That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?
In principle you should see higher inflation and a falling currency. However this policy (aggressive buying of all kind of bonds) has been persued by the Europeans and Japanese for years and it haven't really caused a collapsing currency or high inflation.
Some may argue that it suspends a natural reallocation of resources in the economy. And causes the economy to keep overallocating real resources into things like real estate and finance causing bubbles, malinvestment and zoombie institutions ultimately leading to lower growth.
However that assumes that you had a free market in the first place which you never really had.
Deluge up economics.
We're all struggling to pay rent and groceries and transport costs
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They're all struggling to find somewhere to park another hundred million, billion / trillion? Whatever.
What the Fed accomplishes by handing out the $1 trillion is this: they kept all the _other_ money circulating. If people wanted to hoard $1 trillion because they're scared about the future, well, now they've hoarded it. They feel safe and they spend the rest of their money, and the economy keeps humming along.
If instead they'd tried to hoard that $1 trillion without Fed intervention, there'd be an economic collapse.
Sure, you can give all the money directly to the common people, but you'd end up having to do that forever since the wider economy would collapse as rich share holders first feel doubt, then have those doubts confirmed in a self fulfilling prophecy.
Common people should have non emergency sources of welfare, and governmental aid to rely on. If they don't, then the situation is aleady dire.
The pandemic is showing that most people and state governments are willfully unprepared to provide such welfare even in an emergency.
But you're right insofar as the Fed is trying to change inflation expectations by printing money. But so far they've failed because no one believes they'll actually let inflation happen once the economy recovers. Hence Jerome Powell's recent statements about the Fed changing how it trades off inflation against economic growth. It's a way to more credibly commit to letting inflation actually happen.
Didn’t the fed announce they would run inflation a bit hot for a while just last week?
So someone, somewhere, is sitting on cash, which is deflationary and not what you want in a weak economy.
The cure for that problem is cheap money plus expected inflation (cheap money so people can get cash, expected inflation so they go spend it). The Fed can make money cheap, but it can't force people to expect inflation. It can do stuff to encourage that expectation, though, and yeah it's doing just that.
That seems to be roughly correct. And yet, we are not seeing inflation.
The conclusion seems easy to me (perhaps too easy). The average person is not seeing much of that money being printed. Instead, all of that money seems to be causing massive inflation in the stock market. The S&P500 and other similar indexes are incredibly high.
This is not caused by their expected cash flows growing. Instead, it is is caused by the expected returns of other money falling. Hence the expected 'time discounted cash flows' are increasing, simply because the discount rate is falling. Or, in simpler terms, stocks prices are rising because people with a lot of money to spare need to put that money somewhere. And these people are getting a lot of extra money.
This effect is not a total waste. It should mean it becomes easier for new ventures to raise money on the markets. This could enable the creation of new businesses and innovation.
However, it could be a lot more effective to give this money to people who would do more with it than try and find a place to store it where they can still make some money of off it.
In the real economy it means that people will start -EV (negative expected value) projects. Because heads you win, and tails you default.
The corollary of this situation is that the Fed must not allow debt rates to rise, otherwise an enormous wave of corporate defaults within a short timeframe would ensue.
This also explains why markets keep rising even when the economy is in shambles. The Fed will be a buyer of last resort for everything (the "Powell Put"). Yields are near zero for everything "safe", the money in the funds has to go somewhere, so it goes to assets like stocks and corporate bonds. Stock prices go up, bond yields go down. Corporations can get cheap debt to buy back their own stock.
Meanwhile, the Fed can act like there's no inflation because the CPI doesn't reflect these capital flows, at least not in the average. However, if you split up the CPI, you see significant inflation in some areas, whereas you see natural deflation (due to better productivity/technology) in other areas.
The individual or the mom-and-pop store indeed do not have access to this capital, they are footing the bill.
People incorrectly assume inflation means "the price of everything goes up".
Why is this incorrect assumption to make? Well because prices aren't merely dictated by supply, but rather supply & demand. Comparing inflated money supply to the total good supply is naïve, as this sort of analysis fails to consider the different demand between different goods.
As so, for a dumb example, if the FED just printed tons of money, enough to give each American $10m dollars, and each American said "I'm going to take this $10m in stimulus money, and invest it in Amazon stock", Amazon's stock price would inflate crazy! However, in this scenario meat prices wouldn't change at all, as none of this extra money spurred extra demand for meat - it only spurred demand in amazon stock...
This is predominantly why CPI is a garbage metric of inflation. It does not measure asset prices (such as stocks / real estate), and hence does not measure the inflation that is happening around us (the inflation we're seeing in assets like stocks & real estate).
And the end result is inequality. Those who own the inflated assets benefit from the inflated prices, while non-owners of the inflated assets are at a disadvantage. In this particular case, banks are benefitting from those who want to own a house, but don't already own one.
But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well.
But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake.
So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies.
Whether this is likely is another story.
Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.
It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods.
In any transaction, both parties are typically better off after having made the transaction, else one party would refuse.
The U.S. clearly benefits by acquiring goods, but is China really left scratching their heads with what to do with the dollars (and then throwing a dart and purchasing treasuries with their overflowing dollars)?
If China (in aggregate) is never interested in buying our goods, why would they want to compound the number of tokens that can be redeemed for future goods (by buying bonds)? Do they simply not want to buy goods now, but know they will want to in the future? Are they entirely interested only in the assets, but think the goods are not valuable, or at least not valuable for them, but maybe are for others? Doesn't that put into question the value of any assets the country might have to offer if the goods that the country provides are seemingly undesirable?
Clearly, the value the U.S. is providing can't simply be as the purchaser of a good. The U.S. is trading future obligations for current goods, and the trading partner must have some belief that they will eventually execute that option on future obligations, or trade the future obligation to someone else who will want to execute it, else this token clearly has no value.
However, I do also wonder how much of the demand of U.S. dollar is simply a system of inertia. At some point the trading partners may realize they have no interest in acquiring tokens that they will never redeem, even if this token can be compounded further for more tokens that will never be redeemed. Currently, it seems China is interested in acquiring these tokens because of the reserve currency status, as they trade with other partners in.
The other possibility is this entire narrative is incorrect, and there are other benefits to running massive trade surpluses beyond the future token redemption. Skill building could be one these benefits - the deficit trading partner (U.S.) is shaping the development of labor markets in an journeyman-like form.
It should strike you as odd, what you're saying is wrong.
The US exports $2.5 trillion worth of goods and services, including $1.7 trillion of goods.
The US is the world's #2 exporter of goods. With services included, the US is nearly the world's #1 exporter. In 2018, the US was behind China by only about $80 billion in total exports. That's nearly three times the #4 export country, Japan.
However, the broad intention of my previous comment is to illustrate that the narrative being that the U.S. is simply one of purchaser is lacking, or else if that narrative is correct, it will not be true for much longer once the trading partners catch on.
The end result was
- American Boomers got cars
- Japanese boomers got USD
- Japanese investors then spent much of the USD on things like US real estate investment vehicles (hardly Japan only, any country that collected large amounts of USD due to trade deficit)
- American Boomers in prime markets saw tremendous returns on real estate
- and American millennials 30 years later got priced out of houses
* 70% of global trade is currently denominated in USD (oil markets, commodities, etc)
* US has a lot of debt to other nations
* USD is the global reserve currency, giving the US fairly unique economic power and security
If the USD gets printed into significant devaluation in order to support assets (like bonds, houses, corporates, stocks), then it reduces the real value of the debts that the US owes to other countries (since denominated in USD), which erodes their faith as lenders. Taken together, this:
* Erodes confidence in the USD as a global reserve currency and causes governments to look to other stores of value (e.g., government buying of gold has recently been at an all-time high)
* Artificially inflates asset prices, leading to a bigger crash later when the government support is unable to continue (due to reduced confidence from foreign lenders)
That's all pretty terrible for the US and USD, if it happens.
But there's also an equally credible (though counterintuitive) theory that the USD will actually go up in value (deflation) due to every other country in the world needing to take similarly drastic action and the US being destabilized the least (i.e., the least bad of a set of bad options and everyone rushing into USD and US investments for relative safety).
Plenty of very smart people are on both sides of this argument, but everyone agrees that we are buying ourselves some significant future pain.
Why isn't the Eurozone collapsing, with interest rates skyrocketing and the Euro imploding?
Somehow Japan is still managing - despite a public debt & budget situation several times worse than the US - with a GDP per capita still on par with Britain, France, and just below Germany. And yet all the armchair experts endlessly predict the demise of the US.
ECB balance of assets purchased: €2.9tn(August 2020) Eurozone GDP: €11.9tn (2019) So 24%
Fed balance of assets purchased: $6.3tn (September 2020) US GDP: $21.4tn (2019) So 29%
Even if you look at total assets on the balance sheet (Including assets purchased outright and collateralised loans), the difference is not that huge: ECB: €4.7tn (39%) Fed: $7.0tn (32%)
[0]: https://fred.stlouisfed.org/series/ECBASSETSW
[1]: https://www.ecb.europa.eu/pub/annual/balance/html/index.en.h...
Sure, it would be bad if they dumped treasuries (at a big loss), but why would they do that if they put the money there in the first place because it was safe?