The QT Timebomb
fedguy.com
fedguy.com
Talk about looking a gift horse in the mouth. Or, perhaps biting the hand that feeds you? I dunno, I'm sure there's an appropriate colloquialism.
If QTmageddon is coming (something I personally think is a mistake since it seems like price inflation is being principally driven by supply shock dynamics, but I digress), then the first reckoning in the financial markets is almost certainly going to be VC. The risk profile makes absolutely no sense without a cheap money market.
This lowers the price of stocks and bonds.
The US Gov can't afford to pay more on its debt, so I bet the rates will be driven back down eventually by the Fed, and the USD inflationary debasement will continue (and prices will resume going up).
Failing this would lead the US to insolvency and a hard default, instead of the soft inflationary one.
Yes, interest rates going up lowers the price of bonds because "interest rates up" is mathematically equivalent to "bonds are cheaper."
The notion that changes in interest rates, which generally correlate with inflation, would alter the price of stocks is not obvious to me. Not sure what mechanism you would propose that would cause that to happen.
The US Government has the right to print USD. The notion that they could someday be unable to pay USD-denominated debts is therefore obviously wrong. Also, it is very much in the interests of exporters like China that USD remain strong, and they will likely just add the newly-minted USD to their USD reserves.
When proposing financial disasters, you can take these same types of fears and make them more plausible. E.g. propose that the US Government will overspend, weaken the dollar, cause the dollar to lose status as a reserve currency, and force future US debt to be denominated in something other than USD. Or propose that a sudden increase in inflation might cause effective salaries to decline or be uncertain, leading to a decline in consumer confidence and a recession.
Inflation uncertainty worries me the most. But I don't think there are any nightmare scenarios coming soon.
Higher rates -> reduced accessibility of personal credit -> lower spending -> lower corporate revenue -> higher cost of borrowing -> higher cost of debt service -> lower profits -> stock price
Rates act as a global parameter that impacts performance of companies differently, with the consensus understanding that it impacts debt-fuelled (or what we now usually call growth) companies the most.
I think it's simpler than that. An absurd example: if T-bills suddenly start yielding 12%, capital will flee from stocks to T-bills.
That turns into a hyperinflation, though - where you print the money to pay the interest on the debt, but that creates more inflation, so interest rates go up, so you have to print more money, which creates more inflation...
The end of that process is often a total loss of confidence in the government. That in turn often leads to a change of the form of government - usually not for the better.
> That in turn often leads to a change of the form of government - usually not for the better.
If this is a veiled reference to Nazi Germany, that was not Weimar inflation, it was caused by deflation later. Why hard money people are terrified of hyperinflation instead of deflation, when that's worse, I don't know.
An example of a country that does everything wrong economically and has constant inflation is Argentina, but oddly it's still there and nobody seems to be overthrowing it.
Why is hyperinflation limited to that single scenario?
On the other hand, if you are a consumer goods stock paying a dividend, your value is much more based on the cash you can generate right now and you aren't particularly susceptible to future discounted cash flows affecting your valuation.
Median net worth in the US is $120,000, which includes home equity. You can't retire early on that.
Mean net worth in the us is $1 million by 50years of age. A lot of people could retire 10 years earlier if they really wanted to.
I agree that these numbers don’t turn on a dime, but people can definitely change their effort dedicated to labor.
Median net worth is what you want here not mean, right? Median net worth at age 50 is around $150,000, also, I think, including home equity. Still not going to be retiring early.
Also the median us worker earns over 2 million dollars in their lifetime. Most chose to spend it as they earn it. A lot more of them could certainly reduce their consumption if they really wanted to. Of course a lot of them self selected into the us, and like working harder than the people they left behind.
4% of $150k is 500 dollars a month. Would you retire on that? I wouldn't. Could you retire on that?
I know a guy who is retired and gets $600 a month Social Security. His heat is out right now, his furnace died. It's single digit temps right now, he's got space heaters going. He's trying to get the furnace fixed, if it has to be replaced, it's going to be $15k.
How is that going to happen? Me and his family probably, we've got him, but for people that don't have that?
No, people in the US don't retire early with $150k unless there is no other reasonable choice.
Unfortunately for us, we are not.
The U.S. government did this type of deficit spending in 2020-2021 printing and spending a large amount of money/debt which moved future spending to the present.
If you don't have an emergency fund, now is the time to build one. Breaking inflation is a painful process that will eventually lead to a bad recession. Things will get worse before they get better.
There are weak models behind all of this at best; "cheap money and fiscal discipline" isn't even a model, just moralizing, but the actual arguments about fiscal policy use things like "potential output", which has assumptions like "the economy will overheat if black people have under 10% unemployment".
https://stayathomemacro.substack.com/p/racism-skews-our-beli...
As for current inflation, it's not yet enough to ruin the Fed's decades long record of undershooting the 2% target, but it is caused by an ongoing natural disaster and not money printing. So to fix it, you can try fixing the natural disaster…
Money has been cheap since 2008. Did everyone expect it to be cheap forever without consequences? COVID just blew down a house of cards, fixing COVID isn’t going to magically fix our inflation problems, the house has already been blown down and it will take another decade of fiscal discipline to build something sturdy back up again.
It should be possible to achieve better employment without punishing savers and rewarding debtors.
I assumed it wasn't a large enough amount to count peanuts necessarily. I'm looking at loan around $20k over 3 years compared to paying cash.
The reason I asked is because we do have an emergency fund but paying cash outright would cost half of that fund, which is a tough pill to swallow.
If you are looking at a 5 year time horizon will the changes in rates be enough, or fast enough to make a real difference? I personally doubt it unless an external shock acts on the market -- which of course could also cut the other way!
"There are 2 hard problems in computer science: cache invalidation, naming things, and off-by-1 errors."
https://martinfowler.com/bliki/TwoHardThings.html
Some choose short variable names that they can type fast (this might be correlated with vi programmers).
Others choose long variable names that are more descriptive (this might be correlated with emacs programers).
Personally I chose the latter, because copy-paste is easy, and ambiguity can be confusing.
But ambiguities are great fun for making puns and dadjokes.
u = qtπ
In the long run, that would also mean the end of the American Empire. and all the defense spending that goes with it.
Unlike the Great Depression, this time we don't have the worlds largest supply of oil, the biggest manufacturing base, or anywhere near reasonably competent Governance to ride out the consequences of the ensuing crash.
You'll look back on the plague years, and remember them as the calm before the storm.
How much of a knife's edge is this, and how do we protect ourselves?
The standard advice, pay off all debts, have some cash on hand, stock up on food, fuel, toilet paper. Make friends with your neighbors. Have skills that will be in demand, like being able to fix things.
Why would you pay off your debt if you thought civilization was going to collapse?
The economy contracting 90% is a possibility, and if your income goes to zero, you don't want to lose what you have left because of a loan you didn't think you'd actually have to pay off.
Legal claims will very likely still exist. And if you owe money to somebody with more resources or power than you then you're gonna have a bad time.
Look at the USSR in the early 90s for a great example of what that might look like.
This makes me wish we had competent leaders. Who have meaningful discussion. Who do what they can to avoid wars of both physical and spiritual conflict, by a countries own avarice.
Can you elaborate? Not sure I follow.
Several parties playing a game. One plays chess, the other Go, and yet another checkers. Long term victory,Long term dominance and permanent superiority or win a lot of short term battles and exhaust your enemy. I don't know who will win but make no mistake this is a war, if not cold then maybe deep-frozen.
The US military today is a bloated, inefficient force sucking up resources that would be better spent elsewhere. They’re funding blimps to watch drug smugglers at the US border, for Christ’s sake.
The populace of the US will not stand for additional military adventurism on the scale of Vietnam or Iraq. Trump started the process of withdrawing from Afghanistan and was lucky that Biden got stuck with the mess Trump made of it. It was forecast to be a broadly popular move and would have been had execution been slightly better handled.
The only good way to do this was to never invade and conquer but instead to chase ObL and capture him and fight the Taliban only as needed. How Bush got out of any responsibility for his reckless adventurism, not only here but the unforgivable tragedy of endless war crimes and crimes against humanity his Iraq invasion was, is the real tragedy here not Biden's "execution" somehow being sub-par. Per usual Democrats have to clean up after Republicans.
Decimate the country and leave ASAP. Rebuilding and making sure terrorists aren't harbored again is between the people and their new government. Either permanently occupy or leave after decimation. Half assing it like with vietnam will always end in wasted lives and resources.
I mean, look at afghanistan, the war ended in 2004. The US could have declared that country their new territory and every conflict would be domestic terror. They did not need to stay after 04, they stayed to keep the place stable not to defeat the taliban (which militarily, they did).
And this, ladies and gentlemen, is why MMT does not work. Budget constraints are a thing after all, whowouldathunkit.
If you are anybody else besides maybe a defense or infrastructure contractor MMT does not make any sense.
Meh. While it definitely has upsides, it also has a big downside too. It pushes purchasing power of US consumers down.
https://www.phenomenalworld.org/analysis/the-class-politics-...
At the end of the day, we can make any prices on the SP or QQQ nominally sustainable, the lever being the value of the dollar, and when faced with an existential threat to markets and to the dollar, we are going to pull that lever every time.
All in all, I think the dollar will decline slowly as the rest of the world becomes less interested in holding our debt, not in an own goal melt down.
It's not like there are other countries out there who both have the capacity to be the worlds reserve currency and are financial role models. If the US gets serious about fighting inflation, we might face a recession, but our currency would be very strong.
Let me ask you this, if the world does wish to replace it, what currency will they chose? Really. Look around. Everyone is printing money.
On first order effects yes, but first order effects are not the whole story. If this severely blows up markets, it wouldn't matter that we prevented inflation for a few months. The response to that blowup would probably be massive stimulus and therefor future inflation.
> Let me ask you this, if the world does wish to replace it, what currency will they chose? Really. Look around. Everyone is printing money.
A single global reserve currency is far from a fact of history. You could easily argue that whatever the dollar is right now, has never existed before. I don't think Sterling maintained hegemony through anything like petrodollar recycling.
So what currency will they choose? Probably a lot more currencies. Why shouldn't Japan trade oil in Yen. Why shouldn't China trade oil in RMB? Thing have already been moving in this direction for a long time anyway.
No other currency replaces the dollar. A more complicated system is what replaces the dollar.
>You'll look back on the plague years, and remember them as the calm before the storm.
There's zero evidence this will be true. If anything we'll see this as the dawn of chasing fascism out of the country and a rise of class consciousness for workers and what work life means and how wealth disparity hurts us all. I find the doomers of the world fear exactly this and pray for a collapse than see a leftward swing as millennials and gen-z take power from the doomer-friendly ultra-conservatism so many in the USA accept uncritically.
> There's zero evidence this will be true. If anything we'll see this as the dawn of chasing fascism out of the country and a rise of class consciousness for workers...and how wealth disparity hurts us all.
When Russia and China had a "dawn of chasing fascism out of the country and a rise of class consciousness for workers and how wealth disparity hurts us all," that was "the calm before the storm." The storm included GULAG, the Holodomor, the Great Leap Forward, the Cultural Revolution, the greatest famine in human history, decades of economic stagnation, and ultimately civilizational collapse in Russia.
PRC escaped that fate because, after the Cultural Revolution, class consciousness and eliminating wealth disparity went out of fashion, and consequently it went from being one of the world's poorest countries to one of the richest.
When videos of Americans tearing down statues went viral a few years back, lots of Chinese people thought it was hilarious that the Cultural Revolution had come to the US.
The Nordic states are not based on the rise of class consciousness. They are capitalist countries, by some measures among the most capitalist in the world. Nor are they especially based on chasing fascism out of the country, except in the sense that their current governments were established after the Allies chased the Germans out during World War II. (Except Sweden, which remained neutral.) None of them have explicit laws against Holocaust denial, for example, which are typically the first resort for chasing fascists out of the country.
And none of them have in fact chased fascists out of the country. Even though founding fascist parties has been illegal in Finland since they kicked out the Russians in 01944, no Nordic country has banned Sverigedemokraterna (literal Nazis), Bevara Sverige Svenskt (even more literal Nazis), Alternativ för Sverige (expelled from Sverigedemokraterna for being too Nazi), Norsk Front (literal Nazis that became less popular after they started bombing things), Sverigepartiet (intermediate literal Nazis), Vitt Ariskt Motstånd (a literal Nazi criminal gang), Kohti Vapautta! (literal Nazis), Norges Nasjonalsosialistiske Bevegelse (such literal Nazis they actually have "national socialist" in their name), Danmarks Nationalsocialistiske Bevægelse (literal Nazi party sort of going back to the 01930s), Vigrid (literal Nazis), the Norsk Hedensk Front (literal Nazis), Boot Boys (literal Nazi murderers), the Svenskarnas parti (former literal Nazis), the Folkfronten (literal Nazis), the Nationaldemokraterna (arguably Nazis), Nationalsocialistiska Arbetarepartiet/Svensk Socialistisk Samling (the WWII-era Swedish Nazis that drew up lists of local Jews for when the Nazis invaded), Danskernes Parti (literal Nazis), Stram Kurs (Quran-burning party whose objective is genocide against Muslims), Nordisk Styrka (literal Nazi violent criminals), Perussuomalaiset (fascists with 38 seats in the Finnish parliament), Sinimusta Liike (expelled from Perussuomalaiset for being too fascist), Dansk Folkeparti (an anti-Muslim party with 16 seats in the Danish parliament, resulting in Europe's strictest immigration laws), Sinivalkoinen Rintama/Vapauspuolue (ultranationalists), Suomen Kansan Sinivalkoiset/Finlands Folkets Blåvita (ultranationalists now merged into Sinivalkoinen Rintama), Odinin Sotilaat (anti-immigrant vigilante criminals), or the Svensk Hednisk Front (literal Nazis), and only Finland has banned the international Nazi terrorist conspiracy Nordiska Motståndsrörelsen/Pohjoismainen Vastarintaliike (since 02019). Sweden banned the uniform of the Nationalsocialistisk front (who are also literal Nazis, as you might have guessed from the name) but not the actual party.
So if you want to start expelling US citizens from the US because they have shitty politics, well, I know where that road leads, and it isn't modern Nordic states. Governments are the only organizations capable of chasing people out of the country, and by their nature, they aren't actually capable of discriminating against people with shitty politics; the closest they can come is to discriminate against people whose politics conflict with those of the government.
Neither Russia nor China was a totalitarian communist regime before their "dawn of chasing fascism out of the country and a rise of class consciousness for workers and how wealth disparity hurts us all." The totalitarian communist part came later, as a result of that "dawn".
The atom of truth in your farrago of falsehoods is that the Nordic countries have among the lowest economic inequality in the world. To some extent this is a result of economic redistribution policies and the accompanying high tax rates, but to a very great extent it's a result of liberalism, which allows ordinary people to achieve prosperity by working for it.