Since mid-April, the Fed has withdrawn ~$140B of liquidity from financial system
fred.stlouisfed.org
fred.stlouisfed.org
Around 6T has been injected since the pandemic.
It's taken 5 months to withdraw 140B.
If they keep going at this rate, constantly down without flattening or going up, it will take 214 months or 18 years to go back to 2020 levels.
Ignoring that the 2020 levels themselves were hyper injected from 1T to 4T by the 2009 crisis.
The run-down rate more than doubled in August [1]. Current estimates to optimal balance sheet are about 4 to 5 years [2].
[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...
[2] https://advisors.vanguard.com/insights/article/thefedsplanto...
Added (indirectly) to reflect comments below - tks.
The Fed isn't allowed to buy bonds from the Treasury [1]. The $140bn refers to bonds the Fed is letting mature without reinvesting the proceeds. That leads to fewer dollars chasing Treasuries, which reduces their price, which raises rates.
The primary dealers sell the bonds to the Fed.
At the end, the Fed has bought boatloads of Treasury bonds, but not from the Treasury!
You forgot the word “directly”.
Feds can buy back in “open-market”.
Does anyone operate under the assumption another recession (maybe even two or three) will occur in the next 10-20 years with 100% certainty and like, prepare for those rainy days?
Yes, it's almost certain that someone does. From your comment, it seems like you do.
It doesn't appear that the Fed needs to wind down much, if any, of that liquidity at all, since it seems it's been absorbed perfectly by the global economy.
What we are seeing is the Fed deliberately causing the economy to contract below its capabilities in an attempt to slow down the growth of prices, which is NOT caused by monetary reasons, but since the Fed only has control over monetary levers that's what they're using. Classic case of everything looking like a nail if all you have is a hammer.
If energy prices go back down to more "normal" levels, I suspect the Fed will be forced to inject more money into the system again, to rev up the US economy, and weaken the hyper strong dollar to protect people in developing countries from starving.
So that's why we're getting 8-9% inflation rates? Because of the perfect absorption?
So parent seems right refuting this claim:
> since it seems it's been absorbed perfectly by the global economy.
The macro-economy is solely for the wealthy and when they need a billion or more to see a return on a billion or more, shrinkflation and price increases go up; hard to make a billion back on long time scales at 2010 prices.
I’m not saying they intentionally operate on that philosophy. I’m saying reliance on data trends means they prioritize responding to data regardless of the externalities to the masses.
Only the rich can afford assets so assets are priced for the rich.
He’s keeping the public out of the way of elites. Banks are raising savings account rates to keep cash stashed. VCs are scaling back. Prices on say, homes will crash, rates will be too high for average people, elites build property management portfolios and expand their rent seeking.
The recent era of spread the wealth has been put on pause while the asset class shores up public agency that was getting away from it by creating too many elites. If everyone is an elite the current elites have no power. That’s the simple game they’re playing, leveraging technical indirection to obfuscate.
Rates should have gone up years ago, but a stubborn fed kept putting it off (and COVID didn't help either). The Fed does not benefit from everyone being poor. And I'm someone who thinks cynically all the time, check my post history, but this is just uninformed.
Claiming I am uninformed because I don’t recite the spoken traditions that even the expert in charge admits to not fully understanding is just regurgitating memes from memory; you don’t come off well informed, but like a skipping record.
They don’t have an incentive to NOT keep people poor either. They don’t really care since they’re going ahead anyway with policy they admit will hurt households; deny it again, please. I need a laugh.
The outcome will be one of making cars and homes harder for poorer people to buy; Powell admitted that today and at every other rate hike. He’s testing “what the market will bear”.
Human biology rules us, not social principles hashed out on paper. See my comment history. The result will be clear; haves will be able to afford buying up assets as prices come down. Have nots will be priced out.
Don’t forget too our Congress refuses to deviate from our social history. The Senate was described by Madison as a firewall to protect the opulent minority from the majority. You can carry on that’s “not how it works” all you want. But “on the ground” the result is clear.
Inflation the broad-based change of purchasing power of the dollar by proxy of a basket of goods and services. This is a function of many, many things - cultural norms, commodity prices, labor supply, fiscal policy, supply chain efficiency, interest rates and yes, to a degree, monetary base.
I think you’ll need to do a better job convincing me than that.
Money supply growth is not inflation. Inflation is a broad-based reduction in purchasing power caused by any number of things. By definition.
Here's why. A 50% sales tax would be inflationary without changing the money supply. Conversely, a trillion dollar coin minted and put into a vault wouldn't have any inflationary effect whatsoever because placing it into the vault has a commensurate reduction in velocity.
The idea that 'more money' necessarily immediately means each unit is worth less doesn't stand up to any scrutiny and many counterexamples exist all over the world - and at home. Just look at Japan's monetary base expansion since the 90s [1], while inflation was dead flat zero [2].
Your model is too simplistic which is why it is not generally accepted.
What we’re saying is that everybody knows supply and demand affects money, also.
And if you’d like examples of hyperinflation from over-supply of money, you can just look around.
> It’s complicated, therefore supply doesn’t matter for money, only demand?
I never said supply doesn't matter. Re-read my initial reply. ("... and yes, to a degree, monetary base").
Money in a modern centrally banked economy enters the system on a pull model - not push. Banks don't push money into the system. Borrowers create money when they take out loans and that money obtains its value from the obligation to repay the debt that created it. Once repaid, that money evaporates. Money is always being created and destroyed, which is how interest rates control supply of money through demand of loans. This means supply follows demand so it's harder to devalue due to supply increases as a supply increase inherently follows a demand increase. In ordinary course, when not subject to interventions.
> And if you’d like examples of hyperinflation from over-supply of money, you can just look around.
Hyperinflation isn't what happens when the money supply increases a lot, it's what happens when the population rejects the currency and is usually tied to an exogenous event like a war, corruption, regime change or onerous foreign-denominated debt. Most often a combination - it's a completely different beast. [1] Folks conflate the two because "hyperinflation" sounds like "inflation but more!" - the increase in money supply is a symptom, but it's not the cause. It's effectively an economic and monetary collapse.
I'm not sure you'll be able to actually find an example where oversupply of currency in isolation led to hyperinflation, but if you can find an article demonstrating a causal relationship I'd love to read it.
[1] https://www.businessinsider.com/the-truth-about-hyperinflati...
Not to mention the massive asset price inflation.
Food, beverage and feed: $133 billion. ... Crude oil, fuel and other petroleum products: $109 billion. ... Civilian aircraft and aircraft engines: $99 billion. ... Auto parts, engines and car tires: $86 billion. ... Industrial machines: $57 billion.
Although a noble cause, the Fed's goal isn't to protect people in developing countries from starving. I don't see why this would impact their decisions at all.
Foreign countries defaulting because of the difference in currency valuations could cause the US economy to go into a recession - which is something the Fed does care about...
No it hasn't.
Real GDP:
Q4 2019 19.20 Trillion
Q2 2022 19.69 Trillion
> It doesn't appear that the Fed needs to wind down much, if any, of that liquidity at all, since it seems it's been absorbed perfectly by the global economy.
This comment is extremely misleading. For starters, I don't know how you can say that. It's obvious it wasn't absorbed perfectly because we experienced bubbles in many markets. And those bubbles have caused harm to large groups of people. For example; crypto, equities, housing, etc.
Let's just dive into housing. We have a system that has disproportionately enriched incumbent homeowners at the expense of new entrants. 2 years ago: 30-yr mortgage rate was 2.87% & median existing home price in the US was $310k. Today: 30-yr mortgage rate is 6.02% & median home price is $390k. Increase in monthly payments from $1,029 to $1,872. This is regressive and has exacerbated inequality. The magnitude of this will be lasting. Real wages have not kept pace.
I also suspect the fed will reverse course but that's because the American (and the rest of the American led global) system now expect it. Our markets are dysfunctional and depend on this centralized control. It would take too much time and pain to return markets to their natural pricing.
Natural pricing simply means whatever the market was prior to COVID , with all its imperfection, including the central banks' 2% inflation target
The OP's point was the inflation being experienced today isn't primarily due to monetary policy issues but actual supply contraction and the Fed's response of using monetary policy to resolve a supply issue is having several negative consequences, such as making the housing crisis worse as you point out.
You simply cannot say that with any certainty. A rise in price level is always precipitated by too much money chasing too few goods. No one would argue that global energy and wheat prices are a supply side shock, but to say that a stimulus package of unprecedented size injected into a largely healthy economy has no effect on prices is ludicrous.
https://tradingeconomics.com/euro-area/central-bank-balance-...
I do believe the US is in one of those moments where this isn't true, there is a mountain of money moving from a small niche into the main market, and the rate of this movement will determine what happens, not the change in total money supply. But even then, the size of the 2020 supply is irrelevant.
There's a fascinating PDF from 2020 from Rabobank research desk on the topic. I have it on my system but they took down the link to it.
Money's never printed anyway, it's all accounting - it starts with treasuries, and then those become collateral on which the highly complicated financial system on the world chains one debt instrument to another.
The US Treasury issues debt (called Treasuries) to fund US government operations. The US Treasury is a 'traditional' part of the US government and its debt is considered as close to 'risk-free' as you can get today (some combination of the US government's ability to indefinitely tax the largest/most advanced economy in the world + the US military are the two things cited as to why this is true).
The US Fed is a less traditional part of the US Government. It is technically a bank that the government owns, but voters have no direct means of influencing policy.
Previously, The Fed would 'manage' the behavior of private banks by either controlling the money supply (an increasingly abstract concept in the age of digital money) or adjusting the super short-term interest rate at which it loans money to banks who need it in a pinch (increasingly less relevant for a variety of factors). They actually transacted very little with the Treasury in this period.
In 2008, The Fed found that neither of their tried and true tools was good enough to get private banks to lend more money than they were doing at the time (you'll hear a lot of hand-wringing about the 0 lower bound of interest rates, despite some interesting outcomes from negative interest rates in other countries). In order to do something, the Fed decided to just straight up buy US Treasuries (something Japan had pioneered before; they also buy Mortgage-backed Securities, but don't worry about that right now).
This decision (known as Quantitative Easing because economists love to pretend like they're scientists) has the net effect of making the Treasuries more expensive, and their interest rates lower. This is because Treasuries are sold with a fixed coupon rate (i.e. I'll give the owner of this Treasury $5/month) and a floating face value (i.e. I'll pay a variable amount of money depending on current risk conditions to own the Treasury that pays me $5/month risk-fee). When the risk-free interest rate is low, people tend to look to riskier places to generate yield, and therefore lend money more liberally.
This change is important because it went from the Fed influencing a relatively esoteric, bank-only interest rate to the Fed controlling the most important interest rate in the world (it's one of the most common baselines used for determining other interest rates).
Long story short, The Fed wants that interest rate to go back up, so what are they doing? They are no longer buying new Treasuries to replace their existing Treasuries that reach maturity, to the tune of $90bn per month
Is that removing liquidity? Not really, it's just decreasing the active injection of liquidity that the Fed has been doing for the past 15 years.
Does the nominal amount of money on the Fed's balance sheet matter/should we strive to bring it to $0? Unclear - what does it even mean for the US government to own its own debt? As long as markets don't care (they seem to not care right now out of convenience) then it's all fine, I guess?
Will the Fed ever actively sell its Treasury holdings? Probably not, because they are happy with the tense equilibrium I mentioned above and they don't want to risk breaking that.
What's the best KPI to watch? As long as new Treasuries sell (at auction) at around the Fed's desired interest rate, this is a non-problem and we can sort of ignore it. As soon as the Treasury market breaks (A lot of varying opinions here), then this is the world's biggest problem ever and we will look back at how foolish we were (just unclear if that will ever happen).
Obviously the US economy doesn't work like an individual's economy (as in, you can't just spend less than you earn and be OK) but it's really difficult to understand what the complications actually are and posts like this help a lot.
So in practical terms, if there is political pressure to lower the 10Y, The Fed will probably cut Fed Funds (doing nothing, hopefully dropping it as a policy tool going forward) and then everyone will kind of realize QE is the only current policy tool that actually works.
But then what, people will be calling for more QE to make mortgage rates drop? I mean fine, but it does speed up the 'when does the market question the concept of the Fed owning the Treasury's debt' problem.
I like this line a lot because it shows that while we like to blame inflation and some of the issues we're having on the Fed's work in 2020, when in reality we have to go back to the Great Recession to understand the full impact of what's been going on. They've been trying to keep the markets happy for 15 years by keeping interest rates low and so, never reverted some of the policies that would have helped when COVID hit the economy. So, they doubled down. Now, the chickens have come to roost and they need to reel back, and hopefully, the markets won't get spooked and it will all be good, as you say.
This speech by Chairman Powell is information about the Fed's current thinking on this question: https://www.federalreserve.gov/newsevents/speech/powell20190...
In short, the Fed will not aim to return its balance sheet to the same size, relative to GDP, that it was before 2008. One reason is that the 2008 crisis revealed the importance of requiring major banks to keep reserve balances (and these reserve balances are liabilities on the Fed's balance sheet). There are also other technical reasons commented on in that speech.
Essentially the government got to spend $9T “for free” (don’t come at me inflation hawks) one time and this is the accounting convention that forces us to remember that happened. If the Fed just decided to mark those treasuries to 0 and not collect the interest, who is going to stop them?
Things generally get very weird when you get to national-account level accounting for countries with reserve currencies.
This is a pretty ideologically based statement. The fed is quite literally removing liquidity from the system. They aren’t “actively” adding any liquidity and haven’t been for months.
For context, yes it’s helpful to keep in mind the build up of the balance sheet, but the spin here is overly politicized.
Just so you know, in order to keep the balance constant, the Fed actively participates in the market to buy new Treasuries to replace those that have matured.
I see no ideology in saying that buying bonds (even if it's to replace old ones) is active support.
In fact, the Fed is still a huge player in Treasuries markets even during QT.
If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio.
Yes, so they aren't 'removing liquidity' because they are still 'injecting liquidity' at literally every treasury auction (as they have been for 15 years). They are simply injecting less liquidity than they have been, which is my entire point.
>I don’t see how it’s somehow a bad thing that they are being intentional about the draw down.
It's not a bad thing and I never said it was. If you want ideology, I think the Fed shouldn't even be doing QT and probably never should (I think inflation is largely unrelated to this liquidity).
>If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio.
In literal terms, the government holds an auction for Treasury debt at various maturities. ~20 primary dealers bid on those Treasuries. Those ~20 primary dealers know exactly how much The Fed needs to buy from them. That influences their bids. If The Fed weren't buying from those dealers, they would bid for higher rates. In no way do those dealers consider the amount of debt that has reached maturity that month, they only care about new issuances.
Isn't this pretty basic supply/demand stuff here? Are you also implying that demand for bond ETFs has no effect on the price of underlying bonds?
Your point is myopically focused on the bond market (and realistically the mortgage backed securities market as well).
The net amount of liquidity is going down. They are removing liquidity.
If I’m in a sinking ship and frantically pulling out buckets of water, the ship is still sinking even though I’m removing water. The fact that the fed has to continue to make bond purchases is a technicality that is irrelevant to anyone outside of the trading industry, and has little net effect of the Marco economy.
Like, when headlines come out saying “alphabet stock sell off on earning miss” do you tell everyone around you that technically there was a buyer on the other side of every one of those transactions?
Yes, they are actively injecting less liquidity than they were before which is my original point?
Wouldn't removing liquidity be actually selling holdings?
EDIT: Maybe this helps - you're taking for granted that the US Treasury auctions an increasingly large amount of Treasuries to cover an increasingly large amount of debt, but The Fed doesn't create that debt, that's a separate phenomenon. If the government balanced its budget for a year, does that create liquidity?
The Fed reduces liquidity by receiving coupon payments? So then, unless it's growing its balance sheet by the amount of those payments (i.e. returning that cash to market), it's removing liquidity?
Interesting take, I like the moxy.
EDIT: You have QE/QT backwards. QE increases the money the Treasury sends to the Fed as coupon, which you said removes liquidity.
My entire point was that you are backwards in one of your two conflicting arguments.
[0] https://en.wikipedia.org/wiki/Quantitative_easing?wprov=sfti...
You stated that receiving coupon payments from the Treasury reduces liquidity. How? I don’t know. But you said it.
Buying more Treasuries makes the fed receive larger coupon payments. Are you saying that process reduces liquidity?
That’s my only question.
Do you actually understand what liquidity is?
Bonds are just one instrument the fed uses, the bond market isn’t the end all be all of open market operations. As I noted earlier, the fed was previously injecting liquidity by buying bonds and mortgages. What you’re talking about is tangential.
Liquidity is the amount of cash in the system relative the size of the market for assets. All else equal, adding or removing is the same as adding or removing cash.
>Liquidity is the amount of cash in the system relative the size of the market for assets. All else equal, adding or removing is the same as adding or removing cash.
Citation needed there buddy. Like you're arguing that the Fed is hoovering up too much cash? Wouldn't QE be anti-liquidity since it's net result is more cash goes to the Fed and QT be pro-liquidity since the opposite happens?
On this earth, liquidity is about transaction velocity, and The Fed taking transactions off the table (by being a guaranteed buyer at every auction) makes non-Fed transactions happen at lower prices. The end.
Anyway, enjoy the end of this flamewar.
You have QE and QT backwards.
QE => fed builds up it’s balance sheet, it sends out cash.
QT => fed reduces its balance sheet, it gets cash back.
>On this earth, liquidity is about transaction velocity, and The Fed taking transactions off the table (by being a guaranteed buyer at every auction) makes non-Fed transactions happen at lower prices. The end.
Transaction velocity matters but it’s not everything. You’re myopically looking at one market, while the rest of us are talking about the systemic effects.
Transaction volume follows from the supply and demand for money. If you remove money from the system, you remove liquidity.
Look, you quoted a blatantly incorrect definition of QE/QT below. You clearly have no idea what you’re talking about.
My entire point was that you are backwards in one of your two conflicting arguments.
EDIT: Maybe let's put it this way, the US pays off it's debt and no longer sends coupon payments to anyone. In your framework, that reduces 'liquidity.' But in what market exactly? The "systemic" market?
I disagree.
The US Treasury must issue new treasury bonds every month with face value equal to (a) that of old treasury bonds that mature, plus (b) a bit more to fund the federal deficit.
Someone else must buy all those new bonds, because otherwise the US Treasury would not have sufficient funds to pay back the old ones as they mature.
This means that someone else must somehow find liquidity to buy all those new bonds.
That someone else is (the private-sector parts of) the financial system. Who else would it be?
All that liquidity will leave the financial system's hands.
For years, the Fed has purchased bonds, paid for with newly created liquidity, and now, as the bonds mature, the Fed is getting paid back, removing liquidity from the financial system.
Technically, the Fed gave the Treasury cash in exchange for debt, no? And it was giving the Treasury more in the past than it is now.
To extend the metaphor, You (the treasury) have $100 in expenses (debt) that I used to pay (buy). Now, I (the Fed) pay you (The Treasury) $95 and you need to ask your friend (the financial markets) for the other $5.
Sure, that's less than before, but nowhere near what actual removing liquidity would look like: actively selling holdings in addition to not replenishing matured Treasuries (in the metaphor: asking you to pay me the debt you owe me/giving you a new expense).
https://www.federalreserve.gov/faqs/money_12851.htm
The Fed has been buying bonds by issuing new liquidity, and will be getting paid back, removing liquidity.
This thread that you started is starting to feel... as if the purpose is no longer to find and agree on facts, so I will step away from it. This will be my last comment on it.
>In literal terms, the government holds an auction for Treasury debt at various maturities. ~20 primary dealers bid on those Treasuries. Those ~20 primary dealers know exactly how much The Fed needs to buy from them. That influences their bids. If The Fed weren't buying from those dealers, they would bid for higher rates. In no way do those dealers consider the amount of debt that has reached maturity that month, they only care about new issuances.
If you gave me $100 15 years ago and today ask for $5 back, you're taking money from me (also every month we handed the $100 back and forth)
Why does it make sense to think of it any other way?
The Fed has actively purchased new bonds worth roughly 10% of its holdings from the open market each year just to keep the balance constant.
QE requires active support to remain in place.
Now the Fed is purchasing new bonds worth roughly 9% of its holdings each year, and like sure that’s less than max, but it’s still gross buying like $900bn of treasuries this year (instead of the $1tn it would’ve otherwise).
The problem that a lot of people have here is they think “well the treasury issues new bonds to make up for the bonds that mature,” which again, sure, but that’s an independent phenomenon from what the Fed is doing. Congress could balance the budget and that wouldn’t change what the fed is doing rn.
+ USD being reserve currency of the world, which basically means that rest of the world also pays for US debt/printing money.
https://www.stlouisfed.org/open-vault/2022/may/how-will-fed-...
Thank you.
Note: I'm no economist, so if I'm inaccurate in my statements - please forgive.
Debt is usually benchmarked against GDP for a reason, by that metric the US doesn’t have the highest debt level, it also doesn’t have the highest level of inflation.
The USD is also the currency of basically all international trade and settlements, it’s value is determined by external factors to a significant degree, not only on the US economy itself.
The actual account balance stays the same, but where before you had cash, now you have government backed bonds.
This is what they call "quantitative tightening".
Yes. Or they let the bonds mature and don't buy replacement treasury and agency-sponsored bonds. Meanwhile, the US treasury has to issue new bonds to be able to repay the bonds that mature every month.
Others (meaning the private sector) will have to buy all those bonds.
When you take out liquidity, people's money are now locked in bonds and they can't buy anything else with that money unless they sell the bond. So this has the effect of reducing demand for other financial assets like stocks, real estates, cryptocurrency, etc in the short term.
The hope is that in the long run, the economy will grow enough to be able to support the eventual increase in the money as the bonds mature.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
"That rate is applied to the 6 months after the purchase is made. For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through December 31, 2022."
And here[1]:
"What's the interest rate on an I bond you sell today?
For the first six months you own it, the Series I bond we sell from May 2022 through October 2022 earns interest at an annual rate of 9.62 percent. A new rate will be set every six months based on this bond's fixed rate (0.00 percent) and on inflation."
I'm not sure what the next return is - either way given the current mark that's excellent, just important to know that there is a definite time limit on that interest rate.
[1] https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
Just ask Greece, ca. 2010.
Greece's relationship to the Euro is more akin to an individual US state's relationship to the Dollar. No US state has Greek levels of debt. Greece's debt-to-GDP ratio was up to 180%. Most US states run at a ratio closer to 5-15%.
To be clear, they are not selling bonds. They are simply not buying new bonds to replenish those that reach maturity.
It’s one of those words that gets used in a bunch of different contexts without a consistent meaning, unfortunately.
If one rich uncle starts selling all his bonds it's not that big of a deal. It's not nothing, but it isn't some train wreck waiting to happen like some folks make out.
The spending problem in question is deliberately supported by voters, who oppose lowering spending or raising taxes. Running the government on a deficit lets you simulate the benefits of economic growth without all that pesky growing.
As for congress, raising taxes is wildly unpopular with a large portion of the country. It takes a lot more political capital to make changes there.
There's other disadvantages in that the impact of fiscal policy is usually somewhat on the slow side, leaving a risk that your fiscal tightening hits as you enter the recession or your fiscal stimulus hits as the economy is already booming after the recession. So it's not quite that simple. Take the case of the Inflation Reduction Act, for instance; it purports to reduce inflation by "making a historic down payment on the deficit". Let's take this at face value just to limit any possibility for argument: maybe that'll help!!! but ... if you look closely, this is actually kind of spread out over the next ten years, while we have real inflation now. Does it have an impact? Maybe. Does it have an impact today? Probably not as strong as one would like.
Interest rates are controlled by the Federal Reserve, which is an independent entity that can change interest rates without needing any kind of approval from the federal government. It's very simple for them to actually implement once the decision is made.
Taxes need to be voted in by citizens, or more accurately, the representatives of the citizens. Citizens do not tend to enjoy enforcing more taxes on themselves, and representatives tend to want to get re-elected, so they have incentive to avoid raising taxes and upsetting their constituency, even if they know it's a good idea in the long-run.
On the other hand, there are 535 members of congress. They're elected to 2 or 6 year terms and do need to worry about being re-elected. They are, generally speaking, lawyers and career politicians and spend their time thinking about how to fuck over the other party.
Now, which is simpler?
If the government did close anything in particular, I'd say the answer would be yes otherwise.
This is taxation. Raising taxes reduces inflation in the same way fiscal spending prods it.
The fed "printed" a shitton of money during Covid, dismissed all inflation concerns, and now, two years later, we're facing record inflation. I'd say there is a good chance that it does in fact affect inflation
Happy to see an article or w/e from you in 2020 correctly predicting the actual inflation and when it was going to occur. Saying everytime the fed does something that it'll cause inflation and then waiting years to say "Ha told you so!" is not impressive and not even p-hacking since you don't even have a p variable.
For most significant spikes, there's a two year delay to a spike in inflation. 2009 and 2012 being a clear violation of that observation.
It does look like there are only 3 scenarios ('74, '80, '22) of a spike in m2 preceding a spike in inflation. But the m2 spike in '22 is so much larger (~2x) than '74 and '80 and the inflation spike is so much less (~0.7x) so the correlation of those variables based on those 3 samples seems poor.
But there's also '61, '67, '83, '01, '09, '11 where there was solid m2 growth or a spike and no inflation.
Don't think there is much credible evidence or opinion regarding the latter.
Reality is never all else equal.
---
> Are you implying that it's impossible to draw such a conclusions from particular events such as those of 2020?
That's not my claim at all. In fact I've invited the person to link me to their article explaining their analysis of 2020 and why it would lead to inflation in 2022. My point is strictly that people always claim that X is going to cause inflation and then just wait until inflation occurs to say "Aha, X does cause inflation" while doing 0 analysis to show that it was X as opposed to literally any other reason.
Agreed, but that's not really relevant to the discussion.
> My point is strictly that people always claim that X is going to cause inflation and then just wait until inflation occurs to say "Aha, X does cause inflation" while doing 0 analysis to show that it was X as opposed to literally any other reason.
But we are talking about the money supply. Prices are measured in units of money. You are suggesting that there is not a reason to think that changes in the size of the money supply influence price inflation. That makes no sense. Unless that additional money is just being systematically hoarded which seems unlikely in the long run.
Put another way, a mismatch between the money supply and the demand for money (for use as a medium of exchange) is essentially what price inflation is, almost by definition. So whatever the underlying "cause" of inflation, it's also always fair to say that the money supply was or became too large to keep it in check.
To argue that an increase in money supply wouldn't lead to price inflation (again, all else equal) implies that the difference would just be hoarded indefinitely rather than used to buy anything, which seems unlikely just on the face of it.
Imo, once us states began reopening the fed should have carefully moderated their equity and qe buys maybe even selling positions they opened in April 2020 as early as July 2020. Combine that with vaccine timing around May 2021 where a single 50bps change could have eased in.
In fact, the countries that use the same euro currently posted different inflation rates. In your economic model we should have evenly distributed inflation.
So there you go.
> the countries that use the same euro currently posted different inflation rates.
this is expected.
> In your economic model we should have evenly distributed inflation.
no one expects inflation to occur uniformly. its well understood that one of the prime distortionary factors that result from money printing is that the price level does not adjust uniformly, but responds to where the money is spent. This is bad for inequality because typically the newly printed dollars are preferentially routed to politically connected client groups who then use these new (unearned) funds to purchase assets at prices that have not had time to adjust to the increased money supply.
So (e.g.) it takes taxes from overpaid SV software engineers and makes Social Security payments, buys missiles from Lockheed Martin, pays interest on debt, etc.
No; the Federal Reserve has essentially complete control over the monetary base.
Less money is printed to cover the current budget.
...yet no one, not even MMTers will advocate for unlimited printing. Curious.
"I show that a passive roll-off of $2.2 trillion over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times. However, during a crisis period with risk aversion being doubled, it is equivalent to a 74 basis point increase."
[1] https://www.atlantafed.org/-/media/documents/research/public...
beforehand, they would also reinvest all proceeds back into more purchases. now theyve limited that too.