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Comment by CameronNemo | Hacker News Reader

>Our new statement explicitly acknowledges the challenges posed by the proximity of interest rates to the effective lower bound. By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation. To counter these risks, we are prepared to use our full range of tools to support the economy.

What other tools do they have besides setting interest rates? They keep alluding to these tools but do not explicitly say what they are. Should we expect another round of quantitative easing?

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Normally the US Fed has the following four tools at their disposal: the discount rate, reserve requirements, open market operations, and interest on reserves.

But now due to a very florid interpretation of the CARES Act [0], the US Fed has decided it is legal to buy both corporate debt and stocks[1].

This helps explain why the market is on such a bull run. The Fed has said they will be bailing out 401ks. The republicans (who would normally abhor this type of fiscal overreach) are delighted and the democrats don't know enough to read the writing on the wall.

[0] https://www.bloomberg.com/opinion/articles/2020-06-18/fed-se... [1] https://www.forbes.com/sites/kevincoldiron/2020/07/18/the-fe...

To be fair, the Fed is going to bail out social security as well when they buy Treasuries to replenish the SS trust fund gap. The path to an attempted soft landing is inflating away the constraints the economy is encountering. We’re going to print, not repay, our way out of this.

> We’re going to print, not repay, our way out of this.

Try to, we're going to try to print our way out of it.

If the Fed wants to print their way out of this, the Fed can print their way out of this.

https://fred.stlouisfed.org/series/M2

Nominally you can do whatever you want, that it solves anything is another question. And in fact, they've been printing money for over a decade and things have only gotten worse. The Enron balance sheet could handle a lot too.

I think one key consideration is optics. Printing our way out satiates the power base of the population, even if it does cause longer term damage. Swallowing a bitter pill now causes immediate unrest, which is why we’ve a souses this for 12yrs running now.

I am sincerely asking here... as long as the US dollar remains the majority reserve currency won't the US be able to successfully print its way out and basically ignore the balance sheet? If you think the US could experience repercussions while being the majority reserve currency what are the plausible scenario(s) that that would manifest itself?

It doesn’t matter whether it is reserve or not.

All floating currencies can do the same.

The issue is that the non government sector tends to hoard money rather than spending it.

The left want to confiscate those savings. The right try to mask them by pushing more and more people into debt.

The other option is that you realise net savings are largely inert in aggregate and essentially act like a tax.

Then you just accommodate them

I agree with your statements about the non government sector and other items; however, I still don't follow your line of argumentation.

My understanding of why the US can print money without regard for consequences is because there are always "buyers" for US dollars, b/c countries need US Dollars to carry out business (e.g. China in order to maintain their export driven economy or the fact that the USD is used as the standard unit of currency in international markets for commodities such as gold and petroleum). Yes, there are technically other currencies that are part of the foreign exchange reserves, but none as prevalent as the USD.

As I understand it, this demand for US dollars is what allows USD to remain the dominant reserve currency and why when the US prints money it does not result in catastrophic inflation. If a country like Argentina tries to do what the US does it won't work out, because there is no demand for Argentinian dollars.

The conclusion I'm left with is that the balance sheet is largely irrelevant until the demand for US Dollar decreases. The real question in my mind is exactly what would cause that to occur? Most everything I read is that the network effect of the USD causes everyone to continue to use it, but perhaps something like a war between the US and China might be a precipitating event to decreased demand?

> The conclusion I'm left with is that the balance sheet is largely irrelevant until the demand for US Dollar decreases.

I agree if I change this to: the conclusion I'm left with is that the balance sheet is largely irrelevant (towards any inflationary terms) until the demand for US Dollar denominated debt decreases and is followed by increasing money supply without the increase in debt (government $ denom, corporate $ denom, and individual $ denom on net) and without increasing derivatives notional outstanding on that debt.

> The real question in my mind is exactly what would cause that to occur?

When intl banks get more comfortable with issuing debt (secured and unsecured) in non USD terms, I then would expect demand for USD fall as well so long the US maintains a trade deficit.

With the sunset of LIBOR in 2021, I expect things to pick up more on this front (Not everyone thinks SOFR is sufficient or lacks collateral to participate to the degree they currently need), though that's not stopping banks and OTC market making entities in various derivatives that extend credit in some form, including the use of cryptocurrencies.

A big problem with EM's is a lack of acceptable collateral backing the debt (arguably, this is the issue with the current global monetary system), investors wouldn't mind argentinian debt if they could have those debts backed by sufficient collateral in the event of default (sans the IMF bailout assumption of course, though some creditors continue to get hosed every time the default).

One thing that could cause this loss of faith to occur is if the Chinese are successful with making their new E-currency a medium of exchange for Americans.

My understanding is that the modern monetary theorists have an argument as to why this hyperinflation won't happen in a country with monetary sovereignty. (All the famous historical examples of hyperinflation involve countries that do not control their own currency.)

Damned if I can find a good basic text explaining the MMT argument. Naked Capitalism makes some great allusions but seems like you need to already be on their team to understand their arguments.

Seems pretty important to understand this stuff as we are all modern monetary theorists now whether we like it or not.

It's very simple.

Have you ever held a $100 note in your hand? If you have you have necessarily caused $100 of "debt" to the nation - because you haven't immediately spent it as soon as you received it.

If you'd spent it, it would be taxed as it moves and would rapidly become a $20, then a $10 and so on.

There are lots of reasons why you, and everybody else doing the same, hasn't spent that $100 yet.

What everybody gets excited about and calls "debt" is essentially the world's working capital.

The MMT view shift is straightforward. Stop calling it "debt", and call it what it is on the other side of the balance sheet "savings" or "assets". Then all becomes clear.

"My understanding of why the US can print money without regard for consequences is because there are always "buyers" for US dollars"

That's the usual view.

It isn't correct.

The US "prints" money because foreign US dollar earners don't spend all they earn. They "save". Which takes the dollars out of circulation.

And they do that largely because they end up on the asset side of some bank somewhere who then discounts them into the local currency.

That process locks the dollars (or dollar financial asset like a Treasury) in place. To get rid of the dollars they have to get rid of the local currency too.

All you can do is offset the net non-government savings (which includes foreigners. They are little different in the MMT view). Any more and you get inflation.

Argentina not only can do it, that is exactly what they do do as a necessary function of the way a banking system works. Balance sheets expand and contract through the day.

Again to the extent that there is excess saving in ARS, the government sector could offset that by simply hiring the resulting unemployed and paying them.

That there is unemployed tells you that there is excess saving. As Warren Mosler would say "if there are unemployed then we are overtaxed for the size of government we have".

Nothing but a debt trap. Exchanging long term debt that yields for reserves that yield IOER and stay on bank balance sheets and enter the economy slower and slower the more they do it.

https://fred.stlouisfed.org/series/M2V

Increasing money supply != printing money to get out of debt.

As a countries population and prosperity grow, increasing money supply is expected. The US does not in large quantities print inflationary dollars, they print borrowed dollars. This is a subtle difference, but it is has profound implications. When the borrowed dollars are paid back, the money can be destroyed. Inflationary dollars by definition do not carry this trait.

What is the difference between a borrowed dollar and an inflationary dollar?

> When the borrowed dollars are paid back, the money can be destroyed. Inflationary dollars by definition do not carry this trait.

I'm asking what the process of creating a borrowed dollar is versus the process of creating an inflationary dollar? Is there some financial instrument that the dollar is backed by that enables it to be paid back?

The Fed takes collateral, usually treasuries or bonds, and then gives dollars, these are borrowed dollars, backed by an asset. They carry an interest rate and will be paid back to the Fed. Once a dollar is paid back, the borrowed dollar is destroyed.

Inflationary dollars, which the US generally does not use this a lot, are dollars that the Fed would print and then give away. One way this is done is by paying interest on reserves, but this is not really a significant amount of money. In fact, I'd argue that we don't have enough inflationary dollars right now.

If the US was printing to pay back our debt; we don't do this, we borrow more, hence the increasing national debt, and also the reason that people keep giving the US money; we would see consumer inflationary effects. If the Fed just printed money and sent checks to people, again we'd see consumer inflationary effects. We generally don't do these things, instead we either borrow money or we take collateral and provide loans.

This doesn't mean that there aren't other effects in the economy by creating cheap borrowed money, but day-to-day hyper-inflation is not it.

How will these borrowed dollars be paid back short of real non-BS US economic expansion, which as I understand it is not presently occurring? If they are not actually paid back but just kicked down the road, are they still effectively borrowed, or are they effectively inflationary?

Not trying to troll, just trying to get a handle on the basics here.

So you make a good point. Yes, borrowed dollars CAN become inflationary. We will see this when PPP loans become grants. There are however, also deflationary effects happening at the same time due to the current pandemic...so which will dominate is hard to tell right now.

We are also experiencing supply and demand shocks, so we are experiencing higher prices in certain goods, but this is not inflation, we would expect that prices would return to normal when the constraint of the virus is removed.

I have a hypothesis that modern supply chains combined with weak labor make consumer inflation basically a thing of the past and we worry far too much about inflation that won't materialize in our normally operating global economy.

Luckily, until the world gives up the USD as reserve currency we might float it. Inflation spread over 3-4 billion spenders won't hit as hard as 400 million but it will definitely hit eventually...

>> the democrats don't know enough to read the writing on the wall.

What are you suggesting exactly here? That the Fed is hell-bent on inducing general inflation, even at the cost of skyrocketing asset values?

My understanding is that the inflation is causing skyrocketing asset values, it just hasn't trickled down into the economy.

The action of central banks setting interest rates is an artificial market intervention that necessarily suppresses others asset prices by making risk free assets available that pay free money to banks and financial institutions.

Once the central bank hits zero, asset prices return to their market clearing prices as participants chase yield

Not necessarily. So far it seems like the FED has gotten a lot better at preventing recessions / depressions. That might take some risk out of the market and cause valuations to go up given that risk is less.

Probably a little of both, but it is an interesting time in economics for sure.

We are all commenting on an internet forum run by a company whose entire purpose is to funnel money captured from the (predicted and actual) sale of valuable assets into the economy in the form of more new companies.

This. So much.

And it won't, how should it trickle down?

By the 10 %? By the people entering pension?

I will be K shaped, the rich get richer, pension people will be able to "enjoy" there pension and the poor wont be able to afford rent. Since big corps and funds will invest in housing to "save" money.

Perhaps they want they want to make a "trillion dollars" the new "billion dollars" by inflating the national debt away. YMMV

Since when are republicans for sane financing of anything? I thought that was just bullshit because it nearly always results in increased spending and cuts to services. They clearly just use this to con their base.

Exactly. It’s a transparent ruse they use to bash democrats. They don’t actually care about fiscal “conservatism”. The base falls for it every time.

But the base doesn’t seem to want fiscal conservatism either, so the only ones who really fell for it were Democrats who took the Republicans’ position seriously, and the conservative intellectual movement pushing the policy.

Yeah cause it's all those red cities and states that are demanding we bail out their pensions using Covid as an excuse for the fiscal implosions they've been warned about for decades.

At the national level, both sides tend to claim one ideal and ignore it whenever they get into office in order to pay back their base - Republicans give tax breaks to the already-wealthy, Democrats tend to rain cash down on academia, school unions, legal industry, etc.

At the state and locality level, it's generally the rule that more conservative states and counties are in better fiscal shape, and that's with typically far lower taxes.

> At the state and locality level, it's generally the rule that more conservative states and counties are in better fiscal shape, and that's with typically far lower taxes.

Only because the federal government redistributes wealth from coastal states to interior ones.

https://www.forbes.com/sites/shaharziv/2020/05/12/blue-state...

They have another tool: Forward guidance. By indicating what they may likely do in the future, they can enact current market behavior and effects.

“Other tools” has previously meant quantitative easing (Newspeak for buying assets with printed money), flash loans, and swap lines. The Fed has been mentioning they want the power to buy stocks:

https://www.cnbc.com/2020/04/06/yellen-says-the-fed-doesnt-n...

We should I think take note that the head of the Fed is a Trump appointee, and Trump's definition of a "good economy" is one with a booming stock market.

Which is something that pumping $3 trillion into M2 will certainly achieve.

https://fred.stlouisfed.org/series/M2

What else it will achieve is another matter entirely

I think it’s very unfair to paint trump in that light. Stock market is the main focus for any president, but that’s because companies on the stock market employed A TON of PEOPLE. Of course there are companies who lay-off while stocks go vertical, but in general, stock prices rise allow companies to raise capital and hire more workers.

Also, this administration has been very active in getting money into the hands of the consumers directly. And also trying to shift work away from China back to the states

You're having things backwards, and I don't know where to start educating you, so I won't. Just remember some good rules of thumb: stock market isn't economy, allowing hiring workers isn't the same as hiring workers, US government is quite able to pursue conflicting goals at the same time.

And welcome to Hacker News.

While I think it is unfair to downvote someone just for offering their point of view but I do disagree with your point of view.

Trump got elected because of the working class who typically don’t see the light of increasing stock market. May be they should and may be having some kind of mandatory 401k match the administration was proposing at some point would help them but by and large they don’t.

China is one area I think he has been more consistent with. But the market largely doesn’t benefit from that. That’s why market cheered when the trade deal was signed and now Wall St is largely behind Biden camp hoping the status quo persists. If anything stock market wants to see rising China and stable relationships even though it might hurt long term bottom line and jobs here in US.

Don't you think you might be viewing this through an excessively partisan lens? Before Jerome Powell was the Fed Chair, he was a 5 year veteran of the Fed Board of Governors, having been nominated by Barack Obama. His appointment was approved in votes that included the vast majority of Democrats.

Are his dovish views all that different from his predecessors, Janet Yellen or "Helicopter Ben" Bernanke?

You seem to be insinuating that he is an undeserving lackey, something like a Betsy DeVos. But I just don't see the evidence for that.

Possibly, but let me put that another way. Something like this has never happened to a systemically import currency before in the history of reserve currencies of the world - the US dollar since Bretton Woods, Sterling roughly the hundred years before that.

The quality essentially required of a reserve currency being that it doesn't do this.

Definitely popcorn time - also don't own long date low interest rate bonds time. Which would be most of them. Oops.

The art of being a central bank is to sound like you say something, in a cryptic way, open to interpretation, yet not empty of real content.

It's a place that requires economic as well as poetic expertise.

If you due it just right you can instill a continuous irrational exuberance in the markets.

NGDP targeting has been advocated by some as superior to interest rate targeting. https://en.m.wikipedia.org/wiki/Nominal_income_target

They don’t have anything material, because the whole notion of controlling an economy with debt and unemployment demonstrably doesn’t work.

That’s why we are where we are.

This idea sprung up in the 1960s and took hold in the 1970s because some people couldn’t answer the inflation question that was a result of the failure of Bretton Woods and the oil shock.

We’re about the see another paradigm shift away from Central Banks as Wizard of Oz.

Hence the rise in interest in Modern Money Theory which puts the central bank Debt toy away and concentrates on what actually matters - ensuring everybody has an opportunity to contribute and gets an income from doing that.

It's safe to say Modern Monetary Theory is rejected by most if not all mainstream economists.

Eliminating reserve requirements (the net effect of which is to allow banks themselves to print money at will). This has already been done.

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