Fed to buy junk bonds, lend to states in fresh virus support
bloomberg.com
bloomberg.com
Its balance sheet will have grown by as much as an order of magnitude by the end of the month, far above any levels seen during the global financial crisis of 2008. (If you don't know what this means, think of the Fed's liabilities as "all forms of money issuance.") It's issuing fresh money to buy crap from the people who are stuck holding it. The sellers will come out whole, the buyer -- i.e., the US government -- will suffer the losses.[a]
Meanwhile, the US Treasury is borrowing and trying to spend on the order of an additional 10% of GDP as quickly as possible, increasing the US federal deficit and borrowings by that much as quickly as possible.[b]
And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary.
We are in uncharted waters.
[a] You'll see it here: https://fred.stlouisfed.org/series/WALCL
[b] You'll see it here: https://fred.stlouisfed.org/series/GFDEGDQ188S
The Fed buying junk bonds is "extend and pretend". If you want to save the jobs, allow overextended firms to fail, and then bail them out with the government taking ownership (while removing management). We did this with GM in 2008: we saved the jobs, we removed management, and we wiped out existing equity owners.
Maybe you have noticed something. The rich managers don't really a give a damn about the lock down. They have a huge amount of money and mostly diversified their net worth away from their own business. $5 million after a 50% stock market crash is still $2.5 million.
That might sound like a huge loss but only when you forget to consider that there also exist people that aren't managers and they are in the majority. If you lose your job that is pretty much a 100% reduction in income. If you lose your job you can't just kick out the rest of your family to reduce costs. For every manager that is seeing his portfolio dip there are probably a dozen more non-managers having a worse time.
The bank bailouts weren't actually about bailing out banks. The taxpayers were bailing their own money out. Dead banks mean your money is gone. It's like video game servers shutting down. Your stuff is just gone. The managers at the bank probably couldn't care less about their customers losing all their funds.
More crucially, the virus is affecting the real economy, and people's lives. Fixes for the financial economy that don't address that directly are band-aids to make balance sheets look good.
Just because the pandemic itself was predicted doesn’t mean much when the global fall out is totally novel and unpredictable.
The government paying for Coronavirus also provides a financial incentive to not fuck it up so badly next time. We ignored the warning signs and decided to do nothing -- now it's costing us. Next time, we'll know that mismanaging the early days of a pandemic is going to cost trillions of dollars, so we'll probably do a better job. (Or rather, vote for people that will do a better job.)
(Here's how I think we should have handled the early days of Coronavirus. Ban travel and buy back the tickets/reservations for all travellers. People were still taking vacations even when Coronavirus was widespread. I'm guessing they did that because they sunk $2000 into non-refundable reservations, and didn't want to be the ones to subsidize the airlines. So they took their trip, got Coronavirus, infected 3 other people, and now tens of thousands of people are dead.)
It absolutely doesn't. Time and time again, corporations have proven their shareholders (management as well) will simply strip as much value as they can, and leave us (taxpayers via government, citizens with devalued currency via the Fed and their monetary policy) holding the bag with any losses or externalities to clean up.
For example, the Tax Reform Act was sold as incentivizing "jobs and investment"; all it incentivized was share buybacks [1]. Shareholders and management have proven themselves unworthy of trust, or more accurately, public and fiscal policy benefiting them that operates on the honor system. "Fool me once!"
[1] https://money.cnn.com/2018/07/10/investing/stock-buybacks-re...
How so?
The problem with that reasoning is that governments don't suffer the consequences of mismanagement the same way companies and private citizens do. Sure, the elected officials may end up voted out, but the same bureaucrats will still be running things, and the basic institutions and systems that led to the current response aren't likely to change.
So what? If I own a successful company, eventually I'm going to reach a point of diminishing returns. At that point, it no longer makes sense to reinvest my company's profits back into the same company. Eventually, I'm going to use that money to start a new business. Doing that will make more money and create more jobs than trying to scale my old company past the point of diminishing returns.
With a public corporation it's simply a case of management making that judgment on behalf of the collective shareholders.
Middle class Americans are expected to have enough cash reserves to survive 2-3 months in case of an emergency. Why is this expectation not in effect for an airline that makes vastly more profit per capita than the average household?
Airlines spent well over 96% of their free cash flow on stock buybacks, enriching their boards of directors, executives, and shareholders. Do you think it's fair that they can make those decisions and still be entitled to favourable loan agreements when their mismanagement comes back to bite them?
Why do we not let the airlines have an asset selloff of their "super expensive machines" in an attempt to bridge the coronavirus gap before giving them public funding? Could they not declare bankruptcy and restructure themselves to survive until shelter in place is over and business returns to normal?
Why does the government bailout not have the cash infusions come in the form of an equity buyout, thus bringing actual consequences to the mismanaged airlines and bringing a more stable guarantee of investment return to the taxpayers who have funded this bailout? Shouldn't having access to socialized coffers come with the caveat that your company must become, in part, socialized?
The system only works if companies feel the pain of their mismanagement. Any whisper of bailing out the airlines without considering the above is disgusting and un-American. You don't get to privatize profits and socialize losses. History has shown that companies do not learn lessons unless they are allowed to fail.
Ex-shareholders technically. Remember, stock buybacks only generate value when you exit the stock. Technically, if you've been holding, you're up shit creek.
>Why do we not let the airlines have an asset selloff of their "super expensive machines" in an attempt to bridge the coronavirus gap before giving them public funding? Could they not declare bankruptcy and restructure themselves to survive until shelter in place is over and business returns to normal?
Who the hell would buy them at this point? Wealth is so consolidated right now it'd be right back in the hands of the same people who were incentivizing the behavior in the first place.
The rest of your post is 100% spot on though in my estimation though.
This is nuts. Not prepping for a pandemic that causes governments to eradicate your business model is not due to mismanagement.
All bailing out companies does in the long run is ensure they run things as close to the line of collapse as possible, because if there is any disruption, the government will bail them out.
It creates titanic systematic risk, and greatly rewards poorly managed companies vs well managed companies.
Any company weathering this storm well might as well have never bothered saving money and making long term wise decisions that may have limited short term upside, when you get a guaranteed bailout when things start going south when you have made decisions that lead to having no reserve capital (see American Airlines 12 billion dollar stock buyback, the airline industry wants a 50 billion dollar bailout, having spent 45b on stock buybacks in the last years, why would they save money when the government will swoop in and pay)
Don't think the individuals running these companies don't see the pattern here.
Its akin to betting red on a roulette wheel every time, and getting more free money when it comes out black instead.
No the best recourse when your business becomes illegal is to grant a large dividend to shareholders before your creditors liquidate the company. Preparing for your business to become illegal is a waste of money
If government action didn't kill demand, the ensuing death toll from letting the virus spread unchecked would eventually do it anyway.
"Travel is illegal" is only the proximate cause of the woes of the airline industry. The root cause is a lack of preparation.
2 million people dying in the United States isn't really that much. Given that COVID mostly affects people already more likely to die, the death toll had COVID gone unchecked would likely not be that much greater than the 2.8 million Americans that already die each year. Assuming a 30% overlap, we'd see deaths go from 2.8million to 4.2 million in one year, followed by herd immunity (according to the models). We'd then see subsequent years with a lower death rate (since there'd be fewer people with pre-existing conditions). It is unlikely that this would be as economically devastating as argued. It is incredibly unlikely it would have reduced air demand to the levels we're seeing now.
Air demand would still be around for flights to see family, etc. Most of it is gone due to government regulation. Necessary regulation for sure, but still regulation.
Wtf does profit per capita than an average household even mean?
Also, profit is irrelevant if we’re talking about a super capital intensive business that can’t scale back its expenses when the revenue goes away (which is the case for all of these airlines leasing planes and paying employees).
Individuals and households have tremendously higher risk variability than companies, because most of the time there are only one or two major sources of income. When one or two of those incomes are interrupted it blows a giant hole in household cashflow.
A large company, however, is not dependent on individual relationships with sources of income. Each customer is a source of income, there are potentially millions of them. Losing 1 or 10 or even a thousand customers doesn't blow a giant hole in cashflow. There are correlations in those flows, but it's never 1.0.
Until now.
But let's assume we go ahead with the idea that every major company should hold 3 months of cash. For starters, that's 3 months of at least revenues, which is going to be one and sometimes two orders of magnitude larger than profits. Assuming that your profit is something like 10%, you're now holding something close to three years of profit on-hand, earning approximately bugger-all. Your shareholders will lynch you.
But suppose they don't lynch you. Is that the best use for your cash? Is it the use that genuinely reduces your overall risks? Almost certainly not. You could use that cash to pay for more R&D, more equipment, more and better-paid staff, improvement programs, to buy promising technologies, invest in other companies, pay down loans on larger, more modern and more-efficient factories ... the list goes on and on. By choosing to hold that cash against a catastrophic event, you greatly increase the much more mundane, but still fatal to the company, risk that you will be out-engineered, out-manfuactured, out-marketed, out-sold by competitors.
But suppose that everyone does it anyway. Now another COVID-19 style risk hits everyone simultaneously. What happens? The first thing that happens is that spending on anything that's not immediate ceases. So the money that we held back and didn't spend on investing in the future becomes joined by cancellation of all similar spending out of the rest of our income. So no net gain there.
The rest of the money gets spent on keeping the lights on. If there's a crisis big enough to halt the economy for 3 months, then it's not really going to halt the crisis for 3 months. It will be much longer than that. So everyone decides to hoard their cash and begins cutting everything, everywhere they can, to stretch it out. So the cash doesn't get spent over 3 months, it gets spent over 12 months.
But suppose everyone decides to spend at the 3-month rate anyhow. What happens next is that everyone's bank is suddenly facing a massive simultaneous drawdown in capital. They will almost immediately exceed their capital limits and now, they have to suspend lending. A whole bunch of otherwise companies get killed by the loss of credit liquidity.
But suppose we didn't put all of it in cash-at-bank? Well, we're still boned. If everyone begins to sell their bonds, shares, gold coins and stamp collections at once, prices crater. 3 months of reserves is now worth 2 weeks on the open market.
You've probably guessed that the only way out of this is to pool risks. Normally insurers do this, but insurers know that they cannot withstand correlated risks like pandemics, so they simply don't insure them (with rare and very expensive exceptions).
What we're seeing now is that fiscal and monetary policy is being used as "insurer of last resort". It's never been done on this scale before. It might never again.
All of which is to say that there's a lot to criticise about modern finance and managerial economics, but the idea that it's identical to household finances is very misleading.
Why would they need to hold 3 months of revenue? Why not 3 months of operating expenses and suspend capex?
> more R&D, more equipment, more and better-paid staff, improvement programs, to buy promising technologies, invest in other companies, pay down loans on larger, more modern and more-efficient factories ... the list goes on and on
Does that list include stock buybacks?
The omission is deliberate.
When money is being returned to shareholders I greatly prefer dividends. It puts pressure on management to manage for sustainable long-term cashflow and removes the temptation to pump up the stock for a quick personal profit. Unfortunately the tax treatment in the US is very unfavourable. By contrast, Australia gives franking credits for dividends and more companies there pay shareholders with dividends instead.
The issue here is not really about the actual economic impact of the virus. No amount of money printing or loan issuance can recover the real economic output that has been lost. There is real destruction of capital and wealth because humans and their toys require continuous consumption to maintain homeostasis but production has fallen off a cliff.
What makes everything so insanely complicated is that the real economy is intimately tied up in a financial economy that compounds the distress. Missing debt payments has massive repercussions for both individuals and companies which can far exceed the value of the missed payment. We have built a legal and financial framework around our economy (under the banner of "risk management") that binds us to mutual destruction when things go badly. This is why the popping of the mortgage bubble in 2008 nearly annihilated the global banking system rather than just bankrupting a bunch of risky mortgage underwriters and maybe taking down a bank or two.
Our solution appears to be just making sure no one misses a payment by handing out cash like Santa Claus on a bender. I guess it does the job, but the level of moral hazard this invites is troubling (to put it lightly).
Because airlines don’t typically own those airplanes, they lease them from finance companies like GE Capital. Anything they do own is likely to be at/near EoL and generally worth $0 in a market where nobody can make any use of it.
Unless you’re suggesting that the Fed just take ownership of the aircraft and print money to make lease payments to GE Capital. I’m sure the Democrats in the House will jump right on that.
Didn't the airline industry spend something like $45b on buybacks? And are now looking for $50b in a bailout?
That seems like mismanagement to me.
For how long? It's anyone's guess how long the pandemic will last. If we're lucky, there could be a vaccine ready in 18 months, but maybe we won't be so lucky.
And how much money should the airlines be given, as opposed to, say giving money to people who can't afford to pay their rent or feed themselves or their families?
I’m only half joking.
Do you operate an airline? Do you have some crystal ball that reveals the true economic costs of capitalizing and operating an airline?
Capitalism is premised on the notion that the aggregation of economic decisions made by individuals, with full freedom of choice, leads to the most productive and equitable allocation of capital for the economy as a whole. It's also premised on "skin in the game"--those who risk their capital in a venture both reap the rewards and bear the risk of losing that capital if things go poorly.
Here's the bottom line: no matter which way you slice it, capital is being destroyed when airlines can't operate for six months. Who should pay for that? If your answer is anyone other than the investors who put their capital at risk in financing the airline, then we have stepped outside of capitalism already and we might as well just nationalize the airlines to accomplish whatever your goal is.
Citation needed for this. The 1920s would seem to differ.
The new deal was a failure and caused long lasting damage to the USA.
The works of the roots of the vines, of the trees, must be destroyed to keep up the price, and this is the saddest, bitterest thing of all. Carloads of oranges dumped on the ground. The people came for miles to take the fruit, but this could not be. How would they buy oranges at twenty cents a dozen if they could drive out and pick them up? And men with hoses squirt kerosene on the oranges, and they are angry at the crime, angry at the people who have come to take the fruit. A million people hungry, needing the fruit—and kerosene sprayed over the golden mountains.
And the smell of rot fills the country.
Burn coffee for fuel in the ships. Burn corn to keep warm, it makes a hot fire. Dump potatoes in the rivers and place guards along the banks to keep the hungry people from fishing them out. Slaughter the pigs and bury them, and let the putrescence drip down into the earth.
There is a crime here that goes beyond denunciation. There is a sorrow here that weeping cannot symbolize. There is a failure here that topples all our success. The fertile earth, the straight tree rows, the sturdy trunks, and the ripe fruit. And children dying of pellagra must die because a profit cannot be taken from an orange. And coroners must fill in the certificate—died of malnutrition—because the food must rot, must be forced to rot.
The people come with nets to fish for potatoes in the river, and the guards hold them back; they come in rattling cars to get the dumped oranges, but the kerosene is sprayed. And they stand still and watch the potatoes float by, listen to the screaming pigs being killed in a ditch and covered with quick-lime, watch the mountains of oranges slop down to a putrefying ooze; and in the eyes of the people there is the failure; and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage.
The Grapes of Wrath, John Steinbeck
https://en.wikipedia.org/wiki/Judicial_Procedures_Reform_Bil...
Also, it turns out that fighting a world war is a good economic stimulus. I believe the first American recession after the Great Depression was a very brief post-war recession caused by scaling down war production. IOW, war production was such a large chunk of the economy that simply doing less of it because we won was enough to cause a measurable GDP dip.
Your argument holds little water when you wave away the ratings of "random rating agencies". Their ratings are what drives investment decisioning by the largest funds in the world.
[1] https://www.cnn.com/2019/09/10/business/ford-downgrade-junk/...
I'm not waving away rating agencies. I'm saying that General Motors has less liquidity than Ford. In your "no bailouts" world, Ford would be in better shape than General Motors. General Motors is investment grade, does that magically make them better than Ford even though cash on hand says different?
Ratings really mean nothing right now as far as the health of a company goes and ratings agencies have specifically mentioned that they are backlogged with assessing all consequences of what's going on right now. Ratings have and are always backwards looking data. How the "largest funds" in the world invest is completely irrelevant for this.
It might behoove you to learn what those letters mean before you partake in a corporate debt discussion.
GM was not allowed to fail and then the government took ownership of the company. That's not all what happened:
On July 10, 2009, following Chapter 11 reorganization after an initial filing on June 8 2009,[25][26] the original General Motors sold assets and some subsidiaries to an entirely new company including the trademark General Motors. Liabilities were left with the original GM freeing the companies of many liabilites resulting in a new GM.
GM emerged from government backed Chapter 11 reorganization after an initial filing on June 8, 2009.[25][26] Through the Troubled Asset Relief Program the US Treasury invested $49.5 billion in General Motors and recovered $39 billion when it sold its shares on December 9, 2013 resulting in a loss of $10.3 billion. The Treasury invested an additional $17.2 billion into GM's former financing company, GMAC (now Ally). The shares in Ally were sold on December 18, 2014 for $19.6 billion netting $2.4 billion.[27][28] A study by the Center for Automotive Research found that the GM bailout saved 1.2 million jobs and preserved $34.9 billion in tax revenue.[29]
Also in 2009 General Motors of Canada Limited was not part of theGeneral Motors Chapter 11 Bankruptcy, the company shed several brands, closing Saturn, Pontiac, and Hummer, while selling Saab Automobile to Dutch automaker Spyker, and emerged from a government-backed Chapter 11 reorganization. In 2010, the reorganized GM made an initial public offering that was one of the world's top five largest IPOs to date, and returned to profitability later that year.[19][30][31]
The government did the same thing its doing now. Investing in companies on a short term basis to prop them up and allow them to continue to operate. Once the economy is stabilized, it will cash out its investment(s) like it did with GM.
What you are advocating for is not at all what occurred with GM.
In contrast, in 2008, we realized things were being criminally propped-up and the economy crashed. Expectations were much higher compared to the actual performance of the economy.
The job of the Fed is to keep companies from going under due to this supply shock. If companies do go under, that means that there WILL be long-term problems with the economy because we're lowering LONG-RUN supply.
The whole point of the fed is to smooth short-run supply shocks so that long-run aggregate supply isn't affected.
This is a false narrative. If a company goes under, chances are the long-run supply will not be affected much, if at all.
When a company goes under, its assets are not burned, and its employees are not killed. If there is any long-term profit to be made, a wealthy investor will come in, buy up the assets at a low price, hire the employees who are now jobless, and pick up the torch where the previous ownership left off.
A government bailout only makes sense if you own a company being bailed out, and you want to stay rich. A government bailout is bad for every other American, because it introduces an incentive to making poor decisions and not planning for market downturns. We should not be rewarding bad corporate behavior with a bailout, we should be punishing it by letting the companies go under so fresh blood can have a try.
We shouldn't be living in a feudal society of fiefdoms that are propped up by the federal government. Let the market run its course.
probably wouldn’t be much of a problem (letting the market run its course) if we had sufficient social safety nets in place for workers
but as we all probably know by now, the govt is mostly working for those with moneyed interests so, they get front and center
But all this requires us to re-assemble these things into a new functioning company. A company isn't just a pile of people next to a pile of assets, it has internal and external relationships and processes and culture and on and on happening to make it do the stuff it needs to do. This all takes time and effort to create. To let it all burn down when we need it again in a few months is utterly pointless. What we want to do instead is freeze it for a little bit so we can thaw it out later.
Why should the gov't reward fiscal irresponsibility (stock buybacks) AND a terrible airline product (and thirdly, maintain airlines' negotiating power over employees), as opposed to a "new normal" which might include some fresh ideas?
Shouldn't the government, at the very least, wait a little while to see which companies or industries are actually close to failing, before committing $2+ trillion? American Airlines had 3.8 billion cash as of 12/31/19. Its total OpEx + Interest was about $8.2 billion in 2019. So it had nearly a half-year of expenses covered, before any cutbacks or preservation methods. I'm not an airline accountant, perhaps some obligatory expenses are hidden in COGS which increases their burn rate. But it would appear that AA could survive about 5 months even if it did nothing to reduce expenses -- if they cut back appropriately, perhaps they could extend that to a year. There's also equity and debt markets available if AA needs cash now.
I just don't see why the government felt it was necessary to immediately reassure companies they would be protected, or why, one month in, you are discussing "letting those businesses fail," as if it's a foregone conclusion. In fact, it seems highly likely they would survive intact. Poorer, but probably not bankrupt.
this is exactly how it should have been. If stock buybacks (or dividends, i don't think they are different) during good times, then equity raising during bad times is the counter balance.
No gov't bailout necessary. There will be a price that they can raise cash at. It's not gonna be nice for the current equity holders, but they knew what they bought when they buy equity.
And if the company fails, the gov't bailout should be for the unemployed in the form of social security and healthcare. Not for business continuity.
Yes, that is what happens in a capitalist society. If we are no longer a capitalist society, well... we should probably state that up front.
We do need creative destruction and to prevent moral hazards.
We also need to prevent mass unemployment and chaos. Nationalizing and re-privatizing can do this, but not as efficiently as just giving 0 interest loans to patch over a temporary “pause” in the flow of money.
Written by juniors, who doesn't really understand their codebase and writing ugly hacks all over the code? With code regularly failing at critical moments?
And you are suggesting to hire a bunch of new juniors who would finally fix this mess? I would rather fire half of the developers and hire new seniors instead who will refactor the codebase.
This makes the assumption that at least one of the following is true: 1. There are wealthy investors to fund the purchase 2. There are wealthy investors who realize there is a long term profit to be made 3. That wealthy investors care about long term profit
> A government bailout is bad for every other American, because it introduces an incentive to making poor decisions and not planning for market downturns.
There are events which no company can plan for, either because they are once in a several lifetime events or because they are so cataclysmic that they shake the foundations of a global economy.
all of those are true. Not just one.
> no company can plan for
and yet, in the filings for american arline, they have mentioned pandemics as one of the risks. No company wanted to plan for this, because they perceive the cost to not be commensurate with the reward - perhaps because they, after seeing 2008, know that the gov't bailout is a possibility, and that's cheaper for them than to save for a rainy day.
AKA, moral hazard. It needs to stop.
if the other riskier airline didn't get a bailout, they would've bankrupted today.
So in good times, the riskier airline returns more money to shareholders. But those shareholders should know that it's taking a bigger risk.
And the difference isn't so much that an airline will be pushed out of the market by not returning 100% of the earnings to shareholders.
There is a lot more to play out. A lot of accounting irregularities will be coming to light, as seen with Luckin Coffee.
That's ridiculous nothing structural has changed about the economy. When the doors fly open people will be back to work and life will resume as normal, as it always has.
If the coronavirus continues to be a major threat for the next year or two, which is well within the realm of possibility, we don’t know what society or the economy will look like after.
Worse, we don’t know that there is an after. It’s possible there is no effective and safe vaccine, and that social distancing becomes a permanent feature of life.
Ok, deep breaths. We know that the disease triggers antibody response, we know basically nobody has become re-infected. That means herd immunity is very much in the cards -- and that vaccination is in the cards. So, there is an end-point, when some 70% of the population has it or has been vaccinated.
Next, week now that something like 0.5-9% of people who go to the hospital with severe symptoms of COVID then die (depending heavily, heavily on their age [4]), which means, 99.5%-91% of people with severe symptoms don't die. Now, there's a massive pile of people who show no symptoms at all, and another massive pile of people who show mild flu-like symptoms. This could represent 86% of all cases based on an earlier study [3]. The morality rate is much much lower than the numbers we're seeing because of adverse selection bias. If you only sample the people walking into hospital because they're sick, of course, they're much more likely to die than people who didn't go to the hospital.
This disease is worse than the flu, but not massively worse than the flu especially when you consider the flu kills 646,000 people each and every year worldwide (in spite of vaccinations being broadly available) [2] and this pandemic just crossed 95K -- and somehow we manage not to shut down the world because of the flu.
What that means is that we should respond about the same way we do to COVID as we do to the flu in steady-state conditions. There's no world in which social distancing, either via disease elimination, via vaccination program or via herd immunity, remains a part of our lives forever as a result of COVID.
> We don’t know when the doors will open. It’s reasonably certain they won’t “fly” open.
That was not the case in China where much of the economy is recovering judging from NO2 emissions from satellite imagery.
It's also not the case in Sweden where they aren't shutting down the economy for COVID. "Although herd immunity is not the official strategy, some officials maintain that there is no other conceivable way to stop the epidemic, praising the original British strategy that the United Kingdom later backed away from." [1]
[1] https://www.washingtonpost.com/opinions/2020/04/08/is-sweden...
[2] https://www.cdc.gov/media/releases/2017/p1213-flu-death-esti...
[3] https://science.sciencemag.org/content/early/2020/03/24/scie...
Also China today is nothing like China pre-covid. Mandatory mask wearing everywhere, temperature checks every few blocks, in every shop, mobile codes to scan certifying your virus free status before being allowed to buy anything. They're not exactly planning their next Disneyland trips over there.
Think about it: if you allow it to spread, then yes, you will see people die. The same is true of the flu, which has so far killed more people in the same period of time than COVID has according to the CDC -- in every age category [5].
I bet flu deaths are plummeting in Finland, too. I bet you anything that Sweden has 20X the death rate from the flu as compared to Finland and Denmark. Because nothing spreads when you're locked in. But it would be absurd to lock everyone inside because of the flu right? It's a question of risk management not risk elimination. [1]
And they're quite right, that they will be safe from a second wave as no other country will.
So, to answer you question, it's working out well.
> Also China today is nothing like China pre-covid. Mandatory mask wearing everywhere, temperature checks every few blocks, in every shop, mobile codes to scan certifying your virus free status before being allowed to buy anything. They're not exactly planning their next Disneyland trips over there.
1. They wore masks anyways due to the pollution ([2] this photo is from 2013 not 2020).
2. They had police/army stops anyways due to the PRC government being totalitarian. [3]
3. They have actually re-opened Shanghai Disneyland, as of March 9th. [4]
Sounds pretty similar to me.
[1] https://www.schneier.com/essays/archives/2013/08/our_decreas...
[2] https://www.chinadaily.com.cn/photo/2013-01/25/content_16174...
[3] https://www.wsj.com/articles/twelve-days-in-xinjiang-how-chi...
[4] https://www.usatoday.com/story/travel/destinations/2020/03/0...
1. This is untrue. Masks were worn intermittently only on "bad pollution" days in cities like Beijing and Shanghai. Inland cities like Chengdu there is not widespread mask usage.
2. There is a difference between Xinjiang and the rest of China. You definitively do not see this type of security checkpoints in "regular" pre-covid China.
China is not back to "normal", there is fits and starts in the restarts to life, and there is also a psychological drag on consumer demand even though some shopping is reopened.
2. Sure, it varies.
I didn't mean to imply it was back to 100%, just that it was pointed in the right direction again.
Your comments about China are more hyperbole. What I've found most interesting during this entire event is how many people desperately want to convince themselves and others that we're facing certain doom. It's really quite bizarre.
"We're bad at accurately assessing risk; we tend to exaggerate spectacular, strange, and rare events, and downplay ordinary, familiar, and common ones. This leads us to believe that violence against police, school shootings, and terrorist attacks are more common and more deadly than they actually are—and that the costs, dangers, and risks of a militarized police, a school system without flexibility, and a surveillance state without privacy are less than they really are."
Or in this case, that COVID is much more fatal, devastating and terrifying than it really is, while the flu is much more tame and approachable -- and that we should spare literally no expense in the world to prevent it. Even though of course the flu kills 650,000 people each and every year, year after year. We're just used to it so we pay it no mind.
What we're seeing is less a pandemic (although of course it is one) and more a bug in human psychology on a massive never-before-seen scale.
[1] https://www.schneier.com/essays/archives/2013/08/our_decreas...
What's going on now, in the moment, seems to be something different. I keep hearing people taking minor news stories and blowing them up into apocalyptic scenarios like they WANT them to be true. As an example, there was a story a few days ago about how some tigers at the Bronx Zoo were infected. The next day, I overheard some people talking about how Covid19 is now infecting pets and there are animals spreading it in the streets of NY. Nearly every day I'm hearing things like this. Go look at the trending movies on Netflix - every one of them has to do with pandemics or the world ending. People want to fantasize about these realities. Why is that? It has to be some kind of coping mechanism. Is this an expression of society's deep discontent with the way things are and a desire to see it all come down? Whatever it is, for some reason, imagining the worst case scenario decreases pain/increases pleasure for a lot of people. It's fascinating.
Here's a great article on the subject: https://blogs.scientificamerican.com/observations/psychology...
That's debatable. Great Britain and Netherlands in the beginning wanted to simply let it go and use a "herd immunity" strategy, but changed track quickly after seeing how ICUs were overloaded in Italy and Spain. I've never heard ICUs being overloaded and medical resources being stretched to their limits during the flu season... Could you explain why? Isn't a great difference that we have flu vaccines but no known cure for COVID-19 yet?
Are you sure it wasn't public push-back?
> I've never heard ICUs being overloaded and medical resources being stretched to their limits during the flu season... Could you explain why?
There's never a whole lot of excess medical capacity since medical capacity is, you know, expensive. The disease burden of the flu is high. The US alone sees 45,000,000 flu infections each year. Having two diseases with the burden of the flu is double high, but it's not a reason to stop the world.
> Isn't a great difference that we have flu vaccines but no known cure for COVID-19 yet?
Yep, sure is. That said, COVID has shown so far to exhibit very little mutation. Globally the delta between viruses is about 15 base pairs. This means a single vaccine (or single infection leading to immunity) may be all we need. [1] The flu mutates regularly and different strains make it out each season which is why the flu vaccine needs to be given each year and why it's different each year. Flu vaccines are much less effective (19-60% [2]) for those reasons than, for instance, an MMR vaccine.
[1] https://nymag.com/intelligencer/2020/03/low-coronavirus-muta...
[2] https://www.cdc.gov/flu/vaccines-work/effectiveness-studies....
So what happens when, in order to cover expenses while you're quarantined for a few months, you've sold your fishing boat, fishing poles, life vests, etc.? Your fishing boat might have been turned into scrap metal by the time you can resume working, and you've already spent all the money in the interim (you sold it for cheap because at the time everyone else was selling their fishing boats for the same reason). That's why life won't necessarily return to normal when this is over.
A fishing boat is likely owned by a small business welcome to take out a (potentially forgivable) loan from the SBA to tide them over. Scheduled maintenance can be either deferred or completed by folks wearing masks -- I'd wager boat maintenance people wear masks anyways. Not to mention, is there any evidence people aren't eating fish anymore, and boats aren't out on the water -- well isolated from the rest of society? Isn't being out on the water about as socially isolated as you can possibly get?
Beyond that, China was out of commission for 76 days. How long are you expecting this to go in the US beyond 76 days, and why?
Bankruptcy requires a functioning, liquid market to operate. Complete collapse of demand on a scale never before seen isn’t that.
“Otherwise” is a word with meaning, and, contrary to your claim, that's exactly what “otherwise” means.
Now, the underlying premise for that “otherwise strong” being a meaningful category (that firms in that position are well positioned for a post-COVID rebound if they are prevented from a catastrophic collapse due to COVID) may be subject to legitimate debate, but that's another question.
Most of those fallen angels are leveraged to the max because they were borrowing money to finance share repurchasing and in some cases even paying dividends.
The moral hazard of this latest move is unconscionable
American Airlines Group, AAL 02376RAE2 US02376RAE27, rated B1 qualifies for this since their HY paper is held by HYG.
Probably a great time to write malware hack and steal money from these companies listed in IG and HY ETF's since they'll be made whole apparently now no matter what malfeasance they were up to before hand.
However, lets keep in mind that since the announcement on March 23, frbny via loans through blackrock has yet to buy any corporate bonds in the secondary market as of April 8th ("Loans" > "Secondary credit") : https://www.federalreserve.gov/releases/h41/current/
Several IG airlines could have issued over the past few weeks but haven't for a reason. We have had a flood of IG new issuance and not a single airline or adjacent industry. CCL which basically has the same problems as airlines right now (gov basically making business illegal) was able to raise quite a bit of money. Difference is, they know that they aren't going to get bailed out.
And as of today my initial comment is out of date since DAL got downgraded.
Otherwise I agree: this is urgently necessary.
https://www.bloomberg.com/news/articles/2020-04-09/fed-unlea...
This is an exaggeration. Many companies purposely have junk bonds so they can borrow more money at a low rate, compared to investment grade bonds.
What? Conventional wisdom says that risky (junk) bonds would have higher yields (aka costs for the borrower) than safer (investment grade) bonds.
- Corporations have kept getting bigger and reinforcing their monopolies far beyond the point of optimum efficiency and have been manipulating elections and policy-making to benefit their own interests.
- House prices in big cities have kept going up due to a combination of factors including centralization of capital due to corporate monopoly power.
- Many corporations took free 0% loans from the government to buy back their own shares; often for the purpose of tax evasion. This conduct is unethical in at least 3 different ways when you consider the fact that the Fed is now shamelessly bailing out these corporations to clear that same debt which they used for tax evasion.
- Freedom of speech in the work environment has declined significantly.
- Trust between people has declined to an all time low due to the adverse, coercive work environments in which we operate.
- We are facing huge environmental threats which are not addressed due in a large part to lobbyists backed by corporate interests.
- The financial system is over-complicated and opaque; few people understand how fiat money enters the system but it's clear from empirical evidence that it benefits corporations while harming both small businesses and consumers. Even the Fed itself has admitted that their cash injections do not reach small businesses or the workers.
- Our governments will screw over its citizens in the most blatant way imaginable; they will even exploit a health disaster as an opportunity to fast-track the agendas of their corporate masters.
It's bad enough that most people just stand back idly and nod their heads... But it's deeply disturbing to witness some people go further than that and actually manufacture excuses for what are obviously deeply unethical activities...
Also, it seems that these people who spread misinformation for the sole benefit of corporations are not even getting paid for it! This behavior is not even aligned with the capitalistic self-interest ideals which their corporate thought leaders keep preaching, it's like some weird type of selective masochistic altruism whereby some individuals feel compelled to only help evil people who they know will hurt them along with the rest of society.
If you're a real capitalist, do as you preach and stop defending other richer peoples' interests! That's not how it's supposed to work.
If you're not a billionaire yourself and you oppose the idea of the government making laws which will reduce the wealth of billionaires, you're a socialist for the top 0.0001 percent. A maso-socialist.
.. and to enrich themselves.
Look at Germany today; it's an economic powerhouse. You wouldn't believe that this is the same country that it was after WW2 - Germany did not succeed in spite of the post-WW2 economic crisis, it succeeded because of it. Also, it's not the first time Germany recovered in this way either, just look at post-WW1 economic crisis. Germany went from being penniless to become an economic and military superpower in a very short time. It had accumulated so much surplus wealth that its military could almost afford to wipe out the entire planet in WW2.
Financial crashes are an excellent way to clear out inefficiencies and allow the markets to reform themselves and allow meritocracy to regain significance.
Bold claim.
Economic issues after WW1 helped give rise to nationalism and led to WW2. This is why the marshall plan was so important after WW2. Similar countries experienced post-WW2 economic crisis, but few prospered as much as Germany.
To use your reasoning, many countries should be as prosperous as Germany (like, say Argentina - hyperinflation and economic crisis followed by economic restructuring..)
While rebuilding is a very human endeavor, it can take decades or generations. We need to have creative destruction in the economy, we do not need economic depression to do that (other ways to deleverage..)
non-sequitur point. The germany economy was able to be developed to a point where they became a military threat. Nationalism or not, if you just consider economic recovery, it disproves the fact that damage to the economy can ever be permanent. People are going to find ways to live, and in doing so, produce goods and services, and become increasingly efficient.
[citation needed]
Buybacks and dividends have, more or less, the same federal tax revenue implications. The difference is that dividends incur a taxable event in a window outside the shareholder’s control.
Beyond that, I’m curious where the idea comes from that the government is giving 0% loans to corporations. Yes, the Fed overnight rate is effectively zero, but you can’t have your cake and eat it too. If I borrow from the overnight window, I have to pay it back the next day. Very hard to do that if I already spent it. Or are we talking about the repo market, where banks can get a longer low-interest loan by putting up security in the form of Treasury bonds?
Both of these facilities are to manage liquidity and don’t provide a 0% loan capability to run-of-the-mill corporations.
This is wildly false.
* March 4th assets: 4.2T
* Today: 5.8T
* Proposed: 2.3T more
so that's 3.9T since March 4th. Doubling. Not "order of magnitude"
(Well at least to the subset who think in binary. For those who prefer hex, even a factor of 10 won’t do it).
Mixing terminology as it suits oneself is considered deceitful and/or manipulative. Making excuses for someone who does this and doesn't restate/recant is also bad form.
Although if jocularity in your message whooshed over my head I apologise for that.
EDIT: This doesn't mean the price won't rise. The purpose is to cause price rises, i.e. inflation. But they won't be overvalued; the true dollar value will have increased.
> the true dollar value will have increased. The very definition of inflation is to reduce the value of money. Can you help me understand how they're trying to cause inflation, but also increase the "true dollar value"
The fed’s balance sheet impacts people who hold dollars, not people who pay taxes.
FWIW, I don't like what the Fed is doing, and am troubled buy it, but I think OP is overstating it.
I have my savings in a 401k with a mix of index funds stocks and bonds and to be honest I am quite happy that the government is stepping in and not letting everything go down.
I'm sure there is a downside, but can you make it clear what that is?
I noticed a lot of HN folks just love to be alarmist when it comes to the economy. I am sure this time you are right, but I've been reading HN comments like yours every single week for almost a decade now, always suggesting that we are on the verge of an impending doom...
The impending doom has been pushed in the future, but it will come back much stronger. Sometimes in the future, whrn reckoning comes, usd will lose its reserve currency status, there will be massive currency devaluation/hyperinflation/stagflation.
Nobody knows what the future will hold when everyone is in the same position.
Yes, pension funds and 401ks own a lot of these assets — but people who have pensions and 401ks are doing better than many many other people in the country.
The tangible cost to what the Fed is doing, is that they will effectively destroy low single digit trillions of dollars in wealth held in US dollars (picture household wealth at $100 trillion for this purpose, and then picture the Fed lighting $1-3 trillion of that on fire as a means to prop up the economy; they're debasing our national wealth in this process, drawing on it via their control of the dollar, to point it as a firehose at the fire; not exact figures, merely a conceptual representation). That damage is likely to be anywhere from one to a few trillion dollars in real losses that they'll see from their programs (only a portion of what they do will result in losses of real value, as in the actions taken by the Fed during the great recession; % losses will be higher in this case, as they're doing some wider, riskier things). They're trading that hit as a cost to prop the whole thing up until the economy can find its legs again.
It's absolutely the right approach. It's the only serious option, other than doing nothing (which isn't reasonable, but it's another option). It will not be without a cost. It will prevent a far, far worse catastrophic outcome. If unemployment peaks at ~14-18% (it's almost guaranteed to hit at least the 15% area somewhere, and soon), without the Fed's actions you could easily double that figure.
The US is incredibly fortunate in this case. The many choices of our ancestors, which made the USD the global reserve currency post WW2, we're cashing in that rainy day benefit right now. We've been irresponsible with our fiscal condition the past 20 years, so our primary fiscal back-stop is the US dollar on such a short notice desperate need (this is far beyond the great recession, in terms of extreme sudden need of dollars); using that is a form of a tax against the assets held in dollars and the productive output of the US economy.
There is a very plausible scenario where the US dollar sees little negative impact despite the trillions of dollars in magic printing the Fed is going to do. And that is: the other major currencies it is competing with globally, are all supported by economies being similarly smashed right now (Eurozone, China, Japan; and the Chinese Yuan has very little global footprint, so it's not very relevant to that context presently, it's really mostly the Euro). The global demand for US dollars right now is extreme, which pushed the dollar to a very high level recently. That dollar demand, for liquidity purposes, will relax later on as some normalcy returns with eg a vaccine (within ~12-18 months sometime probably), and then the dollar will see some fallout from what the Fed is doing now, that's when the long-term cost will begin to be represented in such things as consumer prices, commodity prices (priced in dollars), and so on.
People with assets will benefit tremendously from what the Fed is doing. The stock market would be anywhere from 1/3 to 1/2 lower than it is right now, if the Fed hadn't stepped in in an extreme way (and I don't like where the market is at right now at all, it's not properly pricing in the grinding damage we have to deal with over the coming year, it's temporarily buoyant on the Fed's sugar actions). This is the world's largest bailout for asset holders, and it also happens to be very necessary to preserve the economy until it can return to functioning properly.
The only approach that would have maybe been better, is if a national hold had been placed on all major firings, all mortgages and rents for N months (3 months initially). The Fed would then step in to pay that toll directly (ie prevent the fire, rather than try to put it out afterward), along with the Treasury doing various programs. That could have possibly prevented more damage than what we're doing now. The US system, legally speaking, doesn't allow for that kind of command-economy type action very easily though. So the Fed's moves, which were 'guns at-ready' and made possible by the great recession, were the best choice we had (if this were 2007 and it were happening then, the Fed wouldn't have been able to move as quickly; there was a lot of stumbling around in dark in the initialy days of the great recession, trying to figure out what the Fed was allowed to do and what made sense).
Long story short, the Fed is eating some of our national wealth to do what it's doing, that's the tax we're paying (and some of that is being paid by the rest of the world, as the dollar is the reserve currency and widely held). Instead of everyone selling off 1-3% of their wealth and handing that cash to a central authority to take bold actions, the Fed is doing a conceptually similar thing via 'stealth taxation' (aka inflation (which won't register near-term due to very slack demand), aka dollar debasement, aka printing).
I think you are a little too aggressive about inflation in terms of consumer prices and underselling the impact to wealth inequality. Hopefully we will be able to have interest rates rise.
We'll likely see it show up aggressively in asset inflation. Every dollar the Fed puts toward artificially propping up asset prices, is going to gradually leak inflation into the economy as asset holders unlock those assets and convert them into dollars that touch the real economy. Some might ask: if that's true, why isn't consumer inflation far higher (eg in the post great recession era); consider that inflation might be even lower if they didn't do it. That's a very difficult speculation to make either direction, the fact is the best we can do is guess on the what-ifs (would inflation be that much lower otherwise). If the Fed props up the housing market (0% interest rates, buying junk mortgages to take them off the market to prop up values, keeping the lenders solvent, etc), enabling a homeowner to take out a big home equity line at cheap rates and then inject that cash into the real economy, we get some little jolt of inflation from it. The Fed helping to prop up the stock market, enabling millions of people to extract more value out of the market at higher prices, shoots inflation into the economy to the extent that it's abnormal to what would otherwise exist in the absence of the Fed actions. The interesting question is: how low would inflation be without that happening (now and in the recent past)?
Your second paragraph is exactly what I meant by wealth inequality. I don't think rich people buying things will increase CPI, but it does impact positional goods like college and real estate.
So far, the Fed has been providing liquidity to MBS but not enough to prevent real mortgage rates from _rising_ currently. I believe unemployment will remain high enough for long enough to stave off a housing price increase.
The sell-off of equities as boomers retire and live off their stock portfolios is also something to consider as counterbalancing equity prices over the medium to long-term.
I believe the prevailing belief is that we'd be in a deflationary period without Fed intervention.
This is one of the biggest benefit of being a world hegemony, print money and then make the rest of the world pay the bill.
It is true that it's a benefit of US hegemony. The rest of the world will pay a minority fraction of the direct monetary bill (they'll take a minority share of the debasement hit over time). The vast majority of the wealth and productivity held/represented in US dollars, is in the US economy.
The worst of what the rest of the world sees isn't actually a direct financial cost in the manner the US will see that bill. The worst part is the risk of commodity prices increasing in a disorderly manner, as they did when the Bush Administration tanked the US dollar with spending + deficits + tax cuts and the wars, along with the Fed's over aggressive actions to try to dodge a recession after 9/11 (which then helped to cause the housing bubble afterward). The world got food turmoil [1] out of that dollar-inspired commodity bubble, which caused vast civil unrest around the world, primarily in less stable and poorer nations.
The motions of the dollar cause wild effects all over the planet, from food to banking/finance to energy. That's a much worse risk than the world eating 15% of the bill for what the Fed does here. Granted, that is indeed a form of paying the bill (so to speak), it's a different kind of bill than the one the US will likely be paying.
[1] https://en.wikipedia.org/wiki/2007%E2%80%9308_world_food_pri...
> On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial, essentially ending the program. TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit
[1] https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
https://www.clevelandfed.org/en/our-research/indicators-and-...
Yes, we are. But we come with navigational guides.
Quantitative easing was born out of Bernanke's deep study of the Great Depression, where exogenous events prompted a liquidity crisis that kept causing pain long after its cause had subsided.
The demand destruction we're seeing today, as a result of the novel coronavirus, is unprecedented in the modern era. We don't want to spend decades after the infection has passed rebuilding productive capital destroyed for lack of liquidity. That's what these measures aim to prevent.
Navigational guides and models only help in charted territory.
I think the FEDs doing these injections will distort the price of money in such a way that risky activities would be seen as less risky, and so spirals into further illiquidity when something bad hits the fan (again), and the FEDs will need to inject again.
The businesses failing needs to happen. The capital losses needs to happen. Like a forest fire - new growth can't come if the old capital doesn't die (i.e., those controlling the old capital is constantly being protected from downsides, which this illiquidity represent).
Do you mean, what if the economy never recovers?
Then the Fed’s actions will soften the blow. They will have decoupled the spectre of deflation from the underlying destruction. It certainly won’t have caused more harm than would have otherwise occurred.
That said, no democracy survives 30%+ unemployment for long.
I don’t think there’s any merit to the idea the Fed will be able to unwind this support in the future, if that’s as far as they got in one of the longest expansionary periods in history.
EDIT: /u/adventured has an excellent comment [2] down thread you must read that explains the situation succintly; TLDR The Fed is incinerating 1-3% of total wealth (through devaluation) to keep the economy pilot light on until we can start the economic engine back up, monetary policy be damned. Whether these efforts can be "unwound" seems to be immaterial.
> monetary policy be damned.
No, this is monetary policy, aimed directly at what the Fed is chartered to aim monetary policy at.
That was the idea at least.
When the Fed started unwinding a little over a year ago, they had to suddenly stop when markets tanked—hard. After the Fed ceased, stability returned.
I'm not sure there will ever be an unwinding, at least in the traditional sense.
Topping it off, starting last September, the Fed began emergency "not-QE" liquidity injections, which have unexpectedly grown over time.
And now, this black swan event. Nobody knows what's going on.
What were those "not-QE" liquidity injections exactly? What other lever were they pushing on a year ago?
I imagine there's a lot of 'invisible supply destruction' as well, as all those businesses that have let go around 17 million people over the past three weeks[a] are shutting down entire groups and divisions, canceling investment plans, walking away from leases, etc. Not pretty.
[a] https://www.wsj.com/articles/u-s-surge-in-unemployment-claim...
Agree completely.
There's been this naive bit of internet "wisdom" running about assuming plants and planes are the only assets in the world. That after all is said and done, and bankruptcies re-assign that capital, the world can continue as before, with ownership only shuffled.
That isn't how modern economies work. Tremendous capital is in the intangible nature of firms. Apple, Tesla, SpaceX and your neighborhood restaurant are worth less in parts than as a whole.
Well, of course they are. If they weren’t, they could make more money by liquidating themselves, which means they most likely would liquidate themselves.
See, the thing about a market economy is that the value of assets is difficult to ascertain but can be "discovered" through the actions of market participants. Sometimes, a whole bunch of assets are tied up in a company that seems to be using them well enough, and might even be generating a profit (on paper), but in fact those assets could be used even more profitably in some other productive capacity.
Note that this doesn't restrict assets to PPE (property, plant and equipment). I'm pretty sure anyone who has ever been an employee can attest that human capital can be just as unproductively employed as physical capital, but still show a profit on paper.
So no, you can't make some blanket statement that all companies are worth more than the sum of their parts. Some might be, but I believe the main reason we are a capitalist society is because allowing markets to freely discover the prices of assets results in a much more productive allocation of capital than the alternatives.
I would agree with that - except that would also cause collateral damage to people's livelihoods.
if the gov't bailout is more a societal bailout - good unemployment benefits, good socialized healthcare, and effective tax collection of income - then they won't need to do any corporate bail outs, or inject liquidity.
The fact that loans can easily be had, means that a company's investment hurdle rate is artificially lowered. And companies take more risks. I believe japan's lost decade is a prime example, and the bank of japan has held all the assets as their purchase program failed to bring any real economic prosperity (https://www.reuters.com/article/us-japan-economy-boj/bank-of...). I sincerely hope the USA isn't gonna fall to that.
QE was born out of the seigniorage, the ability for the FED to now print endless money at no cost. This is a cycle that repeats every 50-100 years for the last 1,000. A governing body slowly fights for more and more power until it has enough to simple declare what is or is not money. Then uses that power to print as much as it can before runaway inflation takes hold.
Bernanke's insight was nothing more than that of previous King's, coin as much money as you can before people catch on to what you are doing.
Some not so random related thoughts:
- It's not always inflation by the way that eats away at money's value. Often it's replacement with something else, by force. Much of nazi occupied Europe has experienced this after WW II. Much of eastern Europe has experienced similar things after the fall of communism.
- Inhabitants of the US have not really experienced their money losing the majority of its value over the past ~200 years. In that way, the US have been more unique than many people realise.
- I've found David Graeber's "Debt: The First 5000 Years" [0] very interesting. He makes the point that we should think of at money as debt. Whether you agree or not, it's an enriching point of view.
- The biblical concept of the Jubilee [1] is fascinating. It demonstrates how debt forgiveness cycles were deeply embedded in some ancient Middle Eastern cultures.
[0] https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years [1] https://en.wikipedia.org/wiki/Jubilee_(biblical)#cite_note-5
that is a single data point, and also a fairly unique situation. I don't foresee nazi like regimes in the west rising up any time soon (tho, given how trump's been going as of late, may be i m too optimistic?!).
The problem with inflation is that it's it eats away at money differently for the poor vs the rich. And i do believe the rich benefit much more from inflation than the poor does. But the poor make up a majority of the population.
I fail to believe that (low) deflation is actually as bad as the central bank economists claim. Inflation encourages investment, but also encourages more risk taking. I understand that high deflation has negative detrimental effects on an economy, but so does high inflation!
Low deflation encourages saving, and encourages prudent investment. I think such deflation will stop cyclical credit-induced recessions, and make the economy grow at the rate of technological improvement.
But the Great Depression was caused by a financial crisis, that led to a ‘real’ crisis. This is the opposite, a real crisis that will lead to a financial one.
And during the Great Depression, people could still have worked - if there were any jobs. This is not true now. People simply can’t work.
It’s all very well being able to get easy money, but if you can’t get any workers, you still can’t start a business.
A lot of money chasing fewer goods can only have one consequence in the long term.
But seem to be overlooking @JumpCrisscross’ main thrust of: long after its cause had subsided ... after the infection has passed.
It seems reasonable to predict the current restrictions won’t exist in perpetuity.
And even if they do linger on for a long time (years) then businesses will also need sufficient liquidity to adapt to a new normal. Startups created to fulfill any new or newly important needs.
Spot on.
Supply side economic policies (Reaganomics) was a defensible policy for the 70s. While plenty of people thought it was voodoo economics (eg Bush Sr), we needed some kind of course correction.
We're now faced with the exact opposite situation. So we'll need appropriate remedies.
Isn't the Fed buying with money it prints?
If so, it's not the US government that will suffer the losses.
Disclaimer: recently sold my JNK holdings after fed’s announcement today.
Prediction: we will end up with full Japanification and/or MMT.
Inflation and deflation are not so one-dimensional that they can simply "balance out". When the Fed issues money that money isn't distributed to everyone equally. And when money gets removed from the economy, that doesn't affect everyone equally either—nor does it impact the same people to whom new money is being distributed. Even if the total money in circulation stays the same, there's still a massive redistribution of wealth going on behind the scenes.
The fed buying crap bonds isn't even doing anything to prevent economic collapse. The economy has already collapsed, due to to the shutdowns. This is nothing but a transfer of wealth from people who own US dollars, to people who own US equities.
All it does, is prop up the stock market. The real economy could go to zero, but as long as the Fed is buying assets, the stock market will keep looking green.
Personally, it seems to me that if you’re not willing to let capitalism work itself out in a crisis, you should stop pretending to have a capitalist system at all; Norway is a pretty entrepreneurial country despite being a certain shade of pink. But the arbitrary dividing line between “investment grade” bonds and “junk” bonds is not some Platonic boundary between “safe securities” and “crap.” It’s there for complicated historical reasons which are perfectly reasonable to ignore during a crisis caused by an unforeseen and unprecedented economic slowdown.
How would you operate, say, a restaurant with the pandemic risk on your balance sheet? You’d need, what, twelve months of cash available for a rainy day?
All of the dynamism of the marketplace would evaporate and we would have Soviet-style restaurants.
That said, one could also say the taxes businesses pay to the government are like insurance premiums for acts of God and at that point the government can step in...
There are other options. One such option is to let non-essential businesses stay open and stop it with the travel bans. There'd be other benefits besides preventing economic collapse, delayed or otherwise - less domestic violence, people in Africa won't starve because of other countries are hoarding food (and Africa being a net importer a food will suffer), local farmers won't suffer a severe shortage of transient workers, etc.
Do I recommend that? I don't know.
I do know there's a big vacuum in the discussions of COVID-19. We are trying to preserve lives, so why don't we ever talk about the deaths extreme isolation measure will cause? If they pale in comparison to the COVID-19 deaths, fine.
To make this clear with an example...many bond funds, active or passive (E.g., ETF, mutual fund, etc.), have strict covenants guiding their investments. In a simplified system of: Investment grade: A, B non-investment grade: C, D
the funds may only be able to purchase A and B rated bonds. Additionally, they may be forced to sell a bond which has a rating change from B to C or below.
Since many ratings agencies are revising ratings lower across the board, there is mass selling of these bonds, just as the companies attempt to raise money to finance their operations. It's also very typical for ratings agencies to essentially trail the capital markets. So as a bond decreases in value, the probability of a credit rating change increases.
This alone could cause manufacturing, energy, or any capital intensive business to fail as their interest payments skyrocket and they lose access to financing.
The probability of default for these companies skyrockets in this scenario. If the fed props these markets up temporarily, it's extremely likely the defaults will be far less severe.
1. A massive asset bubble and a fundamental re-evaluation of risk/reward ratios for all investments. Historically, the average P/E ratio for S&P 500 companies is around 16. Roughly speaking, this means that investors are comfortable making their investment back in 16 years in static market conditions. Does this decision calculus change if you know that the Fed will bail you out as soon as times get tough? You bet it does. Similarly, corporations are much more incentivized to take on as much debt as possible in hopes of inflating their stock prices. When times are good, massive bonuses for execs all around. When times are bad...hey, bailout! I expect the "new normal" for P/E ratios to be in the 30-50 range. In the short term (next decade or so), this means the party continues, and we see massive growth in the stock market. But when the bubble pops, it'll pop harder than ever...
2. The second scenario is that debt-holders worldwide lose faith in the dollar and start dumping Treasuries, leading to hyperinflation. This doesn't seem to be happening as of today, in fact, the more money the Fed prints, the stronger the dollar. Central banks worldwide are printing money as well, so the dollar looks like the "least ugly" choice by comparison. The big unknown is how long the Fed can keep printing before debt-holders start second guessing the dollar's value.
Can I ask for a journal or study source/citation for this?
We must be living in a different place.
Childcare, Healthcare, Education and Housing have experienced huge inflation.
A home in the bay area was 700,000 in 2008. Today you can't find anything for less than 1.2 million.
When this inflation hits the economy what will a home cost? What will education cost?
Isn't it more likely that the price rises in Bay area property have been compensated for in other areas and sectors?
Why are they even doing this in the first place? The Fed buys assets during deflation and sells assets during inflation. Buying a cheap asset (e.g. $50 for a share) with money created from thin air increases the money supply and over the long run increases inflation. Inflation causes the prices of cheap assets to rise above the original value to $100 for a share. The situation is out of control! What can the fed do? It can sell assets in exchange for $100. In other words. The fed never runs into a situation which it cannot undo.
To whom?
In the aftermath of the 2008 financial crisis, the Fed managed to unload a mere $800B (balance sheet went from $4.5T to $3.7T) in the longest bull run in history. Now that it's an order of magnitude bigger, you can draw the logical conclusion yourself.
The Fed currently holds ~$5.8 trillion, but it's long term holdings are about ~$1 trillion in current dollars, so it's holding an addition ~$4.8 trillion above what it normally has since the early 2000s.
In October of 2014, it held ~$3.7 trillion, or ~$2.7 trillion above what it normally holds, so the recent increase to $4.8 trillion above baseline isn't quite an order of (base 2) magnitude increase.
Having said all that, the net worth of households and non-profits in the US is about ~$118 trillion.
Also, why does the government debt "bubble" ever have to "pop"? Does everyone still believe the government has to "pay off the debt"?
They don't. Ever. For a large number of reasons, to name just a couple:
- No more treasuries or bonds (how many people would freak out if those no longer exist)
- They can print more money forever. Besides, at this point it's just numbers in the FED computer system. Hardly any of it even exists as a physical object (paper, coins).
Also, I'll let you in on little secret. The Fed is never going to fully unwind its balance sheet.
The balance sheet can be unwound simply by waiting for the bonds to expire, then the money goes poof out of existence the same way it poofed into existence.
What the fed has been doing though, is rolling the money into new bonds, keeping the total balance ~constant. If they didn't, it would leave a $4T hole in the bond market that would suddenly need to be filled.
How would that work? The money's been created and has been put into the economy. Balances on bank accounts have increased. You can't just take it back just like that.
When it matures, the fed holds everything. There isn't anything to "take back"; they have it all already.
If the bond is not paid back and the debtor defaults, well... this can't happen with US Treasuries because the fed is an arm of the government and will always roll over a bond. But if it happens with the corporate bonds that the Fed is buying, then the US Treasury is on the hook for the losses because by law the Fed cannot be impaired.
Also, when you say "in fact, the more money the Fed prints, the stronger the dollar", I don't think this is quite the case. The supply of US dollars isn't enough to match the global demand for US dollars. The Fed is having to "print" (basically enter some numbers into a computer) dollars to meet this demand otherwise it causes havoc... perfect example is the repo market spiking and the Fed having to intervene.
For a good explanation search for the 'dollar milkshake theory' by Brent Johnson.
I agree that the Fed's interventions can't keep on going... each intervention creates market distortions that end up requiring more interventions. However, one of my economics professors used to say, “In economics things take longer than you expect, and go quicker than you expect”. So, I take that to mean that the Fed will ‘save the day’, continue to distort the market, and we will have a catastrophic unwinding of the debt.
In terms of how I'm going to protect myself, I looked long and hard at Ray Dalio’s ‘All Weather Portfolio,’ but I've decided to implement Chris Cole's ‘Dragon Portfolio’ (search for ‘The Allegory of the Hawk and the Serpent’) with a tactical overlay taken from Seth Klarman's out-of-print investing book, 'Margin of Safety' which I highly recommend.
3. Dollar devaluation through expansion of the balance sheet even further.
The BoJ balance sheet is about 100% of GDP. The Fed balance sheet is about 30% of GDP. That gives a lot of room to add assets before the US looks anything like Japan in that department.
This balance sheet expansion could happen against a backdrop of stock prices that would otherwise be falling. Expanding the balance sheet through stock purchases allows the Fed to correct the global dollar short squeeze while preventing calamitous stock repricing at the same time.
Nominally, things wouldn't look much different to those in the US. But in real terms, the result would be crushing. It seems, however, that politicians and many voters only consider nominal returns, not real returns.
This is one of the reasons I find it hard to believe people who claim the Fed is "out of ammunition." We're at the level of bazookas now, but the Fed has everything from that to nuclear ICBMs and more to play with courtesy of the dollar's reserve currency status.
If corona turns out worse then anticipated for the US and Trump insist on ending his term on a high stock market in 8 months time, the damage could have already been done.
If the Fed got it up to 100% of GDP (or whatever is considered extreme after this crisis) the status of 'reserve currency' will be in jeopardy.
Being the 'reserve currency' is all there is to the dollar, and the US has successfully leveraged it for more than 50 years.
However, if it comes into question, the collapse of the US will be almost instantaneous.
The ICBM's are for show, no sane person would ever fire them.
The pendulum swings. We had a lot of government involvement in the 40/50s. It declined through the 60s and 70s until we got peak deregulation in the 80s. People forget that near-free telephone calls and cheap flights everywhere were a direct result of all the deregulation. Now I see things swinging back. Maybe it's generational, we forget/become blind to how good we have it, and only see the disadvantages, and then swing back the other direction.
My sense is that we're heading toward something more like China with all the good and bad that entails. Much closer cooperation/coordination between the federal government, industry, finance, and academia. Government that doesn't let big business fail, more stable and "guaranteed" employment/income for people, more state direction of the economy. More emphasis on big firms, "national champions" (Trump creating the CEO advisory council with Apple/Tesla/etc. CEOs, bailing out Boeing), America-first (China-first!) industrial policy, and limited scope for foreign ownership/takeovers (US blocking ZTE's takeover of Qualcomm, arresting Huawei execs in Canada). With the accompanying reduction in freedom of expression, individual rights, ease of hiring and firing, economic freedom, and overall dynamism/ability to adapt and invent new things.
It's been heading this way for a while and frankly, seems to be what people want. Massive escalating bailouts every 10 years, and a serious push for a socialist, worker-first government. It seems there's been some kind of deep shift in our culture away from risk-taking and more toward the stable academic/government/state-directed way of life.
Look at all the main street businesses around you, especially hotels, dry cleaners, diners, gas stations, auto repair shops. It's striking how many were started from about 1940-1970 or so. Nobody wants to own or operate this stuff anymore. Everyone would rather go to college, get a stable job at a big, high-paying, high-productivity company, usually that offers good insurance, paid parental leave, etc. and work there for a long time, or hop between various versions of this same arrangement for a few years at a time.
It’s too bad most people do not possess a spirit of independence and would prefer comfortable amusements.
here's an example: do you all realize that the banks providing these loans are being paid essentially commission [1] for making the loans? anywhere from 1% to 5%? 5% on 500B is 25B in the pockets of bankers. why?
[1] bottom of the page here under PPP incentives https://www.chapman.com/insights-publications-SBA_Paycheck_P... . and if you think covering "processing fees" isn't commission then ask yourself as a programmer why it's not a flat incentive? does it cost more to process the paper work for 100k loan than a 10k loan?
edit: what in the fuck am i getting downvoted for? i have a literal citation of a tax attorney. i'm not editorializing or taking anything out of context or whatever. it's right there:
>the SBA will reimburse lenders for PPP loan processing fees, based on the disbursed loan amount: 5% for PPP loans up to $350,000; 3% for PPP loans greater than $350,000 and less than $2 million; and 1% for PPP loans of $2 million or more
what could you possibly disagree with here??? jesus christ forgive me if your naive understanding of the world doesn't reflect reality.
What does this mean? It's either verifiably true or it is not.
If you keep breaking the site guidelines with your main account, we're going to have to ban that as well.
I, personally, believe we need a stimulus for working families, and that we should significantly increase taxes on capital owners, etc. If you believe in that too, then you should be directing your energy towards getting the government to pass a stimulus, not towards trying to get the Fed to do it (they can't).
BTW, even in a socialist utopia, presuming that there are still markets and currency, we will probably still need an independent central bank.
please show me a single time in history that the Fed has leant directly to businesses, states, and local governments; from the article
>and reached into unchartered territory to support American businesses, states and local governments.
so hmmmmmmmmmmmmmmm
The Fed is an institution staffed by unelected, career technocrats. It's not supposed to have such sweeping powers (and, by charter, it really doesn't), but, like most parts of the executive branch, it has expanded in scope over time due to a steady erosion of our lawmaking institutions.
Put bluntly, the Fed can do what it does for the same reason the President can start pseudo-wars without going to congress: it's inconvenient for lawmakers to cop to such responsibilities. The other branches of government are simply shoring up the holes.
To be honest, I like the Fed a lot... In so far as grossly unchecked power goes, we could have far less competent people at the helm (The fact that so few in monetary policy wind up in congress is the real tragedy, if you ask me). That being said, future performance is no guarantee. History shows that it is not so simple to take back power once ceded for the sake of expediency when it is no longer convenient.
The question is how you put the genie back in the bottle.
I think this is the core insight of small-government conservatism. When big, powerful institutions exist, they can do great things...provided they're always run by exceptional people. But when they're not, the damage they can do is incalculable.
So the question becomes, how do you create a system with the best long-run survival properties? I, I suspect much like you, would like it if there was some way we could return a bit of power back to Congress and other institutions, and away from the huge executive we have today, in 2020. It just feels like a ticking time bomb until the wrong people get the helm.
I am no longer so sure these aren't mutually exclusive. In the end, the buck stops at the voters. Do voters in practice make decisions that make any sense at all? Were the successes of democracy really the successes of voters, or were they the successes of a technocratic gatekeeper class who very carefully controlled the flow of information to induce the voters to make the "right" decisions?
That's the theory, first given when the Fed expanded from buying treasuries in to buying bonds back in 2008. Looking at their balance sheet [0], it isn't working that way in practice.
The dollars earned from a person(entity) selling a bond to the Fed at a price that only the Fed would buy are new to the money supply. The dollars earned from a person selling hours of labor in to the labor market are subject to other market forces and are harder to come by, as evidenced by the fact that most people don't have 4-6 times the wages or savings that they did back when the Fed's balance sheet was ~800 Billion in US Treasuries, 12-13 years ago.
Inflation isn't steady, it's lumpy, which makes the playing field lumpy.
In other words, imagine I took $18,000 from you, paid you $1,200 directly from the $18,000, then I loaned you the balance and charged you interest on the the very money I took from you and loaned back to you.
What should have happened is exactly as you say, give the people $18,000 and allow them to spend it or loan it for the benefit of hurting businesses and the economy and allow the taxpayers to make interest.
So everyone's life is $18,000 worse off.
Do I have this wrong?
It is not an analogy it is math and how we commonly reference and understand federal debt. If you look at the US nation debt clock (https://www.usdebtclock.org/) you will notice next to the total national debt is debt per citizen and then debt per taxpayer.
Congress passed a $6T bill, that money is created as a future debt to all citizens, your point is obvious not all citizens are taxpayers, and not all taxpayers will have the same tax burdens (yet as you will notice we still look at tax revenue on a per capita basis also). There is a reason we don't look at the existing nation debt in those terms rather on a per capita basis. Either way none of that has anything to do with how Congress elected to indebt the Country and distribute the funds.
> 2 trillion divided by 150 million workers is about $13,333.00 per person. That’s much more than the $1,200 per person check authorized by this bill.
Now the Congressman did divide the $2T by 150M to account for workers only; whereas, I divided $6T by 331M (as a rough estimate for total US citizens). Otherwise my number would be closer to $37,000 per US worker (as opposed to $18,000 per citizen)
You’re confusing monetary and fiscal policy, as well as collateralised loans, asset purchases and grants, in a way that makes the sum meaningless.
[1] howard zinn's people's history of the united states
You know that saying about teaching a man how to fish.
Saving the businesses is the same as grabbing the fishing rod so the fish don't pull it into the ocean and the man has no rod to return to.
Giving it directly is giving the man a fish so he feeds himself for a day (something we are also doing with $1200 checks).
If we don't grab the rod and save it, we're stuck feeding the man for many days, until there is another rod available to use.
You may ask "Why not just buy the man a fishing rod?"
Well because there is no rod and rods don't scale to support a population of 330 million people. We're past the point in our economy where everyone can sustain themselves solo. It's more like fishing nets (companies) that each require dozens to thousands of people to operate to pull in a catch.
We're saving the fishing nets.
We lose enough fishing nets and soon enough there won't be enough fish to collect as tax and redistribute to those we need to feed for a day. The ability to hand out anything at all is backed by the fishing nets and the people operating them. You need to save both.
the man doesn't have food now. not 6 months from now when your fishing line untangles. what do you do?
>some extra conditional $600 checks
conditional on what? literacy? drug tests? skin color? why conditional at all?
I don't remember. I think it might have been for dependents. Go read the text of the first bailout bill. It's all there.
Normally it's the best way to inject money into the economy. Right now the best thing to do would be to suspend rents and debt repayment obligations.
One challenge is that the world is run by software. I have no clue how we would begin even modifying everything to account for such a dramatic change so broadly. Also, who do we suspend this for? Everyone? Only those that can't pay? This solution gets very messy very fast due to the layers upon layers of creditors, who themselves may have creditors. Among those creditors it's likely you can count both the American government and regular Americans (people with pensions and 401k's).
One of the potential consequences that concerns me is what all those creditors do when this is all over? Is there any a new element of risk (suspension of payments) that gets priced in that makes all credit more expensive in perpetuity? Is more expensive credit in perpetuity more expensive than the solutions we're pursuing? Do the creditors pull out of the system entirely and move their money to systems that didn't suspend rent and debt repayment obligations? I really don't know, but doing that is uncharted waters that should not be taken lightly since there may be consequences worse than the solution we're pursuing.
All the solutions are going to be imperfect. Generally those solutions that leave the machinery intact are easier to manage and reason about. Messing with the machinery in a time of crisis is generally inadvisable. It's the equivalent of changing code live in production.
Every one of the 16 million people who've lost jobs in the last month has some combination of rent, mortgage, food, insurance, and other expenses that they spend money on. Receiving that money is how many companies need to stay in business. Giving the money to the companies doesn't necessarily provide people with their material needs. Money given to people gets spent in to the real economy. Money given to companies might trickle down in to the real economy, but it also winds up just pumping up the financial economy, inflating balance sheets and asset prices, not necessarily providing anything anyone needs.
Honestly, the more I look at the whole situation, the more it looks like two-thirds of the bail-out is going toward major actors in terms of the causative agents of the problem. The difference between a 1 time payment of 1,200, and a payment of 37000 is that:
37000 is 2 and change years worth of salary for someone making minimum wage ($7.50 an hour), a bit less two years for those at $10 an hour, and a year and change at $15 an hour.
Given that level of infusion, you've bought people a significant amount of time to contribute to normal economic activity at a level they're already participating at, and in some cases increasing it. You're also, by routing that straight to citizen's, giving people the chance to organize into new business units more adapted to the times.
There is also nothing keeping recipients from using said infusion to buy stocks or bonds propping up the Market in traditional ways, but also, by not bailing out companies directly, you give them a shot at dying, and for the price of assets to stabilize at a lower point via sell-off, also freeing up room in consolidated markets unfriendly to new entrants by taking out the least efficient yet too large to die actors.
To be honest, I'm shocked more quote "Free Market aficionados" aren't livid about how this stimulus is going down. Instead of dropping the stimulus in the place most likely to do some good, you've given Corporate America yet another infusion with which to become that much more streamlined at wealth extraction, and divorced from the material reality of delivering immediate goods and services through the coordination of primary market actors instead of leaving the primary wealth allocation decisions to a bunch of bankers.
I've met my fair share of cranks hung up on the Federal Reserve, but I'll be damned if I'm not starting to find myself aligning toward their general stance. The only difference between these two models of bailout is that one actually frees up and delegates economic power to everyday citizens to reshape the economic landscape as they desire (helicopter money) and one guarantees that entrenched players are in no way threatened in losing control of their systemically advantaged position in terms of controlling overall capital expenditure direction.
Sorry man, but I just don't buy it. There is nothing in Free Market economics which states that once you get big enough, your survival takes precedence over the rest of the Market. Yet this policy has clearly demonstrated that our political system as a whole buys that. It is frankly ludicrous. The only message I'm getting out of this move is that legal fictions are more important in the grand scheme of things than actual citizens, which to be frank, has likely been written on the wall for the last 40 years.
The higher the job losses, the longer it takes for the market to create jobs because everyone is forced to be frugal.
The most jobs created under any president was under the two terms of Bill Clinton. That was 18.6 million (15.6%) increase. The greatest percentage increase was under the three terms of FDR, a 21.5% increase. You're arguing that we'll be able to creates jobs at a rate that is an order of magnitude greater than the fastest we've ever created jobs.
You're honestly arguing that the economy will be able to add even close to 47 million jobs in 2 years?
Giving money only to individuals instead of saving the jobs would be akin to condemning us to a recovery that will take at least a decade to recover from and that would be a very very dark decade for many of the 47 million that lose their job.
https://www.cnbc.com/2020/03/30/coronavirus-job-losses-could...
https://www.thebalance.com/job-creation-by-president-by-numb...
I think he, and I, are arguing that if you give 47 million people the money they'd earn from their jobs (that's the magnitude of the bailout(s)), they could spend it in any number of ways, including keeping things they way they are.
To your original analogy; the bailouts are currently structured to keep fishing poles and nets in place, but do very little to restock the river with fish. What the GP and I are arguing is that restocking the river with fish is a better way to keep the whole system running.
EDIT: As a concrete example of this thinking, Nick Kokonas (twitter @nickkokonas), Grant Achatz' business partner in a number of restaurants in Chicago, has been arguing against buying gift cards to support restaurants, and in favor of buying takeout. Gift cards put money in the hands of empty restaurants and leaves them with future obligations. Selling takeout now not only puts current money in the hands of the restaurants, it lets them pay staff with current revenues, and keeps the entire supply chain back to the farm in business now.
Please explain to me how minimum wage for two years allows people to even remotely approach keeping things the way they are?
You're not even remotely proposing paying people how much they would earn from their jobs. Minimum wage is far from that. A bailout that gives 47 million people the money they'd earn from their jobs for two years would cost approximately $6T (US average income * 47 million * 2 years), which is an order of magnitude more expensive than the current bailout. The majority of the $2T bailout that passed and the $2T bailout that is proposed is loans not handouts with no obligations as you're proposing. Only about $500 billion is handouts. $250B in direct transfers to Americans and about $250B in pork like the money going to the Kennedy Center. The rest of the $4T is loans to small businesses, states and corporations to help save jobs until this passes. The overwhelming majority of that will be paid back like it was paid back under TARP.
Apart from it being an order of magnitude greater amount of money that would never be recovered ($500B vs $6T), another very important question is where would the tax revenue come from to finance that $6T? You've just destroyed all the businesses (corporate income tax, payroll taxes, property taxes, etc.) and all the personal income tax 47 million people. The only tax you'd be collecting is sales tax, which only states can collect.
Federal tax revenue would plummet, and that's all BEFORE we get to the point where those that haven't been laid off yet now lose their jobs because we're doing nothing to save the remaining jobs. At this point, the ranks of the unemployed swell far greater than 47 million. If you read the paper from the FED that estimates 47 million unemployed, you'll see that it relies on the assumption that the government makes an effort to save as many jobs as it can via a bailout like we did in 2008.
A total collapse in tax revenue would completely tank the value of the dollar and US treasury bills, since the revenue used to service our debt would evaporate. The US dollar and US treasury bills would no longer be considered safe and almost certainly would lose its status as the World's reserve currency. Americans simply do not appreciate how important having the reserve currency is to supporting our quality of life.
Furthermore, that restocking analogy totally fails. The problem isn't about how many fish are available. There's no lack of fish in the sea. It only matters how many are in the sea if that's the bottleneck. The bottleneck is being able to catch enough to feed 330 million people before those people starve. The fish is a metaphor for all the opportunities people can put work into in order to produce and feed themselves. If 330 million people found themselves with fully stocked oceans and no nets or fishing rods, a lot of people are going to starve.
Market opportunities to support yourself and prosper have never really been lacking at any point in human history. The only thing that has ever been lacking is the labor, talent and leverage (debt, technology, organization) to exploit those opportunities.
You're proposing destroying one of the key sources of leverage (organization) that has allowed us to sustain a high quality of life for 330 million people. Leverage multiplies gains on the way up and multiplies losses on the way down.
The more and more I process your proposal, considering second and third order effects, the more insane it is. Have you done any back of the napkin calculations here and considered the weaknesses in your proposal at all? It would cause catastrophic economic collapse in the US on par which the collapse of Venezuela or the former Soviet Union.
Once that's done, you can loan their stock back to them at an inflated price, then file for an IPO. Things are good for a few years, until they can no longer make their loan payments, then they go bankrupt again and the bondholders acquire the assets of the failed company, lather, rinse, repeat, until there's no longer a viable company left, and the brands & IP are liquidated by the court.
No. We are saving the owners of the fishing nets. The companies can (and likely will) fire the employees to save themselves. Which should beg the question: why does the owner of the company get the money, and not his customer (who is generally also his employee)? Because we want to save capital formation as it was pre-COVID, instead of letting consumers provide the incentives for capital to reformulate to adjust to new market realities.
The reason we persist with the 'freeze the system in place' is 1) We assume the capital class are more capable of redistributing money than the labor class (I think the current approach will favor major corporations and erode the market dynamism that has generally typified the US economy) 2) We assume that the costs of capital destruction are higher than the costs of damage done to the labor class (I think this is faulty) 3) The capital class have taken over the means of distribution and decision-making apparatus (this is inarguable, and is the primary reason the bailout has been shaped so favorably for capital instead of labor).
More ossification of the US markets. More preferential treatment for the politically and economically well connected. More penury for the lower and middle classes, especially the younger generations trapped under a growing debt burden without the opportunities to escape from under it.
Glad I have another citizenship and the resources to bail if it plays out the way I think it will.
Some employees. Every business has employees that are critical to ongoing operations and employees that are not critical and will be shed when doing so prevents insolvency. It's better to fire some employees and save some jobs instead of insolvency which results in the loss of all jobs at that company. There should be nothing controversial about this. Even a socialist system is going to dial headcount up and down based on whether or not having extra headcount is providing excess value or destroying value in excess of the resources being put into that enterprise/endeavor. To do otherwise is wasteful/destructive.
> and not his customer (who is generally also his employee)?
I'm unsure what you're asking here.
> reformulate to adjust to new market realities.
This is neither free nor instantaneous. The Great Depression, by way of example, lasted for 10 years and without WWII would likely have lasted a lot longer. There's a ton of friction it letting things collapse and waiting for things to reformulate for the betterment of most of society, assuming it ever does.
The owners of capital are those that would suffer the least in this scenario. Maybe they can buy one less boat, maybe they escape to another nation where things haven't collapsed. For labor, the consequences of a prolonged reformulation is often dire.
The Great Depression isn't the only example of the multi-year cost of reformulation. Zimbabwe is still suffering the costs of its reformulation. Brazil suffered the consequences after hyperinflation that destroyed companies and the damage lasted almost two decades and took the Plano Real to create conditions where things could reformulate. There's also the Weimar Republic and now Venezuela.
Reformulation is long and painful and there is no guarantee that what arises from the reformulation is better than what was there before. Given how well the US economy was generally doing before this pandemic, there is strong reason to believe it won't be better simply due to the fact that things tend to revert towards the mean.
> We assume the capital class are more capable of redistributing money than the labor class
"capable of redistributing money"? Anyone can redistribute money. That's just asking if people can spend money handed to them. Both classes are equally capable of spending money.
What's valid to ask is which class will be more effective in spending that money in a way that produces greater returns in the future. The group that spends the money on nets to catch fish in perpetuity will prove far better stewards of that money than those that spend the money on fish to feed themselves until they run out of money.
Given that the capital class is generally trained in trying to find invest money to generate future returns, it's pretty safe to assume that they will produce a richer society. That society will most likely be unequal, but the wealth of those at the Nth percentile in a society that invests well will likely be better off than those at the same Nth percentile in a society that does not invest as well.
> We assume that the costs of capital destruction are higher than the costs of damage done to the labor class (I think this is faulty)
Several examples where the costs of capital destruction result in great damage to the labor class: Venezuela, Zimbabwe, Cuba, the former Soviet Union, pre-capitalist People's Republic of China, Weimar Republic, 80s in Brazil, etc.
Even the countries that socialists envy, such as the Nordic countries in the European Union, are only able to provide a strong social safety net because of the preservation of capital and a general high degree of economic freedom.
You said you believe that assumption is faulty. Can you provide us with counter-examples where allowing capital to be destroyed we less than the resultant damage to the labor class?
> The capital class have taken over the means of distribution and decision-making apparatus (this is inarguable, and is the primary reason the bailout has been shaped so favorably for capital instead of labor).
Can you elaborate here? Last The US is a democracy and everyone doing the distribution and making decisions here was elected by the American people by either direct vote (Congress) directly, indirect vote (Electoral College) or was appointed by someone that was elected by the American people.
You can't just claim something is inarguable. It's actually a pretty easy point to argue.
Near as I can tell, it has been shaped in favor of capital instead of labor because those making the decisions understand how destructive the destruction of capital will be for the entirety of the American people, both those that labor and those that don't.
> trapped under a growing debt burden without the opportunities to escape from under it.
No one is born with debt. You acquire debt voluntarily. Don't take on debt and you won't have any burden.
If the Fed instead purchases assets such as MBS, corporate bonds and especially Treasury bonds (yes, the biggest owner of US government debt is actually the US government), those assets can later be sold. The Fed can then pull the money back out of the supply for future use. Assuming of course that high risk MBS and junk corporate bonds don't expire worthless.
A better analogy would be "why not lend money to people instead of businesses?". Here the answer is more clear: people are not in need of someone to give them loans. If you need a loan, you can probably get one.
Effectively it is. Government borrows money from the Fed and pays everyone a $1200 stimulus check.
The Fed doesn’t have the legal authority to give individuals money. That’s why the Congress is passing stimulus bills.
Moreover, buying assets is different from handing out money. When Congress gives every American $1,200 money, the money is spent. There is no balancing entry on the government's balance sheet. When the Fed lends a dollar or buys securities, it spends cash and gains assets.
The Fed could lose money on those assets. But that risk profile is night and day to the federal government's. (This difference also makes a dollar of fiscal stimulus more powerful than one of monetary spending.)
There are other differences between fiscal and monetary policy, a topic with lots of literature behind it. Congress controls fiscal policy. It has outsourced monetary policy to an independent Fed.
maybe you're using this just as a generalization to not have to state all the details, but just to be clear, that isn't what's happening.
In other words, the Fed is buying junk bonds through ETF. There's one more stage to go: buying equity ETFs, like the Bank of Japan has been doing for years.
People keep saying this, but what is the chain of logic for the fed getting into equities? They aren't in freefall. They've been rallying for the last two weeks.
People are still dying. The government has to take action. /s
Taken far enough, this program will leave the Fed without Treasuries to buy. To diversify the flow of assets onto the balance sheet, ever riskier assets will be purchased. Today it's junk bonds. Tomorrow it could be stocks.
It's rallying because all sorts of zombie businesses can now stay alive, thanks to the government lending them unlimited amounts of money.
All this does is it kicks the can down the road for a year.
If we're going to be back to normal in a year, and if stock prices were not overvalued a month ago, then prices now are too low, and it's a great time to buy.
If.
> Loan sizes will range from $1 million to $150 million.
$150 million is obviously no longer about protecting employee payrolls like these business relief loans started out with.
Say 50k average cash compensation (low for tech, but most businesses aren't tech). Health insurance, social security, medicare, 401k match, etc. would add to this number.
10k employees * 50k/year / 12 months = 41.6 (repeating of course) million per month.
Yes. This is why I anticipate the effects from this to be dramatic, horrendous, far-reaching, and long lasting.
This administration's stance on the economy is to do whatever it takes to ensure certain businesses don't go under. Up to and including straight up, permanent corporate welfare. This started with the collapse of the fossil fuel industry due to the glut of cheap natural gas, then continued when the trade war devastated our agricultural industry. I am certainly not surprised to see the government extend this policy to basically every business in the US.
The big problem is there seems to be no oversight or incentive for these business to keep going. Dairy farms are dumping milk down the drain and reducing herd sizes because there's no market for their products. Why would we just continue to pay them to produce nothing? You could get much better outcomes through the government buying up the end products and distributing for free to people in need. Remember "government cheese"? Bring back government cheese.
I completely expect this situation to spiral out of control and become an epic disaster. This is going to be a 10-trillion dollar suicide. We are paying companies to literally stop operating, and we are pissing off all of our long-term allies at the same time. Don't be surprised if these countries are shrewd negotiator when the US comes crawling to them for aid.
I bet we'll still be discussing this come the 2024 election...
Check out this amazing interview about this may unfold: https://youtu.be/_hA3TV1bGsg
It's not just the fact that the Fed is buying crap. To me, that's old news. I don't think there's any currency in the world that can rival the dollar of a united U.S. Ultimately, the dollar is backed by the faith of the U.S. government to honor its debts, and nobody else comes close.
But...news that the Federal government is pitting states against each other, between public and private parties, and between state and federal government in its response to this national emergency I think is something we haven't seen. It's like chained Black Swan events. I don't think state governors will let this debacle go unanswered if they have any real authority.
If it threatens the Union, if people in Massachusetts or New York or California ask each other whether the people in Oklahoma or Georgia or Mississippi will stand by them during hard times and if the Union still makes sense, then investors might start asking whether the country will exist to service its debt in the future. A tipover event like that would immediately put on a stopper on debt renewal and the gravy train, at an absolute minimum.
That's a spiders-on-eyeballs hades-says-hi level of scary, but I wouldn't discount the significance of socio-economic or political effects on economic and financial stability, given how this biological risk wasn't priced into our economic or financial grand strategy.
The second reserve currency is the EUR, the EU is already actually starting to break up with the departure of the UK, and is way more likely to continue to break up than the US.
As for CNY, China is a known currency manipulator with no free exchange mechanisms, no central bank independence, and no rule of law.
JPY or GBP? I don't see it.
I doubt CNY given past history, but if the worst comes to pass, I don't think China would pass up a long-shot opportunity to become the next reserve currency. I think it depends on how desperate people are, and how good China's execution is. USD took off post-WWII and USA's execution was top-notch.
I would also say not having a global reserve currency is another option, especially if globalization shrinks massively and international trade becomes highly discrete and easily manageable at a national level by govt. I think there are some trade deals that are barter-like (Australia // Taiwan with the alcohol for masks trade). No need for USD there.
Let's hope the USD is here to stay, and the country stays strong. I just hate being surprised.
As regards the EUR, I wouldn't say the UK leaving is sufficient to claim "the EU is already actually starting to break up." I don't think there's serious existential threat to the EUR long term, and there are plans to move away from the dollar.
Those factors don't matter much for CNY if China can exert sufficient political pressure on its economic dependents, which it will likely attempt given the long term geopolitical payoff.
I see those as the 2 main regionalizing forces, although as they wean their populations off the dollar, other smaller currencies may follow as it loses benefits of being global reserve.
I know cryptocurrencies are not well liked on HN but if there's ever a time to answer "Why do we need Bitcoin?", won't this be it?
ticker AAAU ?
https://www.federalreserve.gov/newsevents/pressreleases/file...
See also "banks don't lend out reserves." The linkage from "cash" (i.e. bank reserves) to the market price level of goods is not very strong.
I thought that QE was going to lead to a lot of inflation, and it hasn't seemed to. If inflation has shown up anywhere, it's been in the stock market and housing prices due to low interest rates. Even then, I'm hesitant to say that it's primarily responsible for the rise in housing prices because I think demand from my generation (millenials) is helping to cause the sharp spike in markets such as NYC LA, Atlanta, etc.
A major point of QE was to lead to significant inflation compared to not adopting the policy; without it, the projections were that significant deflation would occur.
So, it netted to very low but positive inflation, as intended.
> Even then, I'm hesitant to say that it's primarily responsible for the rise in housing prices because I think demand from my generation (millenials) is helping to cause the sharp spike in markets such as NYC LA, Atlanta, etc.
There's no spike, just a smooth continuation of a trend that has existed during most economic expansions (and even some recessions) since at least when Gen X were children.
See, e.g., https://fred.stlouisfed.org/series/NYSTHPI
No, because this kind of thing has been done before without hyperinflation.
What you are ignoring is what the expected inflation/deflation course would be without the policy.
In other words, in the short term I think there will either be deflation, or no change to inflation (due to all the money printing).
The question will be what will happen once the global lockdown is lifted, and how quickly the velocity of money picks up. There might very well be high inflation or hyperinflation in certain things, but not in others (due to how quickly global supply chains are repaired and how substitutable certain products are. In 2008 the money was given to the banks (to recapitalise them) and then transmitted to financial assets due to the search for yield. This meant that the velocity of the new money was very low, which is why there wasn't high levels of inflation. If there is MMT or helicopter money, we could very well see high levels of velocity and inflation.
Buy enough of them and you might prop up the economy long enough for the bonds to come to term and be repaid.
Buying any one individual bond would have been lossmaking, but buying in such volume proves profitable due to a kind of network effect?
Is this likely/possible? Is it possible someone other than the fed could have done this? Like maybe a foreign government (China, EU, Saudi Arabia)?
We can already see this by the fact that the bond market has surged, pretty much guaranteeing that the Fed is going to overpay for these bonds.
Let the new dawn of Infinite QE begin!
===
Let us give thanks to the the Fed. They just impoverished all of us. Because of this, then the rich will just keep getting richer. The oligarchs of America wins again.
What should you learn from this? Take out cheap low interest loans to buy up assets. Your dollar just got cheaper, while all prices will go up. In 10 years, your $700,000 USD house, will be priced at $1,400,000 USD.
This liquidity isn't a life boat. It's propping up corporations and people who have been dangerously over leveraged for years and who are beginning to become habituated to the notion of getting a government bailout when times get hard.
To the enlightened HN participants proclaiming that this is a necessary step to save an ailing economy facing an unprecedented crisis, consider the following:
1) this crisis was not that unprecedented and many companies had large enough balance sheets that they were able to weather it. Why are we rewarding corporate mismanagement? Have any of the corporations eligible for asset filed for bankruptcy or attempted an asset selloff to recover some liquidity?
2) the Main St. loan pool is much smaller than the Wall St one. Why do we expect smaller businesses to be better able to weather this crisis?
3) what is this cash infusion actually doing to tackle the exponential rise in unemployment? How does it help the taxpayer? It's not going to stimulate consumption in people who have lost their jobs and kickstart a recovery - the unemployed will likely be unemployed for months to come and the loan recipients will likely be so saddled with debt at the end of this that they won't experience growth again for years. There's no mandate that companies receiving emergency loans have to maintain their current workforce. The taxpayer receives no equity in the companies they have gone into debt to save.
4) given the size of these loans we may well be in another recession in 10-20 years and still have the majority of these loans outstanding. Do we then forgive these loans when the usual suspects need another round of cash infusions?
5) the Fed has set interest rates close to rock bottom for the better part of a decade (and backed down from raising them last year when Trump threatened bloody war) leading to a massive asset bubble and a business climate addicted to cheap liquidity. The message this bailout sends is that corporate over-leveraging is rewarded with a cash infusion, but god help the individual who took out a mortgage, car loan, etc. and lost their ability to keep up payments from coronavirus unemployment. Why is one type of entity granted access to public money in order to be spared from their bad decisions?
The scale of this debt is almost unfathomable and adds to an already overloaded Federal Reserve balance sheet. Other commenters have rightly pointed out how precarious this situation is in the longer term. I'm more worried about the callousness of the average person on this issue. American economics are so polluted with worship of great titans of business that nobody really seems that concerned that millions of Americans are facing perhaps permanent homelessness and long-term unemployment in the next few months.
Pumping failing businesses full of cash when millions of our citizens are struggling to buy food should not be normal. It is not a stepping stone of necessity to preserve our way of life. It is a choice to use capital to violate perhaps the most central tenet of capitalism: businesses must face the consequences when the punch bowl runs dry. This is socialism for corporations and we're all footing the bill.
It’s impossibly l to know how this will all play out over the next several decades, but the house of cards is teetering dangerously and when it crashes, it will be a tremendous fall.
In fact, if we did have a system with a private money supply then those issuers would also be printing money right now.
However, in contrast to your explanation, I understand the Fed's mandate to be "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates"
If they don't do it, there will be a lot of deflation. With it there won't be as much. So the money printing is making prices more stable. (There will probably still be some deflation unless they go further, which they should.)
My junk bonds are way better than Goldman Sachs'... Goldman Sachs couldn't make a junk bond if they defaulted on it!