But now due to a very florid interpretation of the CARES Act [0], the US Fed has decided it is legal to buy both corporate debt and stocks[1].
This helps explain why the market is on such a bull run. The Fed has said they will be bailing out 401ks. The republicans (who would normally abhor this type of fiscal overreach) are delighted and the democrats don't know enough to read the writing on the wall.
[0] https://www.bloomberg.com/opinion/articles/2020-06-18/fed-se... [1] https://www.forbes.com/sites/kevincoldiron/2020/07/18/the-fe...
What are you suggesting exactly here? That the Fed is hell-bent on inducing general inflation, even at the cost of skyrocketing asset values?
Once the central bank hits zero, asset prices return to their market clearing prices as participants chase yield
By the 10 %? By the people entering pension?
I will be K shaped, the rich get richer, pension people will be able to "enjoy" there pension and the poor wont be able to afford rent. Since big corps and funds will invest in housing to "save" money.
Probably a little of both, but it is an interesting time in economics for sure.
Try to, we're going to try to print our way out of it.
All floating currencies can do the same.
The issue is that the non government sector tends to hoard money rather than spending it.
The left want to confiscate those savings. The right try to mask them by pushing more and more people into debt.
The other option is that you realise net savings are largely inert in aggregate and essentially act like a tax.
Then you just accommodate them
My understanding of why the US can print money without regard for consequences is because there are always "buyers" for US dollars, b/c countries need US Dollars to carry out business (e.g. China in order to maintain their export driven economy or the fact that the USD is used as the standard unit of currency in international markets for commodities such as gold and petroleum). Yes, there are technically other currencies that are part of the foreign exchange reserves, but none as prevalent as the USD.
As I understand it, this demand for US dollars is what allows USD to remain the dominant reserve currency and why when the US prints money it does not result in catastrophic inflation. If a country like Argentina tries to do what the US does it won't work out, because there is no demand for Argentinian dollars.
The conclusion I'm left with is that the balance sheet is largely irrelevant until the demand for US Dollar decreases. The real question in my mind is exactly what would cause that to occur? Most everything I read is that the network effect of the USD causes everyone to continue to use it, but perhaps something like a war between the US and China might be a precipitating event to decreased demand?
I agree if I change this to: the conclusion I'm left with is that the balance sheet is largely irrelevant (towards any inflationary terms) until the demand for US Dollar denominated debt decreases and is followed by increasing money supply without the increase in debt (government $ denom, corporate $ denom, and individual $ denom on net) and without increasing derivatives notional outstanding on that debt.
> The real question in my mind is exactly what would cause that to occur?
When intl banks get more comfortable with issuing debt (secured and unsecured) in non USD terms, I then would expect demand for USD fall as well so long the US maintains a trade deficit.
With the sunset of LIBOR in 2021, I expect things to pick up more on this front (Not everyone thinks SOFR is sufficient or lacks collateral to participate to the degree they currently need), though that's not stopping banks and OTC market making entities in various derivatives that extend credit in some form, including the use of cryptocurrencies.
A big problem with EM's is a lack of acceptable collateral backing the debt (arguably, this is the issue with the current global monetary system), investors wouldn't mind argentinian debt if they could have those debts backed by sufficient collateral in the event of default (sans the IMF bailout assumption of course, though some creditors continue to get hosed every time the default).
That's the usual view.
It isn't correct.
The US "prints" money because foreign US dollar earners don't spend all they earn. They "save". Which takes the dollars out of circulation.
And they do that largely because they end up on the asset side of some bank somewhere who then discounts them into the local currency.
That process locks the dollars (or dollar financial asset like a Treasury) in place. To get rid of the dollars they have to get rid of the local currency too.
All you can do is offset the net non-government savings (which includes foreigners. They are little different in the MMT view). Any more and you get inflation.
Argentina not only can do it, that is exactly what they do do as a necessary function of the way a banking system works. Balance sheets expand and contract through the day.
Again to the extent that there is excess saving in ARS, the government sector could offset that by simply hiring the resulting unemployed and paying them.
That there is unemployed tells you that there is excess saving. As Warren Mosler would say "if there are unemployed then we are overtaxed for the size of government we have".
My understanding is that the modern monetary theorists have an argument as to why this hyperinflation won't happen in a country with monetary sovereignty. (All the famous historical examples of hyperinflation involve countries that do not control their own currency.)
Damned if I can find a good basic text explaining the MMT argument. Naked Capitalism makes some great allusions but seems like you need to already be on their team to understand their arguments.
Seems pretty important to understand this stuff as we are all modern monetary theorists now whether we like it or not.
Have you ever held a $100 note in your hand? If you have you have necessarily caused $100 of "debt" to the nation - because you haven't immediately spent it as soon as you received it.
If you'd spent it, it would be taxed as it moves and would rapidly become a $20, then a $10 and so on.
There are lots of reasons why you, and everybody else doing the same, hasn't spent that $100 yet.
What everybody gets excited about and calls "debt" is essentially the world's working capital.
The MMT view shift is straightforward. Stop calling it "debt", and call it what it is on the other side of the balance sheet "savings" or "assets". Then all becomes clear.
As a countries population and prosperity grow, increasing money supply is expected. The US does not in large quantities print inflationary dollars, they print borrowed dollars. This is a subtle difference, but it is has profound implications. When the borrowed dollars are paid back, the money can be destroyed. Inflationary dollars by definition do not carry this trait.
Not trying to troll, just trying to get a handle on the basics here.
We are also experiencing supply and demand shocks, so we are experiencing higher prices in certain goods, but this is not inflation, we would expect that prices would return to normal when the constraint of the virus is removed.
I have a hypothesis that modern supply chains combined with weak labor make consumer inflation basically a thing of the past and we worry far too much about inflation that won't materialize in our normally operating global economy.
Inflationary dollars, which the US generally does not use this a lot, are dollars that the Fed would print and then give away. One way this is done is by paying interest on reserves, but this is not really a significant amount of money. In fact, I'd argue that we don't have enough inflationary dollars right now.
If the US was printing to pay back our debt; we don't do this, we borrow more, hence the increasing national debt, and also the reason that people keep giving the US money; we would see consumer inflationary effects. If the Fed just printed money and sent checks to people, again we'd see consumer inflationary effects. We generally don't do these things, instead we either borrow money or we take collateral and provide loans.
This doesn't mean that there aren't other effects in the economy by creating cheap borrowed money, but day-to-day hyper-inflation is not it.
At the national level, both sides tend to claim one ideal and ignore it whenever they get into office in order to pay back their base - Republicans give tax breaks to the already-wealthy, Democrats tend to rain cash down on academia, school unions, legal industry, etc.
At the state and locality level, it's generally the rule that more conservative states and counties are in better fiscal shape, and that's with typically far lower taxes.
Only because the federal government redistributes wealth from coastal states to interior ones.
https://www.forbes.com/sites/shaharziv/2020/05/12/blue-state...
https://www.cnbc.com/2020/04/06/yellen-says-the-fed-doesnt-n...
Which is something that pumping $3 trillion into M2 will certainly achieve.
https://fred.stlouisfed.org/series/M2
What else it will achieve is another matter entirely
Are his dovish views all that different from his predecessors, Janet Yellen or "Helicopter Ben" Bernanke?
You seem to be insinuating that he is an undeserving lackey, something like a Betsy DeVos. But I just don't see the evidence for that.
The quality essentially required of a reserve currency being that it doesn't do this.
Definitely popcorn time - also don't own long date low interest rate bonds time. Which would be most of them. Oops.
Also, this administration has been very active in getting money into the hands of the consumers directly. And also trying to shift work away from China back to the states
And welcome to Hacker News.
Trump got elected because of the working class who typically don’t see the light of increasing stock market. May be they should and may be having some kind of mandatory 401k match the administration was proposing at some point would help them but by and large they don’t.
China is one area I think he has been more consistent with. But the market largely doesn’t benefit from that. That’s why market cheered when the trade deal was signed and now Wall St is largely behind Biden camp hoping the status quo persists. If anything stock market wants to see rising China and stable relationships even though it might hurt long term bottom line and jobs here in US.
It's a place that requires economic as well as poetic expertise.
That’s why we are where we are.
This idea sprung up in the 1960s and took hold in the 1970s because some people couldn’t answer the inflation question that was a result of the failure of Bretton Woods and the oil shock.
We’re about the see another paradigm shift away from Central Banks as Wizard of Oz.
Hence the rise in interest in Modern Money Theory which puts the central bank Debt toy away and concentrates on what actually matters - ensuring everybody has an opportunity to contribute and gets an income from doing that.
What other tools do they have besides setting interest rates? They keep alluding to these tools but do not explicitly say what they are. Should we expect another round of quantitative easing?