Federal Reserve balance sheet trends
federalreserve.gov
federalreserve.gov
When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.
The important thing to keep in mind is that we are intentionally shutting down parts of the economy. But some of those parts include mechanisms (jobs) that we normally rely on to supply spending money to consumers and businesses.
Due to the partial shutdown, the economy's productive capacity has taken a hit. But even so, our economy still has the capacity to provide a decent standard of living for everyone. We don't want to compound the crisis by failing to ensure that consumers have sufficient spending power to activate the remaining capacity.
It would be scary if the Fed's balance sheet weren't expanding like this right now.
http://www.greshm.org/blog/printing-money-cures-the-covid-19...
This is simply not true. The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed) and is effectively injecting money into the economy. This is a bailout as the Fed is making a liquid market (that otherwise would not exist) for assets, saving the balance sheets of firms. Future generations pay this back not through taxes but through inflation.
Whether or not the U.S. dollar will collapse or not is another topic, but what can be said is that it is not sustainable to continue bailing out irresponsible businesses like banks and others when they do not exercise good business practices like prudence, not being overleveraged, or having a buffer in case of lost revenue. The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
That's not necessarily true, economic transactions aren't necessarily zero-sum. I would assume for most of the assets being sold to the Fed, the banks need liquid cash more than they need the asset and so would be willing to take a haircut.
>The only way this ends is either a depression the scales of which we've never seen in history before[...], or a hyperinflationary collapse of the U.S. dollar
Why specifically do you think this will happen now when it didn't happen post 2008? Sure the scale so far seems bigger, but also the scale of the hit the "real" economy is taking is much bigger. And, in March, when some of these asset purchases had already started, CPI declined by 0.4%.
If the Fed steps in to save this market they’ll overpay for debt from companies included in these bond ETFs that will likely go under anyway.
It also creates a moral hazard situation where poor performing companies can raise cheap debt because everyone now thinks the Fed will step in and guarantee it.
It likely would have fallen even further, until the fed decided to intervene and buy corporate bond ETFs.
Now LQD has fully recovered and is back to pre-corona virus levels.
More interesting is the rebound in HYG, another Corp bond ETF, which is 50% BB rating, and the remaining 50% below BB rating. I imagine those will get downgraded and be even worst.
Now what happens when companies can’t meet their debt obligations is that covenants will get triggered and that can mean a whole lot of bad things for corporate debt. Which the federal reserve now holds because nobody else wants it.
edit: they edited their comment extensively after I sent this haha.
The Fed is driving up the price of junk bonds, so it clearly is true.
The consumer price index is definitely flawed. However, one thing I've heard is that the massive drop in demand and velocity of money is necessary to consider when analyzing inflation. I also was initially worried about inflation given the massive stimulus numbers we're seeing but have been reconsidering this.
I'm not well-versed in this at all, but demand-pull inflation under Keynesian economics [1] or a drop in V (velocity of money) in the equation of exchange in the monetarist theory of money [2] seem to be what is supporting why folks are worried about deflation. I would venture to guess that this is part of why the Fed is doing these massive buys right now, too.
Tangentially, pointers to good econ learning resources from anyone would be helpful. I've only started with Khan Academy and what I remember from old classes so far.
[0] https://fred.stlouisfed.org/graph/?g=qH1p [1] https://en.wikipedia.org/wiki/Inflation#Keynesian_view [2] https://en.wikipedia.org/wiki/Inflation#Monetarist_view
This adjustment has been made multiple times in recent decades for housing, which is a large part of any given adult's spending.
So the Fed economists keep saying "wow inflation is so low even after we pump gazillions of dollars in during QE", while ignoring the fact that easy money has lead to massive multinationals consolidating control of real estate and jacking prices up.
So even if it is somehow true that houses have gotten better in some ways (I'm not really convinced), that doesn't matter to people lower on the income scale where the price of housing is the difference between having a roof over their head and not - they can't really afford to care about the latest greatest improvements in housing. They have a different demand curve - be homeless or spend most of their income on rent.
Rent vs income since 1960: https://www.apartmentlist.com/rentonomics/rent-growth-since-...
Skepticism about the application of hedonic adjustments https://www.sgtreport.com/2019/12/what-worries-me-about-hedo...
"The theory is that the vast majority of that 70% price increase of a Camry since 1990 is due to quality improvements, with buyers today getting a far superior Camry; and that only a smaller part of that 70% price increase is due to monetary inflation, namely the dollar losing its purchasing power"
Housing may be a more debatable case, though.
However the usefulness of that improvement is going to be a lot lower to someone who just needs a car to get somewhere rather than someone who can afford to buy a car with the long view of how it will affect their finances over many years.
The “purchasing power of the dollar”, even if you accept the accuracy of hedonic adjustments, is an extremely limiting view of the value many participants in the economy are deriving from that dollar.
I agree housing is a better example because the cost floor is much higher.
I don't understand how a longer lifespan could not affect TCO regardless of how long you keep your car or what portion of its life you use. What does it mean to say people can't afford to spend less money?
This is not remotely grounded in fact. The majority of real estate is controlled by homeowners and small-time landlords, not massive multinationals. Landlords don't have monopoly pricing power, rents have gone up (in specific cities) because anti-development policies restrict supply.
Again, real, actual lived experiences tell the store more than the super-super high level macro numbers might suggest.
There's still the effects on non-home real estate too, in which there is significant consolidation:
https://cxre.co/houston/commercial-property-management/the-b...
"During the past ten to twelve years, Blackstone has grown tremendously. Since going public in 2007, it has quadrupled in size. On top of that, Blackstone’s real estate division has exploded from a $17.7B venture to a $100B portfolio. According to BizNow, since 2009, it has spent more than $50 billion on commercial real estate. In addition, Blackstone closed a real estate fund worth about $16B in 2015. As a result, Blackstone now has the crown of ‘Largest Real Estate Owner in the World.’ Business Insider has even called the group’s Chairman and CEO Steve Schwarzman, ‘America’s landlord.’"
You are confusing cause and effect. The luxury high rises are the result of rising demand and rising prices, not the cause. If you could magically cause prices to increase by building luxury apartments, you would see luxury apartments sprouting up all over the impoverished parts of the South side. But you don't, because the demand is not there. If you stop luxury apartments from being built in desirable neighborhoods and desirable cities, people will just bid up the prices of crappy older housing stock and drive poorer people out anyway (see: San Francisco).
Building new housing decreases the price of existing housing by expanding supply. It does not increase it. People who have a vested interest in seeing housing costs go up (landlords, existing homeowners) understand that fact, which is why NIMBYs keep voting against development. Unfortunately many people who do not want housing costs to go up do not understand the basic economic fundamentals and are motivated by reflexive hate of wealthy developers, so they sabotage their own interests by voting against new housing to the delight of their landlords.
Housing supply absolutely needs increased, but we must require developers to build mixed-income housing. The wealthy developers can afford to leave many units empty to maintain the luxury cache of the building or area. The relationship between supply and price in housing is not that sweet sweet smooth curve - it's lumpier than that in reality.
Additionally while the increase in supply can hurt your local landlords, it can also raise the average income of the clientele of an area, which then benefits them. In practice these landlords have not been staunch opponents of all the new luxury buildings.
Again, you are confusing cause and effect. The luxury apartments are popping up because of rising demand and rising prices; they are not the cause the rising prices. San Francisco refuses to build new housing stock and rents are still soaring there because people just bid up the prices of crack shacks.
> The wealthy developers can afford to leave many units empty to maintain the luxury cache of the building or area.
That is completely false. Real estate developers don't intentionally leave a large fraction their buildings empty to project an image of luxury. No renter is going to pay 2x as much rent because they see that the building is half empty and they think that makes it more exclusive. If they wanted an excuse to pay 2x the rent they would just get a larger apartment or move to a more expensive zip code. Deliberately leaving part of a building empty would be an extraordinarily financially dumb move. If a building is substantially empty then the developers screwed up their market research and are losing money on the project.
> Housing supply absolutely needs increased, but we must require developers to build mixed-income housing.
Building luxury housing frees up existing cheaper housing stock for lower income households. You don't have to build cheap housing to make more cheap housing available. Blocking the construction of luxury housing is counter-productive because it just means people will bid up worse housing stock.
There's no conspiracy among Fed economists to try and hide inflation.
When a majority of leading economists subscribe to economic views that don't reflect the lived reality of an average person, it may not be a conspiracy, but the effect (groupthink) is similar.
Hedge: I'm not saying it's true or that I've verified any of the research, only saying that economists have studied the effects of central bank stimulus action on inflation rates and the economic response seems to take a while.
[0] https://www.google.com/url?q=https://www.lancaster.ac.uk/sta...
USD demand is very high globally and domestically right now. Let's hope that doesn't change over night.
That, combined with the fact that it's not like any major developed economy is doing that much better, means US goods, services and financial assets are still pretty competitive with the rest of the world.
The dollar is up 40% vs the lows of 2008. When DXY is back at 70, it's time to worry about a crack in the dollar reserve system.
I wouldn’t put too much trust in that expert class given their track record.
https://mises.org/library/ben-bernanke-was-incredibly-uncann...
What I don't understand is how people find it very difficult to admit that economists can be wrong sometimes and that their word is not gospel.
I’ve said in other parts of the thread that economists can, in fact, be wrong sometimes. I just find the people making completely unjustifiable assertions about the economy, while simultaneously castigating the economics profession as some cabal of out-of-touch elites who can’t be trusted, unconvincing, when I know that the vast majority of economists are simply researchers trying to understand the world and how to improve it.
If inflation suddenly increases, then the Fed has tools to combat that. They can sell off some of their balance sheet or raise interest rates to reduce the amount of money in the system. Inflation only occurs because there's too much money chasing goods and services.
The Fed was unable to unwind more than ~$650B out of $4T from their balance sheet in one of the longest expansion periods in US history. How will they do this? This is not a rhetorical question, I am genuinely curious in how people think this will be done if the Federal Reserve itself can't do it (either reducing the balance sheet or influencing the target rate above low single digits).
Fed is backed into a corner where it can’t raise rates without crashing the market and can’t lower rates now that we’re at 0.
Uh, the latter is not a distinct option from the former.
Also, you've left out: “the government continues as it has for generations, occasionally bailing out out wide sectors of the economy in black swan events with wide impact but mostly letting businesses big and small that are not prudent fail while cushioning some of the impacts of that failure with bankruptcy (both regular rule-based bankruptcy and similar, ad hoc restructuring in special cases; the latter is often also referred to as a ‘bailout’, but is meaningfully distinct from other bailouts.)”
No, the fact it what you describe has not been going on for decades. It is an occasional response to extreme events, not a continuous mode of operation, and your criticism is all about the potential risk it has as a continuous mode of operation. There've been a couple major cases fairly recently, but that was in response to the biggest financial crisis in 70 years and the most significant acute global pandemic in over a century happening to fall a little over a decade apart, not some change in general approach.
Most countries are actually passing larger fiscal stimulus measures than the USA so far, at least relative to their existing currency base, so wouldn't this mean every currency hyperinflates all at once?
Or, like last time, a global war.
Also, I cannot emphasize more fervently your accurate correction here:
>Future generations pay this back not through taxes but through inflation.
It's a form of theft, really. Increasing the velocity of money is important to Keynesians and the faster that stuff degrades in value the faster those who are paying attention want to get rid of it in tangible or better-performing assets rather than, say, saving it long-term for something like capitalizing a small business.
And, whether an individual or organization, taking out loan after loan and not worrying so much about bankruptcy is easier to tolerate since sooner or later the gambling will pay off and it'll be easier to pay off in the future with easy money. When a dozen eggs cost 50$, 100,000$ in student loans will be easier to pay off.
I read something today about how China is gambling on the dollar collapsing and have been hoarding lots of gold in anticipation of some kind of at least partially gold-backed currency that's likely to be digital.
Inflation expectations have collapsed in recent months. We didn't see steep inflation when the government pumped trillions of dollars into the economy after 2008, why do you think we'll see steep inflation now?
The Fed is supporting the price of dubious, high-yield corporate debt. Whether or not that's good for the economy is a separate question, but it's not as if the Fed is just replacing assets with cash at 1:1 value. It is encouraging lending to risky enterprises, by itself taking on the risk.
1. https://www.ft.com/content/19e47570-ba23-4929-988e-9b5f468b2...
I don't think that's a fair characterization. Inflation helps people with student loans (salary grows but debt stays the same) and hurts people with retirement accounts full of bonds. Broadly speaking, inflation helps the young (by closing the wealth gap between haves and have-nots).
If you’re young without debt, inflation devalues your savings.
In recent times, the fed has been below its 2% inflation target.If it missed on the other side, and inflation went to 3-4%, I think that would be totally reasonable economic policy. Double digit inflation, however, would end up making everyone poorer.
Very casually assumptive, but ok, let's go with it...
"It's not anything that future generations have to "pay back. And it's not going to cause a collapse of the dollar."
If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??
This is a good question. The answer is that the virus and lockdown are currently causing lots of deflation. So the Fed needs to cause lots of inflation to cancel it out. But if they did four times more then that would be too much and would cause inflation to be far too high.
Personally I suspect the the Fed has undershot and we'll see net deflation over this year and the next.
And then what happens?
Before 1 Google stock was worth 1 Tesla car. After 1 Google stock is worth 2 Tesla cars.
The purchasing power of those who hold financial assets is increasing while for those who don't own financial assets stays the same.
But note that, in the same way it's possible to spend too much, it's possible to spend too little. For some reason there are people who think that is impossible.
A major question is whether and how the Fed will absorb the excess liquidity back later to prevent too much real inflation, beyond what is measured by consumer price index. (Some inflation is expected as the economy is less productive because of Covid-19 and the stimulus is used to partially offset its impact.)
I really wish the term "debt" were not used in these contexts. This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt.
In this context the term is being used to refer to an accounting construct that looks like debt, but the meaning of this particular accounting entry is completely different. Using this term only creates confusion among the public and even politicians who don't understand the complex and esoteric details of modern economics.
It depends. If you are Lebanon and borrowing USD it’s pretty much like a corporate debt and future generations are paying it back.
However, if you can print the world’s reserve currency while borrowing in it at the same time then there are different terms.
Of course not all economic activity creates capital at the same rate, and I do definitely agree that the type of economic activity you get during and after a recession with massive QE is likely of a lower quality than what you'd get otherwise. But it may still be that more capital (wealth) is created this way then if you allow the economy to completely shut down.
I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies. Dead or dying companies do die under such circumstances, but so do really innovative ventures that have not yet reached comfortable sustainable profitability. A mega-recession right now might take out a lot of junk, but we'd also risk losing stuff like SpaceX, Tesla, Boom Supersonic, and hundreds of small innovative startups. We might also lose the whole renewable energy revolution and any work being done on next-gen nuclear power like small modular reactors.
In short we'd lose both the bottom and the top end of the innovation curve, keeping just the boring middle.
> The fallacy here is assuming that capital is finite over all time.
Capital is "finite"—as opposed to "infinite", "unlimited", "superabundant"—but I agree that it isn't fixed. There is no law of conservation of capital; it can be created or destroyed.
With that said, taking on debt is not necessarily a bad thing; it depends on how you use it, and whether you have a viable plan to repay the debt out of future earnings. QE fails on both counts; there's no real direction beyond "inject more money into the economy", and no viable repayment plan.
> I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies.
I'm not sure whose premise that was, but I would also disagree. Clearing out underperforming companies would be a silver lining at best, and not enough to make recessions or depressions "good". In any case the companies hit the hardest are not necessarily the ones with marginal profits but rather the ones which are incapable of adapting to changing circumstances. That can include old companies set in their ways as well as new, experimental ones which depend on emerging opportunities.
The second order consequences of a massive balance sheet will be felt not in the immediate future but at some point down the line when the Fed attempts to shrink the balance sheet.
We have a very recent example of the Fed trying to do exactly that in late 2018, and the market immediately crashed on rate increases and assets rolling off at maturity.
The federal reserve should only be concerned about the economy right?
The same in 2016, and other times
How can you say they are not focused on the stock market? They are primarily focused on propping up the markets.
Also, your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith, not some falsifiable statement supported by facts. We don't know if that is true or not.
They're related. There's both fiscal stimulus and monetary stimulus going on here. The monetary stimulus only makes its way to consumers indirectly. On the fiscal side, as you say, Treasury can spend money on whatever they want. And when they do, they transform some of the financial sector's money into assets (treasuries). If the Fed wants to maintain its accommodative monetary policy, they're going to want to re-monetize those assets.
> your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith
"decent standard of living" was not crucial to my point.
There's some part of our economy's productive capacity that we have consciously decided not to shut down because we've deemed "essential" to consumers. My point is that it would be a mistake for us not to provide consumers with the means (money) to access that capacity.
As far as the balance sheet itself is concerned, it's important to look at all of it - with any magician it's critical to watch both hands - and in this case, the right hand is doing this to the M2 money supply, i.e. creating $2 trillion.
https://fred.stlouisfed.org/series/M2
Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly.
That's this month. If that has to be done every month for the rest of the year...
Regardless, it's this line: "Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly" that I was referring to. That calculation does not reflect what the M2 number actually means. You already have a definition of M2, so I'm sure you can figure out where you went wrong yourself if you just stare at that for a little bit longer.
A good aspect of MMT is that it explains how the Treasury spending more than it takes in in taxes means more money is created into the economy than is deleted out of the economy. This is the more important thing to focus on.
Some of the MMT professors also do a good job explaining how QE (quantitative easing) doesn't create new net financial assets into the system, it just shifts around assets in accounts at the Fed.
All this focus on the Fed seems counterproductive.
This is one of the most absurd claims of the supposedly "descriptive" MMT. Taxation does not delete money from the economy. When the federal government collects taxes, it doesn't take that money and burn it in a giant pit. It turns around and immediately spends that money.
Yes, the federal government does not need your tax dollars. Yes, they technically have the ability to print an infinite amount of dollars. But that doesn't support the claim that taxation removes money from the economy.
> Some of the MMT professors also do a good job explaining how QE (quantitative easing) doesn't create new net financial assets into the system, it just shifts around assets in accounts at the Fed.
This is completely false. The Fed creates new reserves (base money) in order to buy assets.
I didn't know that idea was so polemic.
So, what you are saying is that government deficits are inflationary because they add money to the economy, but, on the other hand, government surplus don't retire money from the economy?
>>"This is completely false. The Fed creates new reserves (base money) in order to buy assets."
Yes, but the assets the Fed buy (when practicing QE) are in the accounts of the commercial banks in the Fed. After buying them, those assets are not there anymore, and, instead there is money (1). And money is basically a government bond that pay 0% interest.
Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything. A deficit or surplus is merely the delta between total revenues and an arbitrarily defined budget.
Inflation is caused by additional dollars chasing the same number of goods. Printing money does not create goods and services - it merely decreases the value of each dollar relative to everything else. If I had a machine that could create an unlimited amount of gold at zero cost, the price of gold would approach zero if I made and sold enough of it. I don't know why you would think dollars would be any different.
> Yes, but the assets the Fed buy (when practicing QE) are in the accounts of the commercial banks in the Fed. After buying them, those assets are not there anymore, and, instead there is money (1). And money is basically a government bond that pay 0% interest.
Yes, the bank exchanges an asset (like a treasury) in exchange for reserves (base money). The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase?
>>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything."
You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject).
Now, it seems to me that we agree also that a government deficit can be inflationary. So, by definition, a government deficit is adding money to the economy.
My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money".
>>" The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase? "
Monetary base increase because that is how it's defined.
I think that the problem here is that you subscribe to the fractional reserve banking theory that, I'm afraid, is false. I suggest reading this report from the Bank of England (1) about how money creation works. A private bank lending is not limited for the quantity of reserves available in the system, because central banks have to keep the system of payments working and are targeting an interest rate. So, central banks have to answer any request for additional reserves.
The corollary to all this, is that it doesn't matter if the asset of the private bank is a treasury or reserves in the banking system, banks can lend anyway. The central banks sell treasury to the banks for controlling the interest rate, not the quantity of money.
1. - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
> "QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the assets will be left holding the newly created deposits in place of government bonds."
> "QE has a direct effect on the quantities of both base and broad money because of the way in which the Bank carries out its asset purchases. The policy aims to buy assets, government bonds, mainly from non-bank financial companies, such as pension funds or insurance companies. Consider, for example, the purchase of £1 billion of government bonds from a pension fund. One way in which the Bank could carry out the purchase would be to print £1 billion of banknotes and swap these directly with the pension fund. But transacting in such large quantities of banknotes is impractical. These sorts of transactions are therefore carried out using electronic forms of money."
Not exactly. My undernstanding is that all money comes from the government. That is clear with banknotes for instance, it comes only from one place, but the same is true for bank reserves. Reserves originates in the Central Bank that is part of the government.
Now, if the government want to spend into something, let's say to pay a service to a private company, it tells the central bank to credit the appropriate account of the private company bank with the appropriate quantity. Money was effectively spent into existence, and, this will have inflationary effects.
On the other hand, if, for instance, in order to finance a crazy QE program, new reserves are created in the banking system, that money is available for banks to make loans, but that doesn't mean that a loan will be made. It's not until that loan is fulfilled that the new reserves will have an inflationary effect.
That's the reason why the QE programs were not inflationary. They affected the interest rate, but that was not enough because there were not appetite for loans in the economy. I think this has been calling "pushing a string". The MMT perspective would say "those QE programs are not going to be inflationary but they are not the proper tool. If you want to create demand (and some inflation) you need the government to spend, because the private sector obviously doesn't want to".
It's rare for the federal government to run a surplus, but it did have one for four years straight in 1998, 1999, 2000, and 2001[1]. During that that time, the monetary base increased 32%[2] and the M2 money supply increase 23%[3].
No matter how you look at it, despite the government running a surplus, the money supply continued to increase. How do you square that with your claim that surpluses remove money from the economy?
[1] https://fred.stlouisfed.org/series/FYFSD
Most money is created by commercial banks. As the demand for credit expands the money supply expands, and as credit is repaid, the money supply decreases. This is going on all the time.
Now, in order the government to run a surplus, it has to tax more that it spend. The money that is taxed in excess of the money that is spend, it's the money that it's retired from the economy. Ergo, taxes retire money or "destroy money".
Please, note, that when a government is running a deficit, it's effectively spending new money into existence but, that doesn't mean that all the money comes from the fiscal instance of the government. That's the reason we can see years when the government is in surplus and an increase in the monetary base at the same time.
Where is that money coming from if not from a fiscal deficit? It's coming from the central bank creating reserves. Why the central bank create new reserves if the government is not spending more than it tax? Normally, it would be for only one reason, manage the interest rate.
The credit department of commercial banks doesn't check if they have reserves before given a loan, they check if the loan make business sense (or they should) and then get the reserves in the interbank market. If there are not enough reserves in the system for the demand of credit in the economy, the interest rate will go up (offer and demand dynamics in the interbank market). The central bank has a interest rate target, so, in order to keep it in target, they have to add the reserves necessaries. The central bank don't have control of the monetary base, because if they control the quantity of money, they would loss control of the interest rate.
So, if in years of government surplus, the monetary base grow, that means that central bank had to add reserves to the system. Assuming it was not some crazy QE program, that means that the economy was demanding more credit. Also, we can deduce that in those years, while the public debt was going down, the private debt was going up.
This is related also to the (for me) very interesting concept of sectoral balances (1). If the government is running a surplus, and the GDP is the same or growing, and the external balance of payments is the same, that means that the private debt have to increase.
>>"It's rare for the federal government to run a surplus [..]"
Yes, very rare. It's interesting to think about why is that the case in the context of the sectoral balance model.
(1) -
But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation.
> the bank exchanges an asset (like a treasury) in exchange for reserves (base money)
The "monetary base" increases because of the way they define the monetary base. In the old days, the money in reserve accounts was convertible into gold, and the money in the Treasury bond accounts wasn't, so they count the money in the reserve accounts as part of the "monetary base" but not the money in the Treasury bond accounts.
I actually completely agree, but with a caveat. It may not cause inflation in terms of this years price level being higher than last years price level, but it will cause a decline in the purchasing power of the dollar. For example, let's say in the absence of intervention the price level would fall by 2%, but with intervention the price level would stay the same. That's still a 2% decline in purchasing power.
> The "monetary base" increases because of the way they define the monetary base.
The monetary base is defined as the sum of all currency (including coin) plus bank deposits. It increases or decreases completely at the Fed's discretion, because the Fed has the unique ability to create reserves. This isn't some semantic trickery.
The point of saying that the Treasury bond accounts aren't counted as part of the monetary base while the reserve accounts are is that it doesn't really matter which account your money is in at the Fed. My original comment was pointing out that QE just moves reserves from one account to the other and that this has little effect on overall economic activity because lending by private banks isn't reserve constrained (MMT people do a good job explaining this as well).
Consider that during a recession, factories have surplus capacity to produce more goods. But people don't have money to spend, so the factories don't use that existing capacity, or increase their capacity.
Printing money can stimulate demand and thus increase production of goods.
> If I had a machine that could create an unlimited amount of gold at zero cost, the price of gold would approach zero if I made and sold enough of it.
Well, they haven't created an infinite amount (yet). What if the demand for your watches grows as fast as your machine can produce them?
> why does the monetary base increase?
Has inflation kept up with the growth of the money supply?
One could argue that investing in a bomb that explodes in another country doesn't create as much economic value as using that same money to invest in the education of an American child.
Eisenhower had some thoughts when he left office [1]:
==This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the militaryindustrial complex. The potential for the disastrous rise of misplaced power exists and will persist.
We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.==
==Another factor in maintaining balance involves the element of time. As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow. ==
[1] https://avalon.law.yale.edu/20th_century/eisenhower001.asp
We know MMT is bad long term policy, but politicians in the short term can create favorable economic conditions for the few.
How is anyone supposed to argue against that? You can use that to try and defeat any argument, but it doesn't really demonstrate anything. What people? How do you know they are smarter? Are smart people always correct?
It doesn't need a detailed rebuttal.
Here are some examples of reasonable responses:
- How do you know that?
- When in history did that happen?
- Could you be more specific?
None of those require more than one sentence, or implying that the person is too stupid to have an opinion.
Not sure why the onus is on me to be "reasonable" in my response when we all agree that the person I was replying to was making an entirely unreasonable assertion.
This means nothing when they haven't been held accountable for bad predictions. I work in finance, and it's super easy to build a model that looks like it can predict the future, but fails completely when applied in practice, due to some statistical/modelling error. Predicting the future is damn hard; it's way easier for us to convince ourselves that a model is correct than to actuallly produce a correct model, so if somebody isn't subject to a constant process of feedback (a scientific process) it's very unlikely they're producing correct models. Crystal healers have also spent their lives trying to determine how crystals can be used to make the world a better place; it doesn't mean squat because they don't apply the scientific method in their research.
From an economic perspective, if these people really had models that could predict the future, they'd be traders, not economists. Because why settle for a meagre economist's salary when they could be making millions?
Regardless, I simply have to laugh at your comment. The "finance bro says economists are all morons who would be traders if they actually knew anything" trope is pretty great!
It sounds like you know more about this field than others. That's great—but then the thing to do is share some of what you know, so we all can learn. If you mix it with cheap shots and swipes, that not only breaks HN's rules, it discredits the truth you're trying to advance, which is not in your interests or anyone else's.
I am yet to find a macro economist that is sensible and intelligent.
Interesting possibilities stem from it:
https://www.huffpost.com/entry/sovereign-debt-jubilee-japane...
MMT relies heavily on the fact that tracing back who is paying for it is so convoluted that its backers can claim nobody is. That isn't true. At any moment there is a fixed pool of real resources that we have to divide up. It is pretty obvious that a lot of those resources should be given to people who will use them to create more real resources in the future. It is also obvious that everybody needs enough of a share to live.
A State entity can control the money supply and do strange things with the accounting identities, but in real terms it can only redistribute wealth. The government isn't going to turn to MMT to increase the claim of the makers and innovators to societies bounty; the truly inspired ones tend to be a bit eccentric and tend not to present very well on camera at a press conference. MMT will be a redistribution, by and large, to fast talking and charismatic charlatans or pork barrelling to political consituenties. The political process is not very good at assessing technical risk but excellent at pork barrelling. People will use the word 'fairness' a lot.
It is reasonable to say that MMT will do wonders for the accounting identities. GDP through the roof, measured real wages may rise, everyone can be a millionaire, banks will be saved and inflation will be mysteriously low no doubt. The median citizen will also have less actual stuff and a lower real quality of life.
For example, many people here is predicting hyperinflation, using the MMT model we can predict that's not going to happen. Many people here are predicting "slave grandsons by public debt", the MMT model tell us that doesn't make sense.
>>"MMT relies heavily on the fact that tracing back who is paying for it is so convoluted that its backers can claim nobody is"
I don't know what that means.
>>"At any moment there is a fixed pool of real resources that we have to divide up"
That sentence agrees totally with the MMT cannon.
Lets jump over the the Wiki page on MMT where it has a helpful comparison to Keynesian economics [0]. First line in that table:
Keynesian: Advocates taxation and issuing bonds (debt) as preferred methods for funding government spending.
MMT: Emphasizes that taxation and debt issuance are not required to fund spending.
Under the Keynesian model I can tell who is paying for government activity - taxpayers and lenders. I can also work out how much, by comparing how much tax they pay or how much they lend. It is reasonably transparent about who the government is distributing resources away from (net taxpayers, current lenders) and towards (net tax receivers, people who are enjoying the latter stages of a bond where the interest is payed back). People could have claimed resources; then they were taxed/saved so they didn't.
How do I do that under the MMT model where neither of those things are necessary? Who is the government distributing resources away from? How do I figure that out? I know where they are going. Where do they come from? When we debate MMT inspired ideas, how will we figure out who will be worse off in real terms and in what proportion?
[0] https://en.wikipedia.org/wiki/Modern_Monetary_Theory#Compari...
PS.
> But MMT it's not a policy, but a model
People aren't interested in MMT because it is a neat model; but because if we use that model then it becomes very hard to explain that policies are wasteful uses of time and stuff. It is very easy to make a taxpayer understand why government waste is bad. Quite hard to make people take an interest when nobody knows if they are net givers or takers.
Anyway, you are implying that the current system is Keynesian, and that there are people advocating to change to a MMT system. But the current system is already MMT.
So, to answer your question, for accountability, you could just keep in place the current way of doing things (or find some alternative) but recognize that "taxation and debt issuance are not required to fund spending". Let's recognize that public debt is irrelevant for instance, and that, yes, deficits can be inflationary, if the economy is already in full utilization but could not be in the proper circumstances.
>>" People aren't interested in MMT because it is a neat model; but because if we use that model then it becomes very hard to explain that policies are wasteful uses of time and stuff. It is very easy to make a taxpayer understand why government waste is bad. Quite hard to make people take an interest when nobody knows if they are net givers or takers"
So, basically, what you are saying is "let's lie to people" so we can have a smaller government.
They say that naming is one of the hard things of computer science, maybe it's also true for economics. Let's change the name "public debt" for "public investment" and discuss then how much public investment can we afford.
> So, basically, what you are saying is "let's lie to people" so we can have a smaller government.
That is not at all what roenxi is saying. That is what roenxi is saying MMT is saying, except for the "smaller government" part.
It also is you putting (incorrect) words in someone else's mouth, which is very much not cool.
It is also coming somewhat close to a personal attack (since many of us consider lying to be immoral), which is against site guidelines.
Unfortunately, economics is a very ideologically charged subject.
This has been going on since started inflating our money supply (since when we went off the gold standard in 1971 at least), and the economic degeneration won't stop unless we stop the inflation of our money supply too.
EDIT: The profit from the Fed's assets (after the small interest payments to the private banks) all goes to the government.
There are several kinds of orphan entities, such as trusts, foundations and more.
In the USA at the national level, only Congress is able to incorporate businesses, and they do this in one-off charters, Act by Act. So it was incorporated by a public body - Congress - while the wording of its charter leaves it very autonomous and orphaned. It is not owned by the public, it is not owned by the private sector. Simultaneously, Congress created another public body called the Board of Governors of the Federal Reserve, which is owned by the public, and interfaces between the autonomous orphan entity and the public. It is the one with the appointed Chair, who occasionally reports to Congressional committees.
Congress can amend the charter of both organizations at any time. They don't and it is a line they do not cross. The alternative is the politicisation of monetary policy, which is a heavy distraction for Congress, far more than fiscal policy. It didn't work well before the autonomous central banks and other better alternatives haven't been presented.
To further complicate things - in the minds of those perturbed by the Federal Reserve's role in this country - the Act allows for collaboration with private banks as shareholders, with a 6% dividend. Yes, banks have been earning 6% dividends from their shares of the Federal Reserve for a century. These shares do not convey voting rights. This was to encourage participation in the Federal Reserve system, and any new system would need to be extremely competitive and enticing to encourage banks to participate in that instead. For context, think about America in 1913 when the Act was passed. Banks existed and had their own payment networks all around the country, and the Federal Government wasn't in the business of this at all. The idea of inherent fealty to whatever the US Government represented simply did not exist, the idea of an omnipotent US Government didn't exist. Impressionable children were not taught this in schools and bankers then and now obtain better benefits from not thinking this way. Instead, America was a burgeoning society, that recently got bailed out by JP Morgan himself, now trying to get into finance. It had better be very convincing to the banks!
Like any orphan entity like a foundation or trust, there are people that control it together, in accordance and restrained by the charter. The Federal Reserve is a system, controlled by regional directors who are selected/elected. In each region:
Three directors are selected by the Board of Governors of the Federal Reserve System to represent the public. These directors must reside and conduct business or other activities in the District. They represent the interests of labor, consumers, commerce, manufacturing or agriculture. They may not own stock or serve as a director of financial institutions.
Six directors are elected to the board by the Bank's shareholders, which are the member banks in the District. Of those six directors, three are representatives of the District's banks, and three represent the public (like those selected by the Board of Governors). The three elected public directors may not serve as a director, officer or employee of a financial institution.
Yes, the System is able to purchase certain kinds of securities (or whatever Congress allows, such as the new amendments for direct money to citizens as in the stimulus packages) and whoever it buys from now has newly created money that is diluting the money supply. The System is also able to trade the securities it has purchased for existing money. It is interested in not causing rampant inflation, but this is an inherent possibility, but it is fortunate that it has inherited a larger economy than the rest of the world, and there are people willing to accept its dollars and it just selling them into liquidity keeping the dollar's relative purchasing power amongst other currencies steady.
It's actually privately owned and not public.
The profit share ("dividends") the banks receive is trivial, a couple percent of the Fed's profits. Typically 96-98% of profit is sent to the US Treasury.
Whenever this balance sheet chart shows up, MMT boosters descend to explain why the Fed's balance sheet doesn't matter. It's interest we owe ourselves. Nobody in the real economy looks at that balance sheet when making actual financial decisions, they claim.
I think that misses the point. The point is that since the last financial crisis, the balance sheet has on net expanded. By a lot. When the current crisis hit, the balance sheet shot up from an already elevated level.
To put it another way, consider the size of the balance sheet relative to GDP (~$24 trillion):
https://fred.stlouisfed.org/series/GDP
At the current level, the balance sheet is about 25% of GDP. There's every reason to believe the Fed is far from done. It's bailouts as far as the eye can see at the moment. And those bailouts will be monetized by the Fed. We can't possibly pay for them at the current value of the dollar. Ever.
To the MMT boosters, what happens when the balance sheet approaches 1x GDP? 2x? 5x?
Nobody knows because this experiment has never been tried before. The reserve currency printer is also a net debtor. It runs very high, structural deficits with no end in sight. The currency is completely decoupled from gold, and as recent history shows, possibly industrially-critical commodities like oil.
I'd be very curious to hear from the MMT proponents on what signals they's look for that the Fed's balance sheet actually does matter in the real economy. Things that can only be explained by problems stemming from the size of that balance sheet. Problems whose only cure is a massive reduction in that balance sheet.
Of course, the balance sheet isn't going anywhere. Nor are deficits. When faced with such situations in the past, the answer has been devaluation.
The US did that back in the 70s when it closed the gold window. It will happen again. What the MMT proponents I've seen seem to ignore is what form that devaluation will take given the highly unusual circumstances around which it will be occurring.
They only pointed(1), correctly, that QE was not going to be inflationary AND that monetary policy is not the proper tool for this kind of problem. Fiscal policy is the proper tool.
You will not find MMT economist defending QE or the buying of financial assets, other that public debt bonds, if it's legally required to finance fiscal policies.
If fact, many are very critical(2) of this kind of programs.
(1) - http://bilbo.economicoutlook.net/blog/?p=28422 (2) - http://bilbo.economicoutlook.net/blog/?p=4763
Any meaningful reduction in the Fed's balance sheet is going to be untenable. The Fed will end up picking winners and losers through their actions as a "Deus ex machina" market participant, and due to their lack of any meaningful oversight, I hope they act wisely.
MMT doesn't necessarily condone the Fed's recent round of unlimited QE. Most MMT advocates if anything would probably prefer that money going directly to the people (ie. helicopter money) or to fund ambitious federal programs (eg. job guarantee, UBI, investment) than bailing out mortgage bond investors.
I think we're beginning to see this in the US. In a few years, you won't be able to live in New Jersey and commute to New York City, or take the train from Boston to Washington D.C. The North River Tunnels will have collapsed, because we can't find any money to repair them.
Ultimately, it's a little disingenuous to say this is "selling your children". Yes, if we keep buying stuff, someone will have to pay for it. If society takes on projects that need to be paid for over 100 years, people that aren't born today will be spending some of their taxes on it. But with the right investments, it's almost certainly worth it. We can look back at some of the achievements over the last century and find that they probably grew the economy more than they cost, which makes them good investments when paid for collectively. In 1920, we didn't have an Interstate Highway System, we didn't live in the suburbs and commute to the city, we couldn't fly to the far corners of the world in 16 hours, we didn't have all of humanity's knowledge available in our pockets. There is no reason to believe that 2120 won't be just as good as long as we keep investing.
Yea this is never going to happen in our lifetime.
Practically though we build new houses because old houses tend to not be in places we want them to be, and are not large and nice enough to our liking.
The public debt is just a number, it's the accumulate of pass deficits and it's not inflationary in itself and it's not a problem.
A mental experiment (not so hypothetical): suppose that in order to fight an economic crisis the government decide to spend a big deficit and, in order to do it, they emit bonds. Suppose now, that the Federal Reserve buy all those bonds. Who is that money owned to? who receive the dividends of those bonds?
A second mental experiment: in order to not increasing the public debt and "save for our children" the government don't spend in infrastructure or investigation. In 50 years there is not infrastructure left or new technologies but the public debt is zero. Are the children rich or poor?
What we ended up with is a situation where almost all the wealth/value we (governments, businesses, the people) have built is represented in terms of 'monetary units' (the numbers in the computer), but it's increasingly clear that in the future, these positive and negative numbers will never add up to zero anymore, and we're not going to 'grow our economies out of debt' as was originally the idea of taking on debt now to invest in the future. This means someone is going to lose big time sooner or later.
Printing more money to take some negative numbers from the economy and infusing it with some positive numbers is not a strategy that can save the system in the long term as there are exponential terms involved because of interest. There will be a point where diluting the the money supply (which is exactly what QE is) will result in a loss of confidence people have in the 'numbers in the computer' being a reliable proxy for their wealth. Governments will have a hard time selling treasuries when no-one expects them to have any value in the future. When that happens (which IMO is just a matter of time, how much time is not clear but most definitely not 100+ years) all value that is not recorded in tangible, useful assets or skills will simply disappear, and it will not just mean the 'numbers of the computer' have to be adjusted or reset and everything can go back to normal...
Not really, the history of money doesn't support that theory.
>>"[..] it's increasingly clear that in the future, these positive and negative numbers will never add up to zero anymore,"
They don't add already, never were suppose to add. Where is the dollar coming from if not the deficits of government? The spending of money in the economy is what creates money. So, it's the debt of the public sector what create the money in the first place. You are complaining that excessive deficits are creating too much money, so you already agree with that.
>>"[..] Governments will have a hard time selling treasuries when no-one expects them to have any value in the future. "
That makes zero sense. The Central Banks can, and frequently do, determine the interest of the public bonds. Japan is the main example, but there are many others.
>>"[..] all value that is not recorded in tangible, useful assets or [..]"
A government tax every transaction in the economy, and can do it because it has the monopoly of force in that country. If the USA government only accept dollars for paying taxes, there will be always (while there is an economy and they keep the monopoly of force) demand for the Dollar. The same is true for all the other countries.
To Federal Reserve of course, which will receive the coupons. To be sure, taxpayers will pay the principal and interest down the line.
> In 50 years there is not infrastructure left or new technologies but the public debt is zero. Are the children rich or poor?
Lack of government-built infrastructure is seen. What is unseen is all the other things that the money saved on government-paid infrastructure paid for.
Money is a claim on resources in the economy, and if the government doesn’t claim its share and use it to build infrastructure, these resources do not disappear. Something else uses them.
But I'd be less worried if these debts were to build infrastructure (and we'd have some incredible infrastructure). That's my real concern here: we borrowing to maintain lifestyles not to build useful things.
Your point about Japan is really interesting. I heard things were moving that way but I didn't know they were so up front in recognising it. I love the Japanese. Here in Europe we're in a similar position but no one quite wants to admit it. And we borrow still, we just give it all to OAPs :(
Only if you squint _really_ hard, have near-religious faith in technological advancement, and ignore all the ways we're making the planet increasingly difficult to live on.
The government gives you money(low taxes)/buys something, and does so by borrowing the money for a long time. Now future generations (their children) are on the hook for the payments, having to pay higher taxes in the future for benefits in the present.
This is fine if you are using that money to invest smartly, such as in needed infrastructure. This is not good if you are doing it to lower taxes to win elections.
This is how you can "sell you children", though I prefer the more correct language of saddling them with debts.
For instance, in the current situation, all the countries are applying stimulus at the same time, so, where is all that money coming from?
We're not literally selling the kids. But it is the kids that will be paying off these huge debts via higher taxes and less services.
The debts are mainly owed to China, Japan and a few other nations as well as big private lenders (hedge funds and billionaires)
Relevant link that dforrestwilson posted: https://www.huffpost.com/entry/sovereign-debt-jubilee-japane...
I'm just making quips about how much debt has been run up since 2008 and how little the US (or other nations that have followed the same policies) actually has to show for it compared to what it will take to pay it off...
Think of it like share dilution. For example, without corresponding demand, Tesla can issue 20% more shares arbitrarily, and the price of a share will drop 20%, or Tesla can wait for excessive demand and issue 20% more shares and the price of a share will stay the same because the market clamored for them. Maybe the price of Tesla would have gone 20% higher if they didn't issue those additional shares? Or maybe interested buyers were waiting for a moment to purchase many at once without affecting the market.
Fiat currencies are in the same place. Forget about the cognitive dissonance where currencies are tied to your national identity and comparisons to private shares therefore cause trepidation. The functionality is similar, we just use different terms. Share dilution = inflation.
As long as the relative purchasing power of a dollar, compared only to other currencies, is managed, the Federal Reserve can purchase as much as it wants. When the Federal Reserve purchases things, each transaction creates new dollars. The recipient has dollars that didn't exist prior and are just as fungible, slightly diluting the value of all other dollars (causing inflation). The Federal Reserve is fully capable of selling assets on its balance sheet, for existing dollars. Just options and choices that other market participants don't typically have.
The wide latitude in the side of the Fed's balance sheet comes from the weakness of other currencies. Central Banks around the world are doing the same thing, weakening those currencies, simultaneously actual people are selling their currency for US dollars. This increases the strength of the US dollar, and means the Federal Reserve can dilute it to weaken it. The long-standing predilection of the Fed, the President and Congress has been to not have a strong dollar, so you can predict what the Fed will consider doing based on macroeconomic events.
As long as all currencies are being massively created, the Federal Reserve can do the same proportionally. The amounts don't matter in that regard. You just want to pay attention to the constraints on what it can buy, and if those constraints are being followed, and if there is enough things for it to buy to accomplish its goals (otherwise massive de-flation is likely, and harmful in our ability to predict our purchasing power or investment decisions)
If the government can give you free money (1200$ checks), it also has the power to take everything away from you, right?
I initially looked long and hard at trying to implement my own copy of Ray Dalio's "All Weather Portfolio". I really recommend reading up as much as you can about Ray Dalio and this portfolio. To create this portfolio for US investors you can follow this website: http://www.lazyportfolioetf.com/allocation/ray-dalio-all-wea...
Having done all that research, I've started to modify my approach according to Chris Cole's "Dragon Portfolio". You can learn about it here: https://youtu.be/SkfgEZtJ9LA and read how to implement it yourself here: https://docsend.com/view/taygkbn
Just to be clear, I have no connection to any of the people and companies mentioned. Also, you may have higher risk tolerance, and want a higher level of return, so these portfolios may not be for you. Either way, you should always seek the advice of multiple fiduciary financial advisers before deciding what to do.
The money the Fed prints doesn't go to Joe Average. It goes to investors who are selling the Fed junk bonds. (They then turn around, and buy stocks with those dollars, which is why the market is soaring.)
If you're sitting on a retirement fund, that hurts you. If you're sitting on debt, that helps you. So it's much more past tax payers than future ones who are hurt by this.
On the other hand, decreasing the value of accumulated wealth is exactly what ought to happen here. We're not producing very much, and everyone will have less actual stuff. The question is how the banking system adjusts.
If we see deflation (prices go down, salaries go down, revenues go down), people will default on debts and other fixed obligations, and the whole thing blows up in structural damage from bankruptcies, mortgage defaults, layoffs, etc.
If we see inflation, a lot less structural damage happens.
COVID19 is destroying value. What the fed is doing -- inflation in the stock market to keep prices where they were -- is exactly what ought to happen. Inflation will continue to happen elsewhere in the system. The flip side is you don't want starving, homeless people in the streets -- that will destroy massive wealth. We'll deal with that with inflation too, most likely.
The trillions the Fed is printing aren't being sent out as stimulus cheques. They are being used to provide short-term liquidity (Which does not cause inflation), and to buy junk bonds, (Which does cause inflation, and also happens to prop up the stock market.) Some of that money is also being lent to the government - if those loans are paid back, they will cause net zero inflation. (Because once the money is paid back to the Fed, it is destroyed.)
This is precisely why we have central banks that are independent of government budgets. It creates checks and balances against a government choosing to print its way out of budget troubles.
Government debt does not really get payed. Old debts are payed off with new ones.
Public debt is just a number that express the accumulated of pass deficits. In order to reduce that number you need a government that, instead of a deficit, have a surplus.
If the government has a surplus, less money is spend in the economy.
If that reduction in spending is not compensated somehow, necessarily, the GDP has to fall.
The only things that can reduce that fall in government spending are a positive balance commerce or an increase in private debt.
Now, an increase in private debt, instead of public debt, that's a real problem.
Assuming you can get the fed to make that money disappear, which it doesn't have a good track record of doing so far.
That is debatable. They say this but at some point you have to wonder, will they have the capacity to take it off the balance sheet without massive inflation? Historically, there are two ways governments went out of huge debt: default or massive inflations. I doubt the USG will ever let itself default so inflation is more likely. One advantage that the US has is that it has the world reserve currency.
If dollars are worth 1/2-1/10th of what they are now in three years, that's kind of okay, and in-line with the damage of COVID19. If they are worth 1/1000th, we're looking at a serious, structural collapse.
That is massive inflation.
On the one hand: Look at unemployment rates, business failure rates, mortgage defaults, people unable to pay for food/medicine/shelter, or any other economic metrics, and plot even conservative predictions even a month or two out. The economy will be dead very quickly if we don't do something drastic.
On the other hand: If we let it burn: look at COVID19 mortality rates, and multiply by a significant fraction of the US population. You land on numbers greater than WWI casualties, and likely greater than all previous wars combined. Heck, looking at permanent lung damage alone, we're already tanking our economy.
These are exceptional times.
They take exceptional measures.
The metrics I care about are: (1) Structural damage to the economy (layoffs, defaults, bankruptcies, etc.). (2) The number of people working (likely in pandemic-adapted industries) (3) Deaths. To minimize those, we'll either need to be clever or to inflate. So far, we've been really bad at clever.
People need food, shelter, and medicine, so those are well inflation-protected. But housing prices would collapse if everyone is unemployed for long. Food producers may get sued of COVID19 outbreaks which are happening at plants already (essential workers, no PPE). And hospitals may be overloaded for a long, long time in ways which are quite complex.
And you can't eat gold. It's as fiat as anything else.
We're looking at a potential major collapse. It's hard to shield yourself from that.
Education is always a good investment, I guess. Schools are desperate for students and tuition, and not a bad place to weather a crisis.
It's a good way of inter-generational wealth storage still. Also it's useful along with a basket of currencies to diversify with especially in countries with high inflation or value volatility e.g. Venezuela. It's highly regarded in 2 of the most populated countries in the world (India and China) and that is not apt to change any time soon.
Sure, in a full grid-down situation it's useless and "junk silver" would be more useful as a temporary currency but that is a slim possibility.
That is a pretty outdated view. More like the money supply grew and everyone's money is a bit less worth.
Only if the economy is at full utilization. The reason for the stimulus is that the economy it's not at full utilization, ergo, there will be not accelerated inflation.
Regarding the USD, the same doom cults say the same things during every major global problem / event / disaster going back generations. The dollar was supposed to go away with the great recession; the dollar was supposed to go away with the intense inflatation of the 1970s; the dollar was supposed to go away with Nixon's abandonment of what was left of the gold standard; the dollar was supposed to be doomed with FDR's various moves.
There is zero evidence the dollar is under meaningful risk here.
It's fine to utilize gold as a store of value, there is absolutely nothing wrong with that. And that's an entirely different matter than whether governments will abandon their fiat currencies. The US, Eurozone, China, Japan, Russia, India and so on have absolutely no interest or willingness to give up control of their present fiat + central bank systems. They dictate whether fiat money is doomed or not, via their enforcenment capabilities.
Take one blatant example. Russia has de-dollarized itself heavily, has accumulated a lot of gold lately (relatively speaking), and still has zero interest in giving up the power, flexibility and convenience that controlling the national fiat currency provides. For Russia, gold is just a diversification opportunity that backstops some of their national financial condition. The same is true for China, another accumulator of gold reserves.
The value of the dollar in 1968 was - roughly - (1/40)th of an ounce of gold. The dollar today is roughly (1/1660)th of an ounce of gold.
That is a >95% reduction in value over less than a lifetime. The people who argued the dollar was going to undergo intense inflation would probably be confused about why people argue they were wrong. Some of the young ones (~30 in the 1970s) are probably still alive to argue that point although not on HN. Anyone who stuck with gold rather than dollars when Nixon closed the gold window has been making ~7.7% per annum nominal investment return from holding on to a rock.
The major thing they got wrong was thinking that people would stop using it after it lost whatever % of its value it did. 97% or somesuch so far. Turns out not.
Now, sure, the dollar lost a lot of value between 1968 and now. I don't deny it. But it also lost value between 1935 and 1968. Measuring the value of the dollar in terms of gold makes it look like all that happened after 1968, which makes the rate look higher than it actually was.
But regardless, when people say "collapse of the dollar", they're not necessarily saying the dollar is going to vanish. They're saying it's going to lose its value. Whichever part of history you look at, history shows it's a poor store of value as we just print more of it than goods. Nearly any asset is going to look good next to it if we continue the status quo...
$35 to $1,650 looks a lot more like a collapse in value. And that is after the demand for gold presumably plummeted because it wasn't official money any more, and mining got a lot more efficient through the 70s to the 90s. Maybe the Asians made up for that with new wealth and demand or something. If I'd been alive in 1970s, arguing that the dollar would collapse in value, I wouldn't feel like I'd lost the argument looking at how history played out. I'd probably have gotten the timeframe wrong, but the mechanisms are playing out as expected.
The thing that really stuns me is that countries are willing to hold US dollars as a reserve currency. It is a terrible move for value preservation. They aren't aiming to maximise their savings.
[0] https://en.wikipedia.org/wiki/History_of_the_United_States_d...
And, gold was pegged to $20/oz. Then at some point in the Depression, it was moved to $35/oz in a step function. It wasn't gradual.
And I argue that the actual value of gold wasn't $35/oz at the end of the gold standard. That's why the value shot up so quickly when the market was allowed to determine the price - because $35 was the wrong price on day one. There was a lot of inflation between 1935 and 1968 to catch up for that was not reflected in the $35 price, because $35 was never a market price.
How do I know that $35 was the wrong price? Because the US was bleeding gold. Other countries were buying gold from the US at $35, and the US could see that the official price was unsustainable.
I'm more than happy to agree it is not a precise comparison. A lot has changed over the last 50 years. But even after leaving a reasonable allowance for that, someone arguing that the move off the gold standard would destroy the value of the dollar appears to be (100-2)=98% correct. If you like we can agree that the starting price was $150/oz in market prices, in which case we can agree they were 90% right.
The US government has an inflation policy; they explicitly want to reduce the value of the dollar at a rapid pace. The government is publicly on the record as thinking that is a good outcome. So maybe they would have destroyed the value of the dollar even if it was on a gold standard. That seems likely to me.
If someone was arguing that the unit of trade wouldn't be called the US dollar they were wrong. If they argued it wouldn't be used as the international unit of account they were very wrong. If they argued it would be quick then they are laughably wrong. By pretty much any other measure they were mostly right. Whether this was a bad outcome or not is debated, but given the collapse of real wage growth vs steadily growing productivity after 1970s I don't see how it can be argued that inflation is working. Working to do what, get everyone indebted to banks? High real GDP growth is good for the averages but hasn't done very much for real median wages for example.
If you had $35 US, you theoretically had the equivalent of an ounce of gold. You couldn't actually buy the gold, though, not until (IIRC) 1965.
> I'm more than happy to agree it is not a precise comparison. A lot has changed over the last 50 years. But even after leaving a reasonable allowance for that, someone arguing that the move off the gold standard would destroy the value of the dollar appears to be (100-2)=98% correct. If you like we can agree that the starting price was $150/oz in market prices, in which case we can agree they were 90% right.
Sure, I'd go with that. But that also means that there was (150-35)/150 = 77% destruction of the value during the time when we were nominally on the gold standard, but people couldn't actually use the dollars to buy gold.
If you wanted to argue that it wasn't a real gold standard when people couldn't use the dollars to buy gold, I would agree with you. I wouldn't even complain about "no true Scotsman", because the difference seems to me to be a crucial one.
> The US government has an inflation policy; they explicitly want to reduce the value of the dollar at a rapid pace. The government is publicly on the record as thinking that is a good outcome.
Well, they say they're targeting 2% inflation. To me, that's eroding the value of the dollar, but not "at a rapid pace" - I saw 14% inflation in the late 1970s. I will admit that even 2% inflation adds up rather shockingly when you look at 50 years, though.
> So maybe they would have destroyed the value of the dollar even if it was on a gold standard. That seems likely to me.
If they had a real gold standard, I don't think they could have - they would have hemorrhaged gold until they had none left, and then they would have had to give up the pretense. But a "gold standard, but you can't actually convert" let them inflate while pretending that they weren't.
> Whether this was a bad outcome or not is debated, but given the collapse of real wage growth vs steadily growing productivity after 1970s I don't see how it can be argued that inflation is working. Working to do what, get everyone indebted to banks? High real GDP growth is good for the averages but hasn't done very much for real median wages for example.
I see it like this: After World War II, there were cycles of prosperity and recession, but each cycle was at a higher rate of inflation than the previous (comparing the same points in the cycle, obviously). Then in 1979, the Fed changed strategy. Since then, each cycle has had lower inflation, but also a lower fraction of the population employed. I think (but cannot prove) that the lower fraction of employed workers has something to do with the lack of wage growth.
As to what the Fed should do differently... that's way past my level of understanding.
I know in Australia if you are looking for wealth preservation it is a hands-down win for gold but I don't know enough about the US tax system to comment on what would happen. I suspect the returns are a lot less rosy and it turns out most of the real wealth ends up being transferred to the government.
Enemies that become an unwanted source of distraction are deinstalled by an act of god.
Buy an index fund and wait I say.
As these cycles take a long time, it's better to look at long term charts, like this:
https://www.macrotrends.net/1378/dow-to-gold-ratio-100-year-...
Gold is an asset that was able to keep its value for 5000 years (unlike fiat currencies), and it has to be mined, it can't just be created in an excel spreadsheet in the FED. If you put these things together, it makes sense, that having a new high every few years is normal (just like with stocks).
Gold performs well in highly inflationary environments, so the question is whether the FED stops printing money, or it will just print much more than it did recently (about 4T). To me it looks like it just has gotten started.
What we see now it large parts of the stimulus package are devoured by the top level bureaucracy never doing anything but being transferred to Cayman islands as performance bonuses.
How about we try the trickle up economy for once?
We are. The vast majority of the stimulus so far has gone to benefit the bottom 3/4 of the US economically.
Here is some of what's in the $2 trillion recent stimulus:
- $268b to extend & expand unemployment benefits.
- $293b one time check (which won't be one time)
- $377b small business loans & grants; this has been more than doubled since then
- $150b aid to state & local governments
- $153b boost health related spending
- $42b boost to smaller social safety net programs, such as SNAP
- $45b boost to disaster assistance
- $40b boost to education spending
People will attempt to retort that: well, but big corporations have improperly taken some of the small business loans; they'll try to use a rare edge case to attempt to nullify the overwhelming point that in fact most of the stimulus is going to the bottom 3/4, not the top 1%.
Further, we'll do more stimulus programs yet around sending direct checks to individuals, which will continue to tilt this scale in the favor of the bottom 3/4.
The small business loans, unemployment benefits boosters and individual checks also do not have to be paid back, unlike the big business bailouts (such as with the airlines).
Most likely direct checks alone will cost over a trillion dollars before this is over. There is very little capable resistance to doing more in that regard, it will happen.
The gp you're responding to sounds like he/she is talking about personal investment advice to protect an individual's purchasing power (i.e. micro economics).
However, your response is about a macro economic government policy.
Those are 2 different conversations.
Gold was important at the time where balances were done manually and purchases between countries were settled with physical gold.
(And no, this is not a defense of bitcoin. Bitcoin has to be much more liquid and stable for it to work as a store of value)
The wide latitude in the side of the Fed's balance sheet comes from the weakness of other currencies. Central Banks around the world are doing the same thing - creating currency - weakening those currencies, simultaneously actual people are selling their currency for US dollars. This increases the strength of the US dollar, and means the Federal Reserve can create more dollars to weaken it, avoiding deflation. Currencies based on scarce commodities have deflationary economies as the economy grows, which hampers liquidity and investment, the US has had that before and moved away from it because it wanted liquidity and investment. So you can predict that it will avoid deflationary environments.
All fiat currencies are in the same boat, but the dollar is not in that boat in isolation. Coordinated central bank accounts allow this to continue into perpetuity. Ie. If the European Central bank diluted their currency by creating trillions of Euros, the Euro might trade down to parity with the US dollars (at time of writing the 1 Euro can be traded for 1.09 US Dollar), instead of that happening in isolation, the Federal Reserve can also create an offsetting amount of dollars, weakening the dollar enough to force the Euro to still trade for 1.09 us dollars, while both banks have accomplished their goal of adding liquidity to their economy.
So for massive monetary unions, it is much harder to "fail" or enter into a hyperinflationary environment.
But yes, if that a lot of the newly created currency was being used to buy gold, then the price of gold would be expected to go up. It is just a much harder environment for the narrative of it becoming a replacement for the dollar to be there. Other fiat currencies outside of large monetary unions might have utility in switching to a commodity again.
The same will happen here, the Fed is creating lots of inflation, but not enough to cancel out the deflation caused by the virus and lockdown.
Broadly speaking, these people distrust a money supply that can be influenced by governmental powers. They're always making noise about fiat money, gold, and sometimes cryptocurrencies like bitcoin in internet forums. They tend to become extremely vocal whenever the government intervenes in financial markets, such as the current financial crisis.
The first counterpoint would be that the anti-fiat crowd has been declaring fiat dead ever since the gold standard was abandoned ( https://en.wikipedia.org/wiki/Gold_standard#Abandonment_of_t... ). They made the same claims in the recessions of the 2000s, the 2008 housing crisis, during the low interest rates of the 2010s financial boom, and now in the 2020 crisis. Maybe they'll be right one day in the future in the same way that a broken clock is right twice a day, but are you sure this is their time to be right?
The second counterpoint is that outside of very specific windows, gold hasn't performed very well against traditional investments. The gold proponents had a good run for a few years after 2009 when gold was a hot topic, but it generally hasn't been the home run investment that the proponents expect. You can view long-term gold vs S&P trends here: https://www.longtermtrends.net/stocks-vs-gold-comparison/ Drag the bottom sliders to set different start/end dates. It's possible to find periods of time where gold outperformed the S&P 500, but generally you'd have to get both your buy and sell dates just right to come out ahead. That is, market timing. If you bought gold in 2009 and held you're doing okay. If you bought gold in 2012 and held, you just barely came up to net positive returns after 8 years.
The third argument is that it's not a great idea to bet against the weight and power of the government. People declaring fiat dead are assuming that the government is going to destroy the value of money via manipulation, but most of them can't put together cohesive explanations for how the Federal Reserve operates. The Federal Reserve is a complicated system that can be difficult to understand. If you misunderstand the function or purpose of certain steps, it's easy to get the wrong impression that the government is printing money to buy stocks like all of the memes say. In reality, the system is much more complicated than that and you're unlikely to find unbiased explanations in internet forums, especially if they're coming from people who are heavily invested in gold or bitcoin and would like to see everyone else prop up the price of their chosen investments. It's best to spend an hour or two reading up on the Federal Reserve, why the gold standard was abandoned, and what the Federal Reserve is actually doing with their balance sheets. Wikipedia actually has decent articles that explain the high level details well enough: https://en.wikipedia.org/wiki/Federal_Reserve
You could argue that that wasn't a real reduction, that a real reduction would be 50% or some other number. If that is your argument, it looks to me like moving the goalposts.
I believe this topic is among the most important things we need to discuss and is arguably more important than climate change (what else is driving consumerism and throw-away-culture but inflation?), but economists have overcomplicated things and made it inaccessible to the average person when it really is so simple that a five-year old can understand it: printing money enriches the few who have access to the printing press at the expense of the many.
End central banking and the economy will be stronger, more resilient, fairer, and will reward those who create real value rather than the well-connected.