Fed’s Balance Sheet Exceeds $7T for First Time in History
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In the 1930s the US government had spiraling debt so how did it solve this problem? Simple. It simply made US$1 worth 1/35th of an ounce of gold instead.
What this amounted to was a devaluation of US government debt in real terms but not in nominal terms.
Post-WWI Germany had to pay war reparations denominated in deutschmarks. About 10 years later Germany got into a situation of hyperinflation. This essentially wiped out any outstanding reparations.
So if you wonder what the end result of all this is, it's probably that: an effective devaluation of bonds rather than a sovereign default, which is unlikely in any system where the debt is denominated in the currency you can literally print.
Interestingly this would also devalue the US government's entitlement obligations (eg Social Security) too.
reichmarks
Fortunately gold is a global market that can’t be manipulated long term.
The reparations were the cause of the hyperinflation, as they were required to be paid not in German currency, so they printed lots of currency to exchange for the required hard currencies on the markets, at ever-increasing rates.
Of course this did nothing to wipe out outstanding reparations.
https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_R...
I don't know why I found this so funny, given how prevalent seeing hyper-inflated currencies and countries get destroyed has become in my Lifetime. Its like I saw a 4 year old hitting the print trillions button on a Sim-City like game only to see a Game Over appear right away.
The US Fed has tripled the MB to fix last decade's financial crisis and inflation went down, not up.
https://en.wikipedia.org/wiki/File:MB,_M1_and_M2_aggregates_...
Here is just a number the one's off the top of my head spanning just the 8.5 years I've been doing it or been involved in that space.
Libya, Somalia, Tunisia, Egypt, Venezuela, Ukraine, Argentina (several times), Brazil.
I vaguely recall the days before the transition of the modern MX peso, because my family had property in Baja as a kid and I still remember seeing the obscene amount of zeros on their currency/prices and how much you'd get for just $50 USD, which to me was a lot of money back then. I remember being able to spend all day at an arcade in a mall or a corner shop for $10 and still be able buy chips and soda inside or a fried rice and an ice cream in the food court while my family got haircuts, massages, manicures, medical treatments or whatever took so long to do.
The same with the peseta or lira in comparison to the Deutschmark, which was often used in a certain part of Spain, but I was a child and had no real grasp of economics beyond 'wow, that's a lot of numbers!' I incidentally had the same feeling vicariously when I was in the non Euro zone part of E. Europe and I paid someone with a child in CHF or EUR. Its odd how evocative those short encounters can be.
Debt based deflation is merely a short term symptom, often of a reserve currency/SDR currency, but just look at how bad even some Western nations have gotten destroyed from the capital controls and other restrictions into the local economy after the Market and currency collapses as result of increasing the monetary base.
Hell, even the Eurozone has its own perverse localized form of it, look at what happened to Greece in 2008--they were debating going back to the Drachma for a while and ultimately issued their own form of script/currency in the interim [1]because EUR became scarcer and austerity kept claiming victims after defaulting on the IMF loans. Or the rest of the PIIGS nations for that matter. Slovenia is another example of what happens to an economy that cannot maintain with the EUR inflationary practices by the ECB and distorts the local economy and market dynamics and abandons previously held practices that made them be able to adequately transition after the fall of Yugoslavia, as opposed to its other satellite nations which in the case of Croatia and Serbia led to war.
It's really a matter of how deep you want to look at this, and to be honest, I sometimes wonder if I did some irreversible harm to myself and my psyche by living it and breathing for so long. But the truth is you see the best, and subsequently the worst, of Humanity in those situations and conditions so I have no real regrets as I lived a very rich Life so far as a result.
1: https://www.businessinsider.com/greece-local-currency-networ...
CPI stayed relatively stable, the bond market recovered, the money got (mostly) repaid. TARP ended up being a really smart move, even though it would have been better structured if it included a small business / consumer package.
It'd be interesting if this crisis taught us that the harmful effects of monetary creation aren't as harmful as we thought. Looks like it's time to see if this Modern Monetary Theory thing might hold water. It's terrifying but also kind of exciting.
The rage is barely below the surface. Good fucking luck.
- You value a car on your sales lot on your books: $10,000
- Real value is probably, $5,500, the spoiler and crappy tint doesn't 2x the value
- Your car is currently on fire (act of god) so value is scrap
- Buddy who runs a bank (you pay on the side because, o this ins't the first on fire car you tried to sell trash for cash) offers you $9,500, a bargin
- You are in
- 2 years later, pay off bank buddy (maybe political donation) b/c you are the one of the 9 people who can sell cars
- Throw press conference because you saved tax payers 10k + horrible risk if I failed
- Bank share holders (Tax payers) own pile of scrap
he incentives are mismanaged because the calculated risk of a bank failing is evaluated purely on the chaos induced, not the existing status quo which for joe schmoe is crazy but HFT guy can make bank off of (so sold as all upside if you are smart, but is restricted in apparent but fog like ways). Maybe said bank is actually terrible, but we won't know because they are a rise together, never fall together cartel (malicious or not, fact of reality)
The headline wreaks of sensationalism (assuming the writers are indeed educated and bother to think through what they're writing). Not looking to encourage such headlines with clicks.
The point here is the previously assumed additional round of quantitative easing now going to be so hot on the heels of the last in January the US may as well be a command economy.
When businesses fail and employees are fired real value is destroyed: working relationships are severed & institutional knowledge lost.
It is in all of our interests to do what we can to preserve these businesses until the external shock ends.
Strip the equity, give the assets to someone who can properly manage the business.
I hate this idea that the taxpayer needs to subsidize risk for corporations. It creates a huge moral hazard where companies are incentivized to act as irresponsibly as possible. There are no consequences.
Small business: Have you ever actually run a small business, or even known anyone who did? Do you understand how ridiculous it is to tell a local coffeeshop "Oh, just have six months of payroll and rent in a safe"? These business contribute a lot to communities, and telling them "oh, you don't deserve to exist unless you are capable of withstanding once-in-a-lifetime pandemics" is asinine.
People optimize for health, happiness, and personal utility.
(1) It's reasonable for us to guide society towards different financial goals for people vs businesses. Business failure is part of life (not that we should try to make it happen). Personal failure is catastrophic. The risk/reward tradeoff is different.
(2) You'll notice I'm also not advocating for letting people starve in the streets, if they don't have savings. Help people. Help businesses. We're adults, we can do both.
The US GDP last year was $21 Trillion dollars. The gross revenue was about $2.1 Trillion dollars. This is all back of the envelope math but imagine if 50% of the difference between those numbers was the operating cost in the US of 6 months, or about $9.5 Trillion dollars. If we take that money out of the market and put it into a bank for a rain day fund, imagine all of the people not receiving that money. Imagine how many consumers would go down. This is all just an estimation but we are talking huge amounts of money not being put into the economy and frankly, our economy runs on consumption. Consumption doesn't happen without capital.
People should definitely safe. Have a 6 month personal supply. But companies need to spend.
Companies and the economy cannot handle having a 6 month reserve of cash, that is the assumption and there are plenty of economic theories that show that doesn't work.
Bailing out with taxpayer dollars is one solution and it's the easiest dial to turn. It will bail out a lot of companies that aren't "shitty" and are just handling a time that is unprecedented and needs to be handled. As with most things, it will also bail out some "shitty" companies. We don't have a great metric for "shitty" vs "non-shitty". Those taxpayer dollars to companies are not free (though with inflation they basically are free). They have to be paid back with a minor amount of interest over a 2 year period. Will everyone pay it back? Nope. But many will.
The point to remember here is this is unprecedented and we are attempting to solve a future problem. Let's imagine we don't bail anyone out with very cheap loans. A bunch of "shitty" companies go out of business. A WHOLE bunch of "non-shitty" businesses go out of business. When the world opens up again the people who have lost their job have no where to go. There are no "shitty" or "non-shitty" companies to go back to. They went out of business. Unemployment stays at record highs for as long as is necessary for new companies, both "shitty" and "non-shitty" to come back and start hiring. A bailout allows companies to hang on and then bring back employees ASAP after the virus situation stabilizes.
Are there better ways? Probably. Will be find them? Probably. We can learn from this situation and become better. It will require a set of new methods and economic tools to get through in the future.
But my point is the way our economy currently works doesn't handle a 6 month reserve well. We don't incentive companies to hold on to cash like that. We need to come up with the incentive to do something different, whether it is save cash or "something else". But right now, the incentive is to spend cash and allow for a bailout.
Additionally, we don't think in the future very much. We think about this quarters earnings. So again, we need to incentive long term thinking and resiliency as you suggest. Unfortunately, I am not sure how to do that.
This isn't some novel problem that we don't understand, but rather the direct result of decades of economic policy. The solution is called raising interest rates.
The problem is we do know we need to increase the interest rate. But no one wants to do that now. "We're in a bad economic time and we need rapid growth! We'll raise it later." Later comes and we say "We can't do it now! We're growing! That will slow things down. We'll raise it later." No one wants to bite the bullet and do that. Again, we need to think long term and not so short term. I don't know how to solve that.
Politically what needs to happen is that everybody who is not Wall Street or the 1% needs to realize that ZIRP is a direct attack on their economic power, to benefit the central government/bankers who dole out the piles of the newly printed money. Obviously discussion of this remains well outside the Overton Window of mass media.
Given how ever-increasing government debt itself discourages rates going up, the buy in of the middle class (retirement number gets bigger, so it is good), and how deftly the fake political duopoly divides the plebs even as they know they're being had (here we go again with dueling "presidential" dumpster fires!) I doubt this will happen any time soon. And so what will happen is eventual societal and currency collapse, either when the foreign markets route around USD or when the People finally reach our breaking point. I just hope it happens slow enough to be less of a catastrophe.
That's exactly what we're suggesting. Rather than going through this whole song and dance at least once a decade where the public has to bail out private business ventures, those private businesses should be able to fend for themselves against regular economic disruptions. This bailout and QE money isn't free and it comes with costs of its own. It would be better for the stability of the whole system if these companies could fund their own operations the next time there is a disruption.
Plus, this virus is likely going to last more than six months - even if some businesses did have 6 month savings, what happens after?
[1] https://www.nytimes.com./2020/04/26/business/coronavirus-sma...
In reality, there are very few economists who believe that a company should have 6 months of expenses in the bank for emergencies. I realize you are probably about to explain to me how those economists are wrong and companies are wasteful and whatnot. Frankly, they have their reasons and their reasons aren't do bad.
More importantly, most companies are not spending their money on frivolous things, like avocado toast. This isn't an HBO shocking sitcom/drama. Do companies make mistakes with their money, of course. But in my experience working with VC's, most companies are using all of their money on either marketing and sales, or R&D. Period. Maybe a bit on parties and morale but by percentage, 99% goes to sales and marketing or R&D. Large companies, on the other hand, spend their cash on all sorts of other things. Huge amounts of cash have still gone into sales and marketing, R&D, but also stock buy back, and investment.
Economics is largely a study of game theory. When The Federal Reserve and Congress throw money at all companies, no matter the risk, doesn't this erode the future incentive for companies to be self-reliant and increase the expectation of similar monetary policy in the future?
Also, I read your comment's parent as if it was on The Colbert Report, dripping with sarcasm.
Well, many /most don't. Now what do we do?
This would incentivize future companies to operate a bit more conservatively. The pattern of corporate irresponsibility followed by taxpayer-funded bailouts is a moral hazard.
Also, should we let people that have no 6-months reserve starve? Others will learn
On your second point, no we should not. Do you think it's hypocritical to give humans government benefits that companies don't get?
I generally agree that we should guard against privatizing profit and socializing losses, but I don't think it applies here. The point is to get all businesses and people back to the point they were before.
[0]: https://www.marketwatch.com/story/feds-balance-sheet-tops-7-...
[1]: https://www.federalreserve.gov/releases/h41/current/h41.htm#...
It's likely that this or subsequent rounds of QE with already 0 interest rates will blow some unexpected fuse, but the exact scenario will come as a surprise.
It's easy to stoke fear of an ambiguous and nonspecific threat, or contribute to a general feeling of ambient dread. This kind of thinking doesn't help me much.
It's a lot harder to work through a rigorous model of how the economy actually works, that's consistent with historical and geographic precedent. That kind of thinking would help me a lot, but I'm not sure where to find it.
I've heard people crying wolf about hyperinflation for the 30 years that I can remember, and it keeps not happening.
Instead, we have contemporary examples like Japan, which has been at zero interest rates with high levels QE for literally decades, and there's no hint of collapse there.
Is this time any different for some reason?
Even though it's not quantitative models, I can only recommend "Navigating big debt crisis" by Ray Dalio. Also, he published some chapters of his new book -- The changing world order -- online recently: https://www.principles.com/the-changing-world-order/#introdu...