "risky economic situation (economic depression, loss of jobs etc)" for the past 15 years?
> People are not against government spending because they are misguided
Really?
I would bet that most people don't hold their views on government spending based on anything more than a gut feeling and what the political party they support and associated media tell them.
I believe this because time and time again we see surveys that show random groups of people have a very VERY poor idea of what the actual state the economy is in, what the history of the economy is, who increased the national debt, who decreased it and when, what inflation is actually at, how to plan for current and future interest rates and house prices, who can control energy prices, etc. And most importantly (to me anyway) how wealth and income is actually distributed. These are mostly indisputable facts that we can all look up but somehow don't.
So yeah I think we as a group are mostly misguided most of the time.
There could be a lot of misguided people, but those are not the one engaging in this discussion right here, right now.
If the GP is misguided, points out how and why according to the content of his post, not some general platitude about potentially misguided people that aren't relevant here.
The discussion from the top used the term "people" in a very general way, at least to me, so I think my reply was relevant and I was asking you for more on your point of view. I now have a better understanding of what you mean because you clarified just now. However, you seem to have understood my point too so may I suggest in the interest of us all having a better time on here, that you to respond a bit more charitably when someone doesn't exactly get the point you are making. Thanks.
I did read your comment in a charitable way, which was why I replied as opposed to just ignore it. It's just generally a bit hard to get the wordings right in those kind of charged topic, so I opted for terseness. It might have come off as ruder than I intended, but that wasn't the plan.
The second half certainly wasn't directed to you, just more of a follow up as to why I wrote my original comment.
Another thing that people generally get wrong is what government spending goes on, with wide swathes of people believing that vastly more money goes to welfare than actually is the case.
> vastly more money goes to welfare than actually is the case
Federally, some kind of "welfare" comprises 60% of the budget[0]. Sure, you could argue that Social Security and Medicare are benefits paid for by what you put in during your working years, but that's just a facade over the fact that it is a transfer of wealth from those who are working to those who have retired from work.
I'm not sure what your definition of "vastly" is, but certainly there is a substantial amount of transfers from those who earn more to those who earn less. All of this is separate from a discussion on whether that is good for society, but the facts should be laid out.
In the US "welfare" normally refers to social assistance programs not social insurance. That is no one refers to social security retirement benefits as "welfare" even though technically it is a form of it.
Of that, ~52% is Social Security, unemployment, and labor programs (or ~40% of the total).
~28% Medicare and other health programs (or ~23% of the total).
Not just that, but when polled on specific policy positions, people often agree. But when polled on the policy by name, they disagree. [or the inverse]
ACA is a great example. Most of the core tenets are widely supported across the population. But, ask conservatives about the ACA by name and they often claim it's an awful law.
Yeah, it's a consistent finding that opposition to social programs is largely driven by propaganda. Name the programs, it's "rah, wasteful, cut it!" Talk about what it does, costs, actual e.g. overhead and fraud rates, without naming it, and people are like "that's great! We should use that instead of the wasteful, useless, fraud-filled [name of program you just described]!"
Shit, last I checked IIRC most people don't even understand how marginal tax rates work, which is something that directly affects most of them, is relevant every single year, and that is pretty easy to understand.
It's a miracle our democracy works even as well as it does. But, these results shouldn't be surprising, when you think about it—the average Christian, for example, hardly knows a thing about the belief system they claim holds the key to eternal life(!!!), which you'd think they might take super seriously and study with fervor, but most apparently do not. Why would we expect people to understand government any better than that?
I doubt if they are misguided as much as simply don't have the time to understand the myriad financial/political issues in front of them. Even if they did, all most could do about it is type in all caps on some social media platform. That's when the rest of us ghost them.
It limits the rate of monetary inflation. It is much harder to dig a shiny metal out of the ground than adding more zeros in a computer.
If you're not worried about the long-term consequences of both the fiscal and monetary policy of the United States, I don't know what to say. M2 to the moon.
I don’t really think it does. They could just say this dollar is now worth less gold? Or they could put lengthy restrictions in place for exchanging dollars for gold until it nearly guarantees they’ll never need to produce most of the gold.
Shipping gold is expensive and risky, eventually they’ll start saying, “you own this amount of the gold we have stored safely”. The abstractions find a way…
That said, if the US were in a better financial situation, how would 1-2% inflation (as far as I can tell, this roughly the rate that gold is currently being extracted) lead to people starving in the US?
Obviously, reality is much more complicated, but I just want to understand the reasoning. Assume 0% inflation if you prefer.
2% is a healthy level, which is why it's the Fed's target.
The problem is that pegging a currency to gold does not peg inflation. Inflation will still move around based on other economic factors. You will have just eliminated your best tool for influencing it.
If you needed to adjust a currency pegged to gold, you'd have to get more people working in the mines. Which is either not possible, or a human rights violation.
There's no reason for that. As production improves in efficiency it is natural for things and services to become cheaper. That also means you get more for your money, instead of getting more money. That concept is not too strange for the population to accept.
For a few items in your CPI basket, that's fine. If you have significant deflation across your economy on average, people will start losing their jobs en masse, and zero dollars doesn't buy anything.
Likewise, business revenues will be going down but the investments in capital have already been allocated. Businesses start laying off employees to try to balance the books. Those newly unemployed workers, in turn, now have less money to spend. More businesses find themselves in the red, and it leads to more layoffs.
This is called a deflationary spiral. Basically every period of significant deflation in the past has led to dire economic consequences. You really do not want people to stop spending money.
This sounds like a myth. If the value of your currency is increasing, staying at 0 means you're actually turning a profit, just as making a 10% profit when the inflation is 50% means you're losing money. Inflation is a tax and redistribution of wealth, it's really not more complicated.
Zero isn’t bad. I was explicitly talking about deflation above. The effects of deflation I explained above is not a myth, it is introductory macroeconomics.
Deflationary spirals have happened in the past, but they have stopped since we moved away from the gold standard and we can now intentionally inflate our currency to prevent deflation.
If you have a real business, you're still increasing value in the equation or breaking even. Deflation means you might have to lower wages, but your employees are still getting the same value paid. It means you might have to lower prices, but you're still getting the same value sold. It also means your costs are lowering, so as long as you have a value-adding business you will beat deflation. If not, then you shouldn't be in business.
In today's inflation economy, there are tons of tons of businesses that on paper make a profit, but in reality don't create value because that profit is worth less than the numbers tell. And what's worse: Individuals are becoming poorer and poorer without realizing it, because the nominal value of their pay check might be higher, though the value of the money is probably half of what it was 10 years ago.
And as individuals adapt their lifestyle and spending to circumstances we arrive at the ridiculous situation of today, where most young people after maybe a decade of working and advancing their careers still don't own a home, still don't have any children, and don't dream of splurging on luxurious hobbies.
Thank God there is a huge trend right now with workers of all "collars" saying "fuck it" and doing what they can to change companies, change careers, change cities and change countries to get as much as possible for themselves instead of continuing to be exploited.
This is not something economists disagree upon. All periods of any significant deflation anywhere and at any time were accompanied by economic recession or depression.
If it were just so simple that a “real business” could merely adjust everyone’s wage to balance the books when revenue drop, you would be the world’s most coveted CEO that could save any company.
It ain’t that simple. Businesses make capital expenditures. There’s also often a time gap between incurring costs and incurring revenue.
It makes more sense to me that money should have intrinsic value in and of itself rather than exist as some nebulous digit in a computer that represents nothing but a unit of debt, which is easily and inevitably abused by those with the power to create it from thin air. I don't know if precious metals are the best answer, but money as a commodity makes more sense to me than money as an infinitely dupe-able fiat token with no intrinsic value
You are using a basic understanding of economics then.
You need to understand economics as the metabolism of a larger organism.
This isn't just a hypothetical argument, it is reality. Let's take the digital device you're reading this with as an example. It's not created by any single craftsman. It is the result of millions of people's work. It is a "metabolite" of a larger organism.
You are a node or cell in a larger thing. Everything you know and can do is largely tailored to this system you're currently in.
Consider you are time-teleported back 10,000 years and come across a tribe of humans. Who would be more valuable to whom? Is your understanding of any of the technologies you presently enjoy sufficient enough to reproduce from scratch? Maybe a couple things, but they would most likely have a lot more to teach you than you'd be able to teach them.
I realize the above is very abstract from monetary policy, but the correct premise needs to be set before digging down.
Once you model economics as the metabolism of a larger entity, money reveals its true nature: to control what activities are performed by / within the organism.
There's no such thing as "intrinsic value" -- there is only a medium of exchange or signaling. This signal should not be tied to any physical thing, as that is inefficient to the state of an economy. There are better ways. Imaginary units are a more powerful tool, as they are not constrained by any physical limits.
You may be upset at how these IU's are currently handled, and rightfully so. The current methodology we have is very primitive. Our experts themselves (head of the Fed, treasury) readily admit this. When they take actions they "think" or "expect" it will have this or that effect. And the levers they pull are also very blunt.
When CBDCs come online, then we will start to realize a better economy. They will allow more granular control of things.
Money is a convenient means of exchange and valuation, I don't see the reason why my membership in society (node or cell in larger organism) should require that means of exchange to be imaginary- and I disagree that intrinsic value does not exist, though it may vary in the eye of the beholder. If I approach this stone-age tribe from your example and attempt to trade with them they will not accept my dollars for their goods- to them my dollars are kindling at best. Very little intrinsic value. But a physical commodity perhaps they would accept because it has some actual real-world use to them. Why should one party trade actual useful goods and services in exchange for imaginary numbers? Wouldn't it make more sense for trade real goods for real goods, provided one party's goods are viable for monetary use and can be reliably used as a means of valuation?
I won't argue that imaginary units of money are a powerful tool, they certainly are. So powerful in fact that there is no human on this earth who can be trusted to administer it without rampant abuse. The history of centralized planned economies speaks for itself, and I don't think further consolidation under CBDCs with more 'granular control' is going to improve its track record. The physical limits that constrain the use of commodities as money are what make it a viable as currency, it's a feature not a bug
Monetary policy is one of the biggest reasons for the success of the world economy over the last century. Without fiat currency it would be impossible and loans would immediately get much more expensive, instantly destroying tech investment for starters.
A century is not a very long time, all things considered- we're all still high on the rush from this constant infusion of free cash, these are the good times. But I wouldn't base my entire outlook on how nice the good times are, there are massive risks involved with setting up a house of cards like this. There's a reason the constitution grants congress the sole authority to coin money, and implies quite clearly that money is to be silver/gold or backed by such. Nobody can be trusted with the authority to expand the money supply at will, unrestrained by the physical constraints of a commodity-based currency, free to print trillions upon trillions with no real oversight. That's how you end up with these ungodly banking cartels with disgusting amounts of political power (and all the corruption and cronyism that entails) while the middle class bears the burden of the feds inflationary practices, which is basically just an insidious form of hidden taxation. I'm not so sure that free money for tech startups is worth all that in the long run.
You're not wrong, and of course there are many more factors than just monetary policy alone that affect the lot of the middle class- But I'll point out that the middle class was much better off 50-60 years ago than it is now, back when fiat wasn't abused to the degree it has been for the past couple decades
In the US perhaps, but every other country also uses fiat and the global middle class has never been stronger. That suggests to me that there is a different, US specific reason for widening inequality.
Money having intrinsic value is nonsense. Money is like a spread sheet. It's net worth is zero.
The value you derive from the spread sheet is that it lets you organize your business or economy.
Except that we’ve had one of the greatest economic booms in history and the deficit has exploded. The government has lost sight of fiscal responsibility and society is completely addicted to easy money.
Investments that have a positive ROI are worth doing. Deficit spending is never bad per se.
Arguing about the ROI of a road, education, a new shiny F35 feature, foos stamps, etc. are of course completely valid.
Neither society nor the government is one big hivemind.
There are small government advocates (who usually turn out to be cruel totalitarian dickheads), there's a new wave of young people who parrot "eat the rich" and usually turn out to be clueless idiots cosplaying as leftists, who also say things like "just pay for everything out of thin air".
It's big, it's completex, it's hard, emotions run high, there's a chance of things turning for the worse, while a lot of things are inching toward the better.
The problem with deficit spending is the interest. It gets paid by the taxpayers. But they get no value from paying the interest. And it goes to the bankers, who already have more money than they need.
Occasionally short term deficits and endless bottomless deficits are not the same beast. The latter is simply a lazy political tool used to buy votes and further enrich the bankers.
Almost a third of the US debt is held by federal agencies that manage benefits programs on behalf of US citizens (e.g Social Security).
Another third is owned by state and local governments, mutual funds, pensions, private citizens etc. That is, other US tax payers that receive benefits from the interest.
Only the last third is held by banks and foreign debt holders.
Large deficit spending may or may not be a problem. Economists and politicians are divided on the issue, but the interest generated from the debt largely goes to US taxpayers and it’s pretty well mixed across the economic spectrum (at least compared to other government economic policies).
Exactly this. In a significant chunk of the cases, debt is just left pocket/right pocket accounting within the local economy when aggregating across government sector, private sector and individuals.
If these deficits creates positive externalities (eg. Jobs through expansion of business, new deal program, or even as we've seen in massive programs like NREGA - increasing purchasing power through direct cash deposits). If the deficit spending puts wealth in the pockets of financial speculators, this is often a problem.
Even for external debt denominated in local currency, devaluation is always an option (though may not be attractive). It's only foreign currency denominated debt which is a problem.
If. And if they did there would be endless piles of political fodder. Politicians patting themselves on the back praising their genius. Etc.
That's not happening. Conclusion? If is generally closer to highly unlikely.
As for left pocket / right pocket those shifts have overhead. A program(s) to manage the programs. Let's consider that interest. Let's consider that too little value added to the taxpayers. In other words, the deficit is being used to perpetuate the government and the status quo, and not much more.
In theory I agree with you. Unfortunately, the reality is much different. The fact it has been normalized doesn't mean we should accept it.
Only one third? At the size of the deficit that number is significant.
As for the rest. The taxpayer is paying the interest to borriw as well. So that's a wash. Then there's the bureaucratic overhead devoted to the deficit. That's a loss.
The reality is, it's a net loss to the taxpayer. That is money is magically moving around and too little value is being delivered. Ask any taxpayer if they're getting value.
Except there are almost no programs where the government can actually deliver positive ROI, and the government never has any motivation to actually do this and report on it.
I think in almost all cases except where private markets can’t deliver (for example police, army, possibly roads), private markets will almost always use money (or resources) much better.
In what countries is healthcare "better" when private markets deliver it? Here, the term "better" has multiple meanings: cost vs quality/outcomes. Example: Some people say that the US has the "world's greatest healthcare" (whatever that really means), but most people can agree that the US poor cost performance (high cost, poor outcomes).
To editorialise for a moment, as I read about various public healthcare systems around the world, the diversity of systems is large, including outcomes. Almost none of them in highly developed countries are good and cheap. In these countries, healthcare is damn expensive, no matter how you do it. It's very difficult to spend less than 10% of GDP (that is huge for these countries) and have "good" healthcare.
Another topic about which academics have debated for decades: Same question as above, except primary/secondary/tertiary education.
Let’s look at actual problems with the US healthcare system. I’ll propose ways that if the market for healthcare were actually free, it would be better. It is not actually free because in the US, employers typically provide healthcare, and if you do not have an employer who does, the plans are prohibitively expensive.
Issue: People lose healthcare when they switch their jobs.
Solution: Have people purchase their own healthcare rather than receive it through their employer.
Issue: People don’t like their healthcare plan.
Solution: Allow individuals to choose their own healthcare plans. They know what they need far better than their employer does.
Issue: People cannot afford the healthcare plan they want.
Solutions: Stop throttling the amount of doctors who can attend medical school so that there is a sufficient supply of doctors. Higher supply will lower prices and improve outcomes. Institute outcome-based pricing schemes, i.e. providers get paid when they fix your problem. This will fix insurance companies’ and providers’ misaligned incentives; right now, their goal is to charge you as much as they can for health care and provide you as little as they can. That maximizes their margins. If they were only paid when they solved issues, I’m sure they would prioritize that.
IMO, the debate over “public” vs. “private” healthcare is a false dichotomy. The US does not have a private, free market healthcare system today, but proponents of public healthcare use the current state of it to argue against private systems, since it isn’t public. Proponents of private healthcare ignore anything that could improve the state of healthcare because they do not want to see it socialized and assume all suggestions will come in this form. The people in need of healthcare are left with poor healthcare as politicians fight imaginary healthcare dragons.
There is also a secondary issue in the healthcare discussion: prevention. Why do we have to spend so much on healthcare? It’s not like the human body spontaneously breaks down at such a fast rate. The actions we take as individuals, and as a society, cause a lot of disease. If we are concerned about healthcare prices, it is disingenuous and negligent of us to not look at what is driving our healthcare costs.
“ It’s not like the human body spontaneously breaks down at such a fast rate”
A significant amount of healthcare spending in the US takes place in the last years of life which is, indeed, just the body breaking down at a fast rate.
For those interested, I went and crunched the numbers. Statistics are from 2014, from [1] and [2], so a little outdated:
11.4% of medical spending on ages 0-18 (23.11% of population)
21.0% of medical spending on ages 19-44 (36.23% of population)
33.2% of medical spending on ages 45-64 (26.17% of population)
34.4% of medical spending on ages 65+ (14.5% of population)
So there is definitely more spend in older age, which makes sense, but the majority of spend is in populations I wouldn't consider old (<65). Additionally, what we consider "old" is really a reflection of average lifespan, and if we had healthier habits as a whole, maybe "old" would be older than "old" is today. By definition, old is when the body does start to break down at a fast rate, like you say, so I suppose it is tautologically true. However, I don't think it means we have to accept high healthcare costs related to that.
American healthcare is excellent at keeping people alive that would probably have died under other healthcare systems. That is, it extends the long tail out, with rapidly increasing marginal costs (in a "money is no object" situation). This is why a lot of people who could afford to go anywhere and obtain any medical treatment they want often come to the US for it.
It's not so good at keeping regular people healthy so that they don't need expensive care to begin with; though I'm not sure if this can be blamed on the "healthcare system" per se, versus cultural or educational factors. The average American is quite unhealthy.
It's quite bad at delivering routine care at reasonable prices. Get in a car wreck and break your leg? Want to deliver a baby at a hospital? It will get done at high standards and short wait times, but the bill if you're uninsured or underinsured will be eye-watering. This is a result of broken incentive systems surrounding healthcare in America, and probably deserves a lot of policy attention.
Currently, we don’t actually know the answer to that because the United States is subsidizing all of the research advancements in healthcare. We’re paying out the nose and the rest of the world gets the benefits at a discount.
In much the same way that environmental costs of business operations are subsidized across society instead of being born by the business itself.
Infrastructure and education are two fields where it is often easy to demonstrate positive ROI. Of course not every project is good, but in general both drastically increase the productivity of their society.
Food stamps and pension funds are a bit harder, since they mostly boil down to three arguments: ethics, crime and stability. People tend to turn to crime when they have no viable other means, so feeding them is a way to reduce crime, and crime would cost more. Also people who are desperate are more likely to revolt, which is either very costly to the government or entirely prevents them from doing other activities with positive ROI in the future. So they are cost centers, but arguably necessary.
Postal service, telephone, internet and public transit would also fall in the infrastructure category. Societal benefit is often much larger than the willingness of the individual to pay for it, so it makes sense to have them either run or subsidized by the state.
Universal healthcare can deliver positive ROI by being more effective than the private alternative. As a society we want citizens to be healthy, because healthy people are happy and productive, and don't infect other healthy people.
I completely agree that governments should regularly run and publish ROI calculations, or maybe there should be an independent watchdog that does this. And a lot of money seems to be wasted because people on all levels of government have the wrong incentives. On the other hand, one of the major reasons why the idea of governments is so widespread is that they regularly do provide positive ROI overall.
If you look at the projects funded by the Roosevelt New Deal (where the stated purpose of the spending was to reboot the economy and create employment, rather than chasing a particular return), a lot of them returned many, many times the government's investment. For example, the Tri-Borough Bridge, the Hoover Dam, the paintings of Jackson Pollock.
> Except there are almost no programs where the government can actually deliver positive ROI, and the government never has any motivation to actually do this and report on it.
This is sharply contrary to figures I've seen on the outcomes of government spending.
Don't think of "government" as one entity. It's helpful to think of "government" and "politicians" (yes yes, branches of gov, but go with it.) Politicians have no incentive to be fiscally responsible; government does.
This kind of "double think" is by this point classical. I can't begin to count the amount of people I've met who are absolutely sure that the majority of their countrymen are too irresponsible to rule their own life, by virtue of them being mere humans, and that politicians are a bunch of crooks. Then they turn around and say the "government" and "authorities" should rule people's life. Clearly the politicians have no influence on the holy "government" and the "authorities" are of course not manned by those mere humans?
I have seldom seen government incentivized to be fiscally responsible. It comes in extremely unnatural shocks. With one hand you're doing flashy multimillion dollar upgrades to the shiny new training simulator/science lab/whatever; with the other you're telling everyone to stop printing so many pages of materials for students.
This is an interesting point not well broadcast I don’t think. I was just daydreaming the other day about the Amish HN post regarding their leaving South Dakota and wondered about why they couldn’t pay their taxes in grain or some other substance. Why can’t we barter with the government? I couldn’t advance that curious questioning any further, but your statements above may be the piece I was missing. I wonder where specifically the law is written on the books around this subject. That would be a worthy reference to post here for rich context.
Or, in a free market, why didn't some business play middleman - bartering grain with the Amish for whatever they wanted, selling the grain, and paying their taxes?
Fiat currency owes its value to the threat of violence and/or loss of liberty? We are effectively bullied into buying into the system? And have little recourse but to comply?
Makes sense, but I do need to think about it.
That said, on the weekend I did listen to a podcast where at one point taxes were (indirectly) described as behaviour modification.
re: The right gov response...
In theory yes, but only if the system's purpose is to maximize the benefit to all. On the other hand, if the system's purpose is to tilt the game to favor the few then responses can take many forms, as long as they enforce the tilt. A simple graph of income inequality and wealth distribution tells us all we need to know.
>That said, on the weekend I did listen to a podcast where at one point taxes were (indirectly) described as behaviour modification.
Just wait until you hear about this thing called the law and the police force...
For example, when the government introduces laws that prevent underage children from working, they do behaviour modification and they will even outright admit it and they won't even think they are wrong. Really insidious stuff, if you ask me.
> if the system's purpose is to tilt the game to favor the few
I wouldn't say it's the purpose, since banks are better at extending loans than the government such that losses are minimized, but getting first dibs on newly created money, and taking a small cut of it, is an incredible privilege.
Yes. But when that privilege is abused then things go sideways. Given the concentration of wealth and it's getting more so, I'd say were deep into sideways.
The economy only works if you have a slightly inflationary, stable, highly liquid method of conducting transactions.
Yes the govt has created a moral hazard where they can always just create more money to solve a problem, but inserting a ponzi scheme does not fix that
> The economy only works if you have a slightly inflationary, stable, highly liquid method of conducting transactions.
What's this statement based on?
As a thought experiment, say a load of survivors wash upon a deserted island, eventually settling into economic roles. I don't think their economy or productivity grinds to a halt because there isn't enough liquid currency. They are constrained by their access and production of real world resources.
Imagine one person on the island is good at fishing. He will stop fishing as soon as everyone has plenty of fish to eat because there is no way to liquidate his assets.
But if the island became connected to a trading route he could trade excess fish for gold or another non perishable asset, he could store up those assets. But he would only do that if he believed that those assets had liquidity.
> He will stop fishing as soon as everyone has plenty of fish to eat because there is no way to liquidate his assets.
Sounds like his problem is lack of demand, not currency liquidity.
> But if the island became connected to a trading route he could trade excess fish for gold or another non perishable asset, he could store up those assets. But he would only do that if he believed that those assets had liquidity.
Ok, but that kind of breaks the island economy experiment, given that he was already trading fish in a closed system for some other good or currency.
Inflation is value confiscation. It's a tax. It reduces the burden of the greatest debtor (government) at the expense of everybody who holds dollars and produces value.
If you want to live in a society were the banks and wealthy individuals can make significant income by doing literally nothing, that is fine, but the rest of us would like to live in a world where goods and services are produced at a rate similar to how they are produced today.
You don't seem to understand what literally nothing means.
When there is deflation you do nothing. You don't even go to work. You don't even look at your bank account or the money. You don't think about it. You just wait and do nothing. It is the equivalent of taking a drug that makes you feel good. You won't find the need to actually accomplish anything.
If there is inflation, then banks actually have to do their bank related tasks to earn the money, people actually have to sit at their desks.
What you're describing is the exact way that large swatches of the population live. They were smart enough to make themselves be born earlier than other people and they can spend decades or even their whole life doing literally nothing, taking out another mortgage on their real estate as the value continues to increase.
This is not a tiny 1% of the population. I would wager that most people reading this thread has at least one person among their friends or family who live a good life without having contributed much to the economy, or even having never contributed anything at all. Riding the wave of inflation in real estate.
Tell me again why I and others should contribute to the economy to support these people's lifestyle?
No one is saying that we think you should support someone else's lifestyle. We are saying that if all currency went up in purchasing power all the time, that the problem of people doing nothing would be worse than it is today.
What you are talking about is something different, some sort of work police or something that forces everyone to work the same amount or something like that.
Function means that most people that want jobs have jobs and most people that want to purchase goods and services are able to purchase goods and services.
Imagine if you went to a grocery store and it was completely empty. That is the situation in Haiti currently. That is a nonfunctional economy.
Functional does not mean that everyone has everything they want at the price they want.
We have whole generations who are extremely productive in the economy, but are being denied the basic necessity of having their own home. That is a non-functioning economy. Well, of course it functions greatly for those who are in the position to exploit such an arrangement.
It's like a sheep farmer thinking he is successful because he decided to kill all lambs every spring instead of letting them grow to adults. Sure, the meat tastes nice now, but he has destroyed his future for short term gains.
> Functional does not mean that everyone has everything they want at the price they want.
Nobody is demanding anything close to that, people want the basic necessities and have no way of getting them. Or should they just keep working hard and be grateful that they're not in Haiti.
The absolute best thing a young, enterprising person from a Western country can do today is to move out of that hemisphere and establish themselves in another country. That step gives a massive increase in quality of life, as well as a much better prospects for the future.
Very well put! Just to add, this is also the reason why every nation has extremely complicated taxation systems, taxing income, property, sales transactions and everything else under the sun. Sometimes people suggest a more simple and fair way for tax collecting, but the rulers need to tax every aspect of human existence, or else people would just instantly switch to other assets for storing and exchanging value, which would mean the total collapse of government and the rulers losing their strangle hold on the population.
I'm not convinced it's tax collection specifically that gives value to the dollar. If the US government collected some taxes in bitcoin it would still have to pay its obligations on existing dollar-denominated bonds. So it would sell the bitcoin in exchange for dollars, thus creating demand for dollars.
I think that if people increasingly wanted to use cryptocurrency over dollars, the Fed would nevertheless be able to maintain the value of the dollar even as they got less common. Eventually the currency would disappear when the last dollar was traded to the Fed to pay off the last dollar-denominated bond, and I think dollars could maintain their value until that happened, even as the government started collecting taxes in other currencies.
You ignore the other way more relevant use case: if I want to buy something at a store, the store is required to accept the nation's official currency. It might accept other currencies, but my guess is that it would be illegal to give customers any benefits or reactions if they use other currencies.
> Is it legal for a business in the United States to refuse cash as a form of payment?
> There is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law that says otherwise.
In 2009, some Detroit businesses agreed to accept a local currency called a Detroit Cheers (aka Detroit Community Scrip) [0]. Per Wikipedia “ Modeled upon the local scrip that were used during the Great Depression, it was being used to restore local financial confidence following decades of economic decline. ”
Taxes would be based on fair market value at the time of the transaction. There are policies around this already, otherwise the rich could avoid taxes by bartering with cars/watches/paintings.
Sounds like it's just making work for the IRS. I'm curious if the situation is the same in Australia. Can't find anything definitive online, though I've never heard of a business here taking payment in anything other than AUD (except at the airport, where many retailers will accept other common currencies).
Is it similarly legal (in the US) to pay workers in "alternative" currency-substitutes?
Debt creation also gives value to the dollar. In 2020, which was an odd year which highlights the point, deficit spending came near to revenue from taxes.
In the future as the workforce shrinks and liabilities increase I imagine deficit spending will regularly exceed tax revenues.
Only because enough people believe that's true, and then only because there are aircraft carriers that convince people in other countries that it's in their best interest to use them.
> the same people who swear cryptocurrencies have no intrinsic value and are therefore worthless continuously say “there is no problem because the government can simply create as much money as it wants out of thin air.” So they are implicitly saying that any currency has value because people believe it has value but don’t extend that generosity towards other assets where there is a clearly demonstrated group ascribing value to it.
I don't know if I'm one of those people, but I'd say that no currency has any intrinsic value. Land, labour and production capital have intrinsic value, but I don't even see gold as having intrinsic value; it only has value because we agreed to consider it valuable. The value of any currency comes from the economy that uses it to pay for stuff. Dollars are used to pay for a lot of stuff. Bitcoin was supposed to be used to pay for a lot of stuff, but it seems to have turned into an investment toy. Actually using it to pay for stuff is slow and expensive, and only really worth it for transactions where anonymity is important enough to make the cost worth it. And that seems to be mostly market for crime.
But please correct me if this is outdated and there's now a thriving economy of people buying all sorts of goods with Bitcoin.
I'll nitpick the "gold doesn't have intrinsic value" part: There's a limited supply of elemental gold on the planet, it takes some effort to extract it, and it has unique electro-chemical properties that make it productively-useful for industries. You could consider the jewelry use of it to be "merely aesthetic", but I would argue that even in that aspect, it has demonstrated intrinsic value. So many cultures over so many hundreds of years have valued its use in to enhance beauty via jewelry, which you can think of as an aid in attracting mates, etc, which definitely has intrinsic value to many humans.
We shouldn’t conflate money with payment systems. Like 90% of my daily expenses are through a credit card. The unit of account for these transactions is my local currency (happens to be JPY) but yen is not being exchanged. What happens is that I give an IOU to the bank and the bank gives an IOU to the merchant. These IOUs are settled on a recurring basis, at which point actual money might be involved.
In the strict sense only physical banknotes, coins, and reserves at the Fed are money. Everything else involves a counterparty and some level of trusted intermediation. If there is ever a significant amount of economic activity that is priced and settled in Bitcoin, we can be sure that most of it will be through trusted intermediaries just like every other currency.
So as a new type of money is introduced, at first, the money itself is the payment system (you take coins and banknotes from your pocket and give them to the marchant), and as economic activity and technology grow, the payment system gets taken over by bank transactions and stuff like that.
And in a way we currently see that already for bitcoin: lots of people keep their money not in their own wallet, but in that of an exchange, so it can be more easily traded. The downside of that is that you don't control your money anymore, and there's no legal framework to protect your ownership of that money, so people have been losing a lot of money to fraudulent and incompetent exchanges. But that change also kinda defeats the original purpose of bitcoin.
> But that change also kinda defeats the original purpose of bitcoin.
The original purpose of Bitcoin was to take power away from governments who could artificially devalue your money, not to protect you from fraud or ignorance.
Along with that also came the choice - how much do you want to trust someone else with your funds?
You can go full "zero trust" and build your own Bitcoin client from scratch, rely on your node to see what transactions are included in chain, and self-custody your own funds. You can have some trust and only self-custody your funds/use a multi-sign wallet with your family so you lower your personal responsibility to not lose funds, or you can allow someone else to hold funds for you if you fully trust them. You can also make any choice in between.
Having that freedom to choose the level of trust you want to have is one of the major values crypto offers, though most people will go with the "full trust" model since it's the easiest and they don't care about decentralization enough to worry about self-custody.
I know. And so do many other materials. But I hope you're aware of gold's role as financial backing, and that that role has nothing to do with its useful properties in electronics, medicine and science.
What is the odd statement here? You know very well what I'm talking about, and yet you want to play dumb? The value of gold as financial backing does not come from its electrochemical properties. You know this. So why keep pushing that issue?
Yes, crypto is fiat money just like government issued currency. The USD, though, is backed by the US (the government, military, economy, etc.) and generally monetary policy is an advantage of government issued currency.
With crypto, usually be design, you actually have zero ability to alter how it is managed. It’s even less power than your vote gives over the USD.
It may be backed by the US but there is no guarantee of it holding its value especially when the government has become extraordinarily reckless with monetary policy. While we’ve never experienced a serious crisis of confidence in the dollar and there are many who have predicted hyperinflation since the 70’s, I do not believe you can exponentially increase the supply of something and not see its value diminish. The pace and looseness of monetary easing over the last decade and especially the past few years cannot be overstated.
The guarantee is that the USD will _not_ hold its value. And if you don't trade your natural resources in USD, the other guarantee is that your country will get bombed.
The USD actually has to always inflate to stay relevant since it drives much of the world's markets. Over time there has to generally be an increased supply of the green bills because other countries become more affluent. It is one of the reasons why the Nixon Shock happened - the gold standard became too restrictive, and since the USD was tied to it, it became unsustainable. Countries like France were considering exchanging their USD with gold, which would have seriously depleted the US gold deposits.
I think that depends. An active participant in the Ethereum ecosystem probably has much more influence on Ethereum policy than a median US voter has on USD.
Possibly due to crypto still being niche and relegated to internet communities while the USD is the official currency of several countries, the largest having over 300 million people and trillions of dollars flowing through it per year.
The greatest feature of a centralized currency is the ability for the governing body to step in and become a lender of last resort when once a century crises hit to stave off a depression that could take decades to repair. The trouble is that once a century is becoming once a year now.
We don’t have a lot of good history on this, but there’s basically only one instance of such a deep and lasting depression and it occurred after central banking was established, not before.
> there’s basically only one instance of such a deep and lasting depression
Because we didn’t measure for it. (18th-century GDP is post hoc estimated.) The 19th century, during the free banking era, featured multiple 30%+ drawdowns in business activity, greater than the Great Depression, albeit against a smaller baseline [1].
I don't think this is the correct interpretation of 'fiat currency'.
'Fiat' of course refers to making something come into existence simply by saying it, as G_d supposedly did with the words 'Let there be light'.
My understanding of 'fiat currency' is that it is not the currency as a whole which comes into existence by fiat (which would seemingly apply to most currencies, including Bitcoin and metallic ones), but that individual units of the currency come into existence by fiat. The government (meaning the union of the Fed and the Treasury) can create additional dollars simply by writing 'X has Y dollars'. No one can create Bitcoin in this manner, so it is not a fiat currency.
People really do not understand the mechanics of money; to the extent that the Fed is "creating" "money" through credit, that's an intrinsic part of how credit works. It also works in crypto. We saw how in FTX: "crypto-on-an-exchange" behaves like a bank deposit, in that it's a debt from the exchange to you, and can be created by extending a loan to another organisation; it is then "un-created" when the loan is paid back or defaults.
If you get paid $20/hr, you can think of $20 being intrinsically worth an hour of your labor until you quit or get a raise. The dollar isn't actually intrinsically valuable, but it's mostly treated as such anyways because no matter how the currency changes due to inflation or exchange rates, you're still only getting $20. On the other hand, if you get paid in crypto, you'd get paid $20 worth of that crypto. Today it may be 1 coin, tomorrow it could be 2, and in a month it could be .1 coins. In that case, how many coins you get paid in this crypto completely depends on the supply and demand on this crypto.
>the government seems to show less and less restraint in exchange for instant gratification
The good news is that. Raising interest rates is the opposite of short term gratification, which is why so many people want it to stop.
>Emergency measures are there for just that, emergencies, but it seems the bar for what qualifies for an emergency gets lower and lower.
Agreed. But you can't blame the the cardiovascular surgeon for performing a triple bypass surgery. The blame falls under the patient who is addicted to eating barrels of pork.
> If you get paid $20/hr, you can think of $20 being intrinsically worth an hour of your labor until if you quit or get a raise. The dollar isn't actually intrinsically valuable, but it's mostly treated as such anyways because no matter how the currency changes due to inflation or exchange rates, you're still only getting $20. On the other hand, if you get paid in crypto, you'd get paid $20 worth of that crypto. Today it may be 1 coin, tomorrow it could be 2, and in a month it could be .1 coins. In that case, how many coins you get paid in this crypto completely depends on the supply and demand on this crypto.
Piggybacking on this, the same example can be extended towards other currencies & assets: That $20 could've also been paid in pounds / euros / yen / gold / silver / seashells / MTG cards. The first 3 are less volatile than the rest, mainly because of the per-unit density of liquidity that can absorb the exchanges in between A & B (ex. USD-yen, yen-euro). For the currencies, they have much deeper liquidities to exchange with/against concentrated around narrower price ranges, and as such prices are not as volatile as commodities & assets. The exception to this however is if the currency in question is perceived as weak.
> “there is no problem because the government can simply create as much money as it wants out of thin air.” So they are implicitly saying that any currency has value because people believe it has value but don’t extend that generosity towards other assets where there is a clearly demonstrated group ascribing value to it.
Prior to 1971, federal reserve notes were backed by gold. Their value was generated out of thin air even then - a piece of paper with a promissory of gold is not a bar of gold.
Today the US holds thousands of tons of gold at Fort Knox and other places. Why? Why does it do this? I can assure you the 9 billion dollars worth of Dogecoin out there do not have thousands of tons of gold out there implicitly backing them.
Beyond all of this, your point that countries don't have printing presses that can generate am infinite amount of value is valid.
"the government seems to show less and less restraint in exchange for instant gratification and short term benefits"
I'm not sure whether you're talking about raising the rates or reducing them. But the idea that reducing rates is just instant gratification is just false. The rates simply dictate how willing banks will be to loan money out. It's a tool. Countries have used this to spur foreign demand of their goods for years. Portugal Italy and Greece used to do it all the time. Once they joined the Euro and they were no longer able to inflate at will, their economies tanked.
It's better to think of money like shares. The total amount of shares outstanding doesn't really affect much... it's the relative proportions that people control and the percentage of equity that those shares represent that matters.
> It's better to think of money like shares. The total amount of shares outstanding doesn't really affect much... it's the relative proportions that people control and the percentage of equity that those shares represent that matters.
Inflation is not evenly distributed. Newly created money goes to the rulers first, then to their lords and vassals etc. The people who actually produce in the economy are the last to receive the new money after it has been completely diluted.
>> any currency has value because people believe it
There is no contradiction. Your rant is coming across like all currencies are the same, they are not.
People tend to believe the U.S. Govt more than say Venezuela (no offence).
Even amongst currencies, the USD is special due to the underlying tie to oil sales. See https://www.lynalden.com/what-is-money/ for a much better introduction than I could ever give.
The tie to oil sales is not exactly that. The USD is tied to the threat of military force by the Federal Reserve's government. You will get bombed if you don't trade your oil in USD.
I am one of the guys that says money do not have intrinsic value. Or more precisely it "value" is due the fact that they enable trade and enable time shifting the trade (That is store value). My mental analogy is that money are lubricant. Too little everything grinds to a halt (deflation crisis) or too much and it burst seals and spills everywhere (inflation crisis). So there is clear signal to the population that something is wrong with money. Then if you live in democracy you have say on the policy. That is why democracies tend to have more stable currencies compared to autocracies. And lack of this stabilising feedback loop is main critique of cryptocurrencies. Note how unstable value of bitcoin is - it goes from massive inflation to deflation and back very often (single years time spans).
I was just referencing the fact that we have no democratic say over the fed rate in the US. Not trying to say democracy is bad, just that we don't really have it with respect to interest rate policy.
FED chairman is elected by POTUS and confirmed by Senate. With 4y term. That is your say - it is indirect but most (all?) things in modern democracies are indirect. Obviously on top of that there are more soft influences - such as public opinion.
“Elected by POTUS”… You mean appointed... Appointments and public opinion could affect rates in non-democratic countries as well. Anyway we’re on the same side. I just want a more directly democratic influence over the rate
Usually when people say that about crypto, what they mean is that close to 100% of the demand for it is based purely on the expectation that it will go up in value.
Remove that expectation and almost all of the demand disappears.
What most people don't realize about this covid-related inflation is that it was a different beast... it wasn't due to excess demand, it was due to restricted supply. The fed using interest rates to beat inflation down could make sense when unemployment is at 2% in a normal economy, but when we're still experiencing global supply chain issues, you don't raise the rates. That's not the right way to beat inflation. Suppliers need loans to keep their doors open and expand capacity again. Raising the interest rates restricts access to these loans, and the shortages just stick around longer. Of course the people running the show know that, but they're using the excuse to raise rates to consolidate their share of the economy even though they know what will happen.
The other thing that was driving the inflation was rich people using the PPP loans to speculate. If the goal was really just to control inflation, the fed rate isn't the only way. They could also have made the tax rate more progressive like it was in the 50s and 60s. But of course they haven't gone there in a long time.
Maybe what's needed is a rejiggering of the supply chains instead.
Shorter chains. i.e. bring back the local supply that we sold overseas decades ago.
Obviously the fed can't make that change, but I was reacting to your implication that we just need to get back to where we were before Covid. I feel we were already losing altitude before Covid, the overhead airbags had already deployed.
And just to further derail the conversation, was it really Covid itself that caused the supply chain disruption? Perhaps I could be convinced that somehow Covid got us into the current mess but I guess it would still follow then that if a Covid-like pandemic could take out the global economy for (checks watch) 3 years and counting, the problem still ultimately comes down to a dependency on an obviously fragile supply chain.
I'm fine with that, but that rejiggering takes liquidity. Trying to rejigger without loans being available is just going to end up being de-jiggering. If we want to control inflation, that's fine, raise taxes
The frustrating thing with the inflation crisis is that a lot of it is an emotional response to eg food prices. This is totally valid! Vital goods going up in price is scary!
Wages also have been going up, maybe not as fast as the price of some goods, but still pretty fast. The issue is that people are very quick to internalize a rise in wages (I did this! I changed jobs, got better at my current job, got promoted etc.) and externalize a rise in costs (gov spending is the reason eggs are expensive!) when really the two things are very connected.
People are pushing their representatives to tackle inflation without thinking for a second that this might mean they'll get fired or take a paycut. All the gains they've made since 2020 are personal wins, all the inflation is due to government spending.
Blaming wages for inflation is a misconception. Wages are always the last to increase with inflation - because the purpose of inflation is to exploit more resources from those who actually work and earn wages.
I'm not blaming wages for inflation. Just noting that inflation is also responsible for a large proportion of many peoples raises and promotions etc. The government tackling inflation is going to repress wages.
Fiat is created through loans, in other words, people contractually obligate themselves to accept the currency as payment and they implicitly agree to a certain price level. This means that the price level ends up very stable because there is predictable demand for fiat and people can't just dump it like a hot potato immediately.
With cryptocurrencies there is hardly anyone that uses it for payments or loans. People mostly speculate with it. If people suddenly think it is worth much less then it will have a sudden change in its price level. Worst case, it can go to zero in a day.
Creating money without loans is a bad idea because it makes it much easier to have high inflation as there is no mechanism to take the money back.
This comment is a prime example of something that makes sense on the face of it because the rebuttal requires knowledge on how money actually works.
For example, you completely glossed over the fact most economists agree that, for money to have value, it needs to be a good:
1. Medium of exchange
2. Unit of account
3. Store of value
To achieve this, a currency needs a certain level of stability and to be accepted by the institutions you need to do business with i.e. governments. Money & Macro has some great videos on this topic. This one on China's attempt to replace the US Dollar as the reserve currency is a good starting point: https://www.youtube.com/watch?v=49iLl-V4xos&t=653s
I’d say this is the high school textbook version of the story. Money is simply the “best” medium of exchange in a given context. Stable value and fungibility (“unit of account”) are attributes that make something better at this role, because it becomes suitable for a wider range of transactions across time and scale. Ludwig von Mises has a lot more to say about this.
One difference is that countries know reasonably well how many citizens they have, and how many “trust the system” (however you want to define it).
Those “other assets” that mention are obscure by definition. You can claim that “your cryptocurrency has millions of users”. Are those real people? Or are those two guys in a data center with a shellscript? Compound that with the extensive marketing, posturing, hyping and gaslighting and the “people believe in it” argument loses strength.
Besides, the main criticism has never been “people don’t trust on them”, it was “there’s no regulation”. The continued rug pulls, scams and steals should already make it clear how this is a problem. And this is by design.
> it seems the bar for what qualifies for an emergency gets lower and lower
Maybe you're right about that, I don't know... But even if it was not the case, we'd still expect emergencies to occur more frequently today than in the past, and even more frequently again in the future.
You know, climate change and inconsiderate usage of finite resources within a finite volume and always-increasing entropy and all. The link is direct.
As a fellow crypto non-enthusiast, I agree with all of this. I thought that the best way to look at cryptocurrency and the crypto ecosystem is as a satire of the world of finance, etc. This is still accurate, I believe, but it can be easy to overlook how subtle a satire it is.
The USD is valuable because the US government demands its taxes be paid in USD. If you want to operate in the world's largest consumer market, you need dollars.
As an actual crypto enthusiast, I fucking hope not. Can you imagine if the entire planet switched to using proof of work cryptocurrency? The energy usage of the network would dwarf that of the largest country.
Less than the Bitcoin network would use if the entire world switched to it.
At it's current usage where maybe 2-3% of the global population has ever actually performed a transaction on the bitcoin network, and next to no one uses it as their primary network for transacting, it used the equivalent energy of the entire country of Brazil, which has half the U.S. population (though less than half the energy usage)
To be clear, the energy usage is a function of price more directly than it is of actual usage, it just so happens that the price would continue to increase if people actually used it for real-world transactions.
I also don't think there's anything inherently immoral about energy usage. Bitcoin can theoretically help us access remote natural sources of energy and convert it to wealth instantaneously with just an internet connection when otherwise it would be infeasible to transport
I, too, dislike some thing about fiat. But the real question is how is the energy usage "worth it" compared to other cryptocurrencies that wouldn't consume 20000 Twh /yr (more energy than is currently produced on earth) like Bitcoin would in this wet dream fantasy of yours?
Proof of work is the key innovation that secures the decentralized network. Thinking that something is possible with no energy is the real fantasy land of scammers (aka proof of stake)
Proof of stake has some measures of security that proof of work doesn't. Essentially, the cost to perform a consensus for a bad actor (or set of bad actors) attack might actually be higher. We've already seen centralization of mining pools on the bitcoin network, very nearly leading to 51% attacks on multiple occasions. We've also seen "Eth Classic" and several other proof of work networks suffer consensus attacks.
Of course, there are ways the proof of work model is better too. There's tradeoffs both ways. But nothing offered by cryptocurrency makes up for the enormous energy usage of proof of work at scale, so the other consensus mechanisms are the only real, sustainable models for world-wide adoption
Nothingburger. It’s as valid to be concerned about these accounting losses as it would be to suggest that by removing a source of income from the Treasury it’s fighting inflation.
hey, i dont know much about central banking/economics, but i feel like i know enough to know that I know nothing. it seems that this topic produces the lowest-quality, highest-confidence responses of any on this board.
You and a few others seem to be the only posters with an proper understanding of the topic. But I could be wrong - you may be as dumb as me.
Could you point me in the direction of some resources that can help me be literate in this topic? I have already read the BoE paper that gets passed around here.
Just watched the latest Ray Dalio video on the SVB collapse, and it got me thinking. We lived under zero rates for so long, how many investments made during those years are now underwater? When rates are 0, any risk adjusted return greater than that is profitable. SVB's situation was odd (had they not had a liquidity crunch, would we have found out they were in trouble? Mark to Market vs. Mark to Maturity). What about the broader economy? Like .. regular public companies or pension funds or whatever. Isn't everyone in the same situation where they don't have cash but rather, they have assets. But now, cash pays a high return (5%ish). Why not just sit on cash (or require risk adjusted returns to be in excess of 5 %)? What am I missing? If the concern is valid, how will this play out?
This is the entire reason the Fed manipulates rates in the first place. When it wanted to accelerate growth, it cuts the risk free rate which pushes investment into riskier assets like equities. When it wants to slow the economy, because of elevated inflation, it increases the risk free rate which acts to pull money away from riskier assets like equities.
That’s not a concern, that’s the system working as designed.
You are right of course. The fed wants businesses to stop/slow down investing and only prioritize high returning projects. But since rates went up so quickly, are various sectors really prepared? E.g unsophisticated home buyers who got ARMS clear ly were not. It was shocking to see SVB make a similar mistake .. but was it really a mistake? In hindsight, if you had crappy assets (e.g. low yielding MBS), as soon as the fed started tightening you should have sold off your assets (albeit making a small loss). Are people really doing that? It seems the expectation was that rates would go down again in a year (mid 2024) so it seems people just "let it ride".
I guess the equivalent argument works for a house too but transaction costs are high (and you need a place to live in the interim). Someone could have sold their house right as tightening began and bought the house back once rates stabilized.
For homeowners, I can’t imagine why anyone would have gotten an ARM when 30 year fixed were so low. The US standard mortgage only really exists because of government intervention and was a huge gift.
I mean, I know people did but it’s hard to figure out what they were thinking.
What SVB should have done was raise additional capital much earlier. Rates didn’t just start rising in the last year. Even if rates did start falling again they could do a dividend or stock buyback. We expect banks to be conservative.
I need to tell you something about Canada (and maybe the rest of the world except the US) .. we're F'ed. Most of the world does not have 30 year fixed rates. That's a unique American gift. (I guess because of how Fannie May/Mac work).
To clarify for those who are interested, in Canada you can still get a home mortgage with a 25-year amortization period (or 30-year in some circumstances), but the repayment terms are generally renegotiated on a regular basis: generally on a 5-year cycle, but with options between 1-7 years. For most people, they’re generally just making a choice between fixed- or variable-rate and open or closed (early repayment without or with a penalty). Looking at today’s rates, I’m quite thankful we locked in at a low 5-year fixed rate right before rates started to climb, but there’s a lot of folks who are going to be having a rough time here…
I don’t have a good intuition for when it’s prudent to take a mortgage if only ARMs are available. Off the cuff, I’d think you’d want to have a significantly lower DTI to start with so you can survive some interest rate increases.
The standard US mortgage is a 30 year fixed rate loan, with no prepayment penalty, as low as 15% down, a narrow spread over treasuries, and in some states no recourse beyond the security. Foreclosure is expensive and selling a seized home is expensive.
This is not a loan any sane person would ever write out of his own pocket. It is available because of a web of government programs and incentives, above all Fannie and Freddie.
Thanks for clarifying. I'm in the UK and it doesn't sound that different, except we don't to my understanding have the Fannie/Freddie situation. I don't see why it's such a bad deal for the loaner, unless defaulting is high?
My understanding from some friends in London is that there are not 30 year fixed rate mortgages. The interest rate on your mortgages get fixed for a few years and then float.
Ah - yes. I see the difference now. I don't really understand why the US does it that way, then. Why not do shorter-term mortgages that price in risk? Or is it doing that in a way I don't understand? (But then why is the government involved?)
Well that’s exactly it. For the homeowner 30 year fixed is great. You know that your mortgage payment is never going to go up, regardless of what happens with the interest rate. On the flip side, if interest rates fall since we have no prepayment penalties you can just refinance and pay less.
It’s great for the borrower, which means it’s bad for the lender. There’s some spread of interest over treasuries that might make it worth it for them anyway—like if it was the 30 year bond rate plus 10% or something, but the spreads are narrow.
That’s why I said I don’t think it would exist accept for extensive government intervention, because it’s such a good deal.
As for why the government decided to get so involved, it goes way back to before my time. Now they’d have a hard time extracting themselves without making a lot of homeowners very mad.
Operating losses means that the Federal Reserve is paying out interest to banks in excess of the amount that it is earning in interest. Historically that wasn’t possible because the Federal Reserve didn’t pay interest on reserves. It has to do so now because its balance sheet is so large due to QE that it can’t influence rates by shrinking its balance sheet.
This is significant because the losses are born by the taxpayer which violates the constitutional mandate that all spending is approved by the house. The Fed is sidestepping this by booking the operating losses in an accrual account to be booked against future interest earned.
> Monetary policy was all but assured to generate Fed profits prior to 2008. That changed once the Fed started paying banks interest on their reserve balances and making large open market purchases of long-maturity Treasurys and mortgage-backed securities
The Fed is currently paying banks 4.9% on their reserves (this rate was always 0% before 2008). and they pay you close to 0% on your checking account. When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point.
>The Fed is currently paying banks 4.9% on their reserves (this rate was always 0% before 2008). and they pay you close to 0% on your checking account.
> When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point.
Yet the banks listed above don't seem to have much trouble existing.
> people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed
Matt Levine summarized the Fed's points well [1]. They're sensible reasons, though I suspect they could be solved with the right policy treatment. (For example, limiting depositors to natural persons and paying a lower interest rate on reserves.)
Or invest directly in federal government obligations through a federal money market mutual fund, even. That way there's no bank in the middle trying to undercut you on rates. Instead, you more or less receive the fed's rate directly.
So the banks had bonds in their balance sheets that went down in price because of the rising interest rates. If they are in need for money, they sell them quickly but don’t get 100%. So basically not all checking account money can be satisfied. In my understanding, this brought down SVB.
The Fed took over these bonds for 100% as a measure of stabilization. There is no issue here because bonds will be repaid for 100% most probably. Basically the Fed is taking over temporary losses of the banks. When the bonds are repaid the negative equity will vanish.
No, this isn’t a mark-to-market loss, as the article clearly states—these are operating losses, literally more cash flowing out than flowing in. This is because the Fed is trying to raise short-term interest rates, and to do this effectively it has to be willing to pay out its own interest target. These interest payments now exceed the interest it receives on its portfolio of government bonds and mortgage-backed securities. If this goes on for long enough then the Fed’s equity will become negative.
Absolutely nothing compared to how much the federal government is "earning" because inflation is running hotter than the average rate of interest on Treasury bonds.
At a 7% rate of inflation and a 2% average interest rate, it amounts to over a trillion dollars a year discharged in terms of real debt owed to the public.
The deficit always grows in nominal terms because of inflation. Scaled properly [1], the deficit isn't great, but it's improving and far from unprecedented.
It amazes me how many of the commenters seem to think that this is a piece by WSJ journalists. It's not, it's an Opinion piece by two members of the same right wing think tank (American Enterprise Institute). Whether you agree or disagree with the article is a separate matter, but knowing whether it was written though a lens of journalism or advocacy is important, imho.
>This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance.
This statement isn't exactly true because the cost to finance the purchases of Treasuries during quantitative easing was not 4.6% when the purchases were made.
They would be losing money only if they were now selling those Treasuries at market rate, but they aren't doing that - they're just letting them roll off the balance sheet as they reach maturity.
Post-QE, the Fed now has to pay interest on it's excess reserves[1] in order to achieve it's Federal Funds rate. This costs the Fed real money, and it no longer collects enough money on the interest paid on it's assets (given they're lower yielding assets than the current target rate) to offset this cost.
They are losing money regardless of what they do with their bond assets - they would simply lose even more money if they tried to sell their bond assets below purchase price/book value.
The fed doesn't really care if it loses money, but when it has a profit it gives it back to the government. So loses for the fed means the government gets less revenue.
Also these loses accumulate and until the are offset by profits no more money can be given to the government.
That combined with high interest payments on government debt will make the debt ceiling vote a lot harder.
> This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance.
"..to finance", but finance from where!? It's not as if Fed is a household where it has to get money from somewhere at 4.6% interest and invest it. What am I missing here!?
The Fed is the central bank. It artificially sets the price for money higher than the zero it would tend to naturally (given that money is essentially costless to produce).
So they have decided to finance their liabilities at 4.6% while only receiving 2% on the assets they hold.
The 2.6% difference is funded by creating new money, which the Fed believes will reduce inflation.
This is an overly simplistic take. The other way to frame this is that they are levered 40x in removing liquidity from the system. By spending 2.6% they can remove trillions from the economy and slow the velocity of money.
I'm pretty sure you can safely ignore a lot or most of this article. This is not my area of expertise, but from what little I understand, it miscontextualizes a lot of true facts and abuses a few words (semantics is everything) to give the wrong impression about what central banks are, how they work, what the incentives are, what metrics mean and which ones matter.
I could be wrong, but I'd wager if we had a handful of economists in the comments section they'd generally agree, but would have a much better explanation than me.
BRICS is the new reserve currency. America pushed too hard on bad policies, poor public sector services, unaffordable health care, and lower education standards... there's no coming back from that.
> America pushed too hard on bad policies, poor public sector services, unaffordable health care, and lower education standards... there's no coming back from that.
Yes, because BRICS doesn't have any of these issues...
USD will be the reserve currency because even if United States has its own problems, it is still better than the rest of the world.
I don't think people are lining up to store their value in Rand, Real, Roebels or Rupees (but maybe Yuan).
I know the US is devaluing the dollar all the time but still if i have to choose between keeping my savings in Rand or US Dollars that is a easy choice. But i'd take Krugerrands over Dollars.
Crypto’s largest use-case aside from retail gambling is to facilitation of capital control evasion in Asian countries, notably China. By and large the flight is into dollars.
It doesn't issue shares. Instead of answering to shareholders the Federal Reserve answers to congress. Congress has granted the Federal Reserve quite a bit of autonomy, but law established the Federal Reserve and law can modify or abolish it.
I saw this last night, I found an article from some smart PhD dude who is a Yale prof and a former federal reserve governor, it explained what would happen if the fed lost money. Nothing much, unless they lose a lot of money for a long period of time.
There is a difference between monetary policy and fiscal policy. Monetary policy is set by the Federal Reserve while fiscal policy is set by Congress (as laid out in the constitution) The activist Fed under “the courage to act” Bernanke and more recently under Powell moved from the realm of monetary policy to fiscal policy.
By massively expanding the Feds balance sheet with mortgage bonds the Federal Reserve massively increased the value of housing and lowered mortgage payments for existing homeowners. Prior to 2008 the Fed only bought US government securities so any market distortions it caused the benefit accrued to the Government.
As the Fed is now having to pay interest on reserves and higher inflation it is making the cost of those decisions more apparent.
Now, if Congress had said in 2008 that they wanted to write checks for a a couple of trillion dollars per year to homeowners and pay for it with a 10% tax (inflation) that would mostly benefit the old and wealthy and hit the young and poor the hardest they would be within their constitutional power to do so. It is unlikely that Congress would ever do so but the Federal Reserve made that decision. That makes me uncomfortable.
I think the point the authors of the article were trying to make was that the Fed has operated for 90 years and never lost money. We've been through multiple financial crisis and not been in the situation. They are implying the current said is doing a poor job of running things.
It’s unreal to me that an unelected bunch of bankers at the Fed have such an outsized impact on the global economy, and yet when anyone challenges them, half the people actually defend them.
If there is any institution that should be under constant and heavy scrutiny at all times, it should be the Fed.
> If there is any institution that should be under constant and heavy scrutiny at all times, it should be the Fed.
First, I want to say that I agree with you 100% here. I even think maybe the accountability mechanisms might not be designed correctly, although I don't know enough to be sure.
> half the people actually defend them
In their defence though (and notwithstanding what I said above), they're all incredibly intelligent and competent professionals who happen to be at the helm of the ship in uncertain times. :shrug:
From my vintage, among the most competent governing institutions are the Supreme Court and the Fed, neither of which has any oversight. I'm not claiming any sort of perfection, but compared to congress, it's like night-and-day.
It'd be interesting to understand how and why. That's not true of all institutions without oversight.
I'm of the exact opposite opinion, I see those two groups as some of the absolute most harmful in modern US politics. I'll take a gridlocked congress over an activist SCOTUS legislating from the bench or an out of control Fed printing trillions of dollars for their banker friends any day of the week, though I suppose the gridlocked congress is part of what enables that behavior
imagine the mess if there were elections for central bankers. fiscal authority is sort of elected. you really want somebody different in monetary authority...
> We've been through multiple financial crisis and not been in the situation.
It's not as if any of those previous financial crises are comparable to what we're going through now though. These are very different times where we're coming out of unprecedented events. Maybe the Fed really is doing poorly, but I can't exactly remember a time in my life when everybody loved the Fed and what they were doing either. Is there some kind of golden age when everything was being handled correctly and we didn't have problems that we should be trying to go back to?
So even the fed is in trouble from this psychotic obsession with inflation (that isn't really even there, or at least is not 'normal' inflation, IMHO), and using interest rates to bludgeon demand.
