This is another QE/Quantitative Easing, even if they don't call it that way. I hope inflation doesn't come back/get higher again because then we'd likely see the kind of second wave inflation people saw in the 70s.
QT is still ongoing as of last week, however, I don’t see it lasting.
I do think a .25 rate hike will still happen.
this is QE with extra steps
The actual rate is 4.68%.
more like 5%
I read press releases from the federal financial agencies and look at their balance sheet. The similarity here is that money is being created and injected into the balance sheets of private participants in the economy, money that wouldn't have seeped out to purchase things now will, overlapping in the venn diagram with QE. Another similarity is that additional US treasury bonds are now on the Federal Reserve's balance sheet, in direct exchange, overlapping in the venn diagram with QE. The difference is that the Fed is not acting as direct buying pressure in the US Treasury bond market, as the extra step is that people deposit the bonds as collateral to the fed and the feds will own them if the banks stop repaying. We're focusing on the similarities, you're focusing on the difference. I feel the similarities are a policy pivot in the worst way. I don't find the differences to be relevant.
As for your comment itself, it seems like you gloss over the similarities and ignore the differences. For example, you say "money is being created" but this is objectively false. As is your claim that this money is "seeping" anywhere; it isn't doing anything other than ensuring bank solvency.
Your comment is what I'd expect from someone who wants to call this action by the Fed "Quantitive Easing" but doesn't want to bother actually considering if it is or not. It is not, as you said, because of the critical and relevant differences. This money isn't going back out into the economy as you claim, which is the meaningful mechanism through which QE has its effects.
Without that mechanism, calling this QE is misleading at best.
[0] https://knowyourmeme.com/memes/well-that-sounds-like-slavery...
Now that everyone is woken up to that reality, they want to move it around now into other banks and other assets, and actually can. It is impossible to stop at just ensuring bank solvency.
As of Wednesday last week, 4 months of QT have been reverted in a single week: https://fred.stlouisfed.org/series/WALCL
Also half the money was literally just to pay back SVB and signature deposits while they unwind their book. Once everything is sold the other FDIC member banks will have to pony up any extra cash to pay the loans back.
What bond-selection strategies do banks usually take in situations like this? Riskiest bonds off of their sheets first?
We had close to 0% interest rates for almost a decade, and inflation was in check. It’s not the Fed that caused inflation, it is:
* Suspending school debt (extra income)
* Injecting real cash into the economy (stimulus checks and PPP loans to small businesses)
* Supply chain bottlenecks after Covid
All things that make real people wake up tomorrow and decide to spend some extra cash they have around in their bank account. It’s very tangible, it’s very measurable.
Of course 0% interest rates didn’t help, but it wasn’t the originating source of our inflation problems, as the previous 13 years of QE didn’t cause a spike in inflation.
I am not arguing that “before” it was better for the “little guys”, I am just making an observation.
You can affect the economy with fiscal policy (what our politicians/government does) and monetary policy (the central bank). Turns out monetary policy didn’t cause inflation to rise as much, as the previous 13 years demonstrate, but it was caused by liberal fiscal policy after Covid (all those points that I mentioned + supply chain bottlenecks).
The fact that our government blames the Fed is just scapegoating. They messed up big time, and acted quickly in such a way that they were not able to coordinate properly (rates should have gone up in light of liberal fiscal policies being implemented). These two entities don’t work and collaborate well together, and hindsight is 20/20.
I am not sure I understand what you are trying to say. Inflation either spikes up because of increased of demand, or lack of supply. In our case, both have happened:
* Increased demand because free money is hitting the bank accounts of almost everyone.
* Decreased supply because of supply chain bottlenecks, when every vendor canceled their orders in anticipation of a lack of demand (which never happened, with Covid), and then all of a sudden had to place again the same orders. Since every vendor practiced Just-In-Time order of all parts, the sudden demand (or - to put it in other words - the "lack of demand" which never happened) put them in a though spot where everyone was re-ordering the same parts again, but factories had to start with a fresh order queue.
This is not a "wealthy people problem", this is a "everyone is creating demand" problem. Wealthy people cannot create inflation in common goods because they are both outnumbered by regular folks, and because there is not too many of them anyways. How many eggs can a wealthy family purchase anyways? The demand of wealthy people is otherwise focused on goods that are not affecting the rest of the pyramid (does anybody care if yachts are price inflated because too many wealthy people buy them?).
Easy access to money caused inflation along with a supply chain bottleneck, the easy money that caused inflation was not ~2-3% loans that were accessible for 13 years prior to Covid, it was PPP loans, stimulus checks, and student loan pause, which all combined was given to pretty much the entire population of the US. Next thing you know, inflation is up.
I am not saying that people didn't deserve handouts for a very unique and though time in the history of their lives (Covid), I am just making an observation with the benefit of hindsight.
When you print money, Its unsurprising that those closest to the money printer will accumulate the most money.
In other words, had both monetary and fiscal policy stayed the same, inflation would not have happened to the extent we are dealing with right now. But fiscal policy (government handouts) was extremely liberal after Covid, and that put us out of balance.
It was a problem for a lot of people who either got priced out of the housing market or have huge student loans or have huge healthcare bills. The price of eggs or gas is really not much of a problem when the price of these big ticket items shoots up.
It may have been, but that was not reflected in the CPI, and we are talking about inflation as it is officially recorded in the CPI reports. The CPI inflation didn't spike up until early 2021.
If you consider that assets and results rents on those assets skyrocketed while "inflation" wasn't happening, then sure, but realistically, the dollar lost value and people got poorer in that time while having the same or increasing income
The bank bailouts, in particular, were done with broad bipartisan support.
This is mostly a joke, as I don't trade commodities; however, if BLS is juking the stats year over year with some agenda or other, basic inputs should have a steeper nominal trend line than they do, noisy as it is.
https://www.reuters.com/article/us-usa-fed-dudley-ipad-idUST...
The "getting away with it" is that in some forms, the wealthy can say it's bad that poor people get money because "it makes inflation" but when rich people get money, it's ok, because the resulting cost increases don't show up on the CPI
What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.
The downstream consequence that we didn't see with SVB was the bank starting to call unsecured loans, and pull back on lines of credit etc. Which should in turn have triggered the turning in of the leased Lambos and Audis....
By the way just with regular <2% YoY inflation, a $1m home in 2005 was worth $1.3m+ in 2019 (before covid and the current inflation spike), and that is with regular inflation.
Because homes cost a lot of money to begin with, the compounding effects of “healthy” inflation is going to be noticeable, and that doesn’t even factor in the low supply in the market.
https://www.macrotrends.net/countries/JPN/japan/population-g...
Despite a massive decrease in population, Japan has been mostly flat, when they should be in a strong deflationary environment due to demand destruction - because, you know, people being dead.
So hey, if the US population would decrease .5% a year (doesn’t sound like a lot, but it adds up fast - 1.75 mln/yr if in the US), we could also tame some inflation!
Thought exercise.
There are 140,000,000 houses in the US. What do you think would happen to the price of each house if there were 280,000,000? If you answered anything other than 'they would still go up for some reason despite many of them being empty and derelict' then we are in agreement that it is a supply and demand issue. Ergo a zoning issue.
There is massive excess supply of housing in Japan.
They literally demolish entire villages because no one lives there anymore.
Everyone who can moves to Tokyo, and prices there are insane.
In the US, if we had 288 million homes, the big question would be ‘where?’.
We already have millions of acres of land with literally no zoning rules at all. Even Greenlee County Arizona (1500 sq miles) is more than enough.
No one would want to though, because it’s not the place people want to live.
The answer to where is “up.”
Also the prices in Tokyo aren’t insane at all they’re super affordable by any standard.
https://japanpropertycentral.com/tag/tokyo-apartment-prices/
Tokyo prices are running 908k yen/square meter, or $685 square foot. While manhattan real estate is $1.5k/sq Ft and San Francisco $1k/sq ft - median incomes are dramatically lower in Japan, as is purchasing power, with the median Tokyo income being only $66k/yr.
There is a reason the stereotypical apartment in Tokyo is tiny - on average 65 square meters (700 square feet), of which only 41 square meters (441 square feet) is livable space.
That’s often for more than one person.
Outside of Tokyo, property is nearly free. Inside Tokyo it’s expensive, crowded, and tiny.
Looking at the national stats, it roughly averages out.
But that isn’t this utopia you seem to think is occurring.
Put a billion houses on Jupiter, and their value will be zero, while new york remains expensive
[1] https://www.nytimes.com/interactive/2019/06/18/upshot/cities...
I don't think you'll ever get much cheap housing, unless you build a ton along the periphery of a population center (which people don't want). You'd have to build at least 20% more housing for the price to drop 10%, and most of that housing will be where people don't want to live.
Zoning ‘overhead’ is people trying to control perceived negative effects and assert boundaries on what they will and will not accept.
Building more freeways doesn’t result in lower traffic for any length of time, because traffic increases based on available capacity in high demand areas.
If we put a billion houses on Manhattan (somehow), there would still be ‘in’ and ‘out’ areas with high prices and restrictions, with those high prices driven by managed scarcity.
Because being selective is a large part of HOW an area becomes and stays desirable. It’s not possible for one to stay that way for long without some attempt to defend itself, in my experience.
Saying ‘prices wouldn’t be high and we could all have what we want if we just got rid of zoning’ doesn’t reflect what is really going on.
Now, busting the worst offenders with artificial scarcity, like monopoly/trust busting, could easily have a lot of value as it has gotten over the top in a lot of areas.
But frankly, remote work and increasing costs of funding should do a lot of that anyway here soon.
They only depreciate
I don't think that's the case. Development was occurring so quickly, supply exceeded demand, and new houses sat or became entangled in bad mortgages. Property values increase as a function of population, which sounds the same as supply and demand but isn't quite. Housing prices increased because labor, builder and materials rates increased.
Homes are up in price because zoning rules preclude development of new houses sufficient to meet demand, creating an imbalance in supply vs. demand. Interest rates only shift that equilibrium. Concretely, Japan's monetary and interest rate policy has been almost the same as the US for decades however they haven't seen an increase in housing prices in nominal terms since 1990. They federalize zoning so councils can't preclude you from building safe and reasonable housing, and this allows supply to meet demand.
Housing is driving inflation in the US, not responding to it - remember, inflation is the measured drop in purchasing power calculated from prices. Zoning causes house prices to go up, which in turn means the purchasing power of the dollar is calculated to be lower.
Punitive zoning rules are inflationary.
[1] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage
I think you are trying to say that CPI and Inflation are the same thing.
> I think you are trying to say that CPI and Inflation are the same thing.
I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.
The supply did grow and the money went to banks, to the US government, etc. You can look at the Federal Reserve’s balance sheet and see entries for US treasury bonds, mortgage backed securities, etc. The US government then went and spent that on things, and the value of mortgage-backed securities increased which decreases the return on the investment and thus encourages banks to take on higher-risk investments. These activities drive inflation. So, no, an increase in the amount of money isn’t inflation, but a higher quantity of money supply times velocity does, by definition.
SF is pricey because of high engineers' earnings, foreign cash inflows, on a background of low rates.
The whole zoning discussion ignores the fact that investing in housing became hugely popular in the last decade, largely due to monetary policy as well as faverable tax policies.
“Inflation”, unqualified, means consumer price inflation. Asset price inflation is a completely different thing, with slightly overlapping potential causes, and completely different effects.
> What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.
Systemic firesales that drop asset prices aren’t “a deflation”, because, like inflation, unqualified “deflation” refers to consumer price deflation.
A 10000x increase in rent makes carrots unaffordable even if the price of carrots hasn't changed
You would be better positioned to make that argument if you could demonstrate a basic understanding of what the distinction is.
> People’s main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index.
The cost of housing as a consumer good (rent, actual or, for homeowners, imputed) is included in inflation measures (consumer price index, PCE, etc.)
The asset price of residential real estate is not, but that’s a different thing.
This makes it very difficult to get into the market since our rules require 15% of your loan in up-front capital. For a 1 room apartment that means about one year of salary saved up. Yay boomer economy...!
https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
Stimulus checks were a feature of George w bush's presidency too during the great collapse of 2008.
The past 13 years of qe put so much cash into the supply side that inflation was inevitable as all the governors for responsible corporate income basically evaporated with free money. The governments hamfisted bailout loan of about a dozen major conglomerates while ignoring small business during covid was probably the real torch that lit the powderkeg.
“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”
since there are legal implications if you default (including legal liability, wage garnishment, loss of social security benefits, and revocation of professional licenses). This is similar to indentured servitude, which is a form of involuntary servitude.
Also it’s pretty offensive to equate paying back debt to indentured servitude.
I think in the future, those student debt punishments will be looked on in a similar way to indentured servitude. At best, forced to work (though for an indefinite, likely forever time period) for whoever gave the loan, and at worst, much worse.
Debts are risky, and should occasionally be discharged with bankruptcy. Zero risk loans make zero interest
Of course, helicopter money (debt cancellation, Covid relief), will also increase the money supply, but at least it will flow first to the most needy. If the price of eggs goes up because more people can actually afford to eat them, I'm not sure that is a bad thing.
https://modernfarmer.com/2023/01/record-breaking-egg-profits...
How about this one ?
https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1...
As unbiased as it can be. Hopefully you can stomach the direct quotes from the companies themselves.
> It’s not the Fed that caused inflation, it is: > > * Suspending school debt (extra income)
School debt repayments are about $100B per year ($0.1T).
> * Injecting real cash into the economy (stimulus checks and PPP loans to small businesses)
$800B in stimulus checks. PPP was about $800B as well. So we're talking $1.6T over 3 years, $0.5T/year.
The US economy is $23T. Let's put $0.5T/year in perspective: social security payments are now $1.3T/year and defense spending is $0.8T/year.
You're trying to argue that a 2% GDP increase in spending is the main cause of significant inflation? That's nonsense.
Not every expense is the same when it comes to the cost of general goods and services.
That's completely wrong.
When the government spends on defense that money is not put into a large pit somewhere at Lockheed HQ and then lit on fire. It is spent on wages, on buying things from other contractors, etc. It ends up in people's pockets just like stimulus checks do. There's no difference. This is Econ 101 stuff.
You're seriously misleading people in this thread about how CPI, inflation, and the economy as a whole works.
It is true that defense money gets redistributed across the population and into the economy, but that has always been the case and inflation was in check.
The fact that you are insinuating that this has anything to do with the current inflation problem is misleading. In 2023 we are dealing with the fallback of Covid fiscal policies, not defense spending.
No. I'm stating that medicare+defense spending is far larger than either covid relief or student loan forgiveness. By an order of magnitude per year.
The fact that you don't think the thing that's 10x bigger can cause inflation, but you think the minor foonote that is covid spending can, shows that this is 100% ideology-driven and not fact-driven.
Even basic back of the envelope economics shows you're completely off.
What a weird comparison.
If it's true that something doesn't cause inflation, then if you make it 10x as big it still probably won't cause inflation. That's not an illogical position at all.
10 times zero being zero is not holding ideology over facts.
And even if we say defense spending was a significant part of the 2% inflation, that doesn't mean it also caused the huge spike we just had.
That's kind of hard to believe when inflation went up worldwide.
That plus...the supply chain bottlenecks were real, and affect the whole world. Supply chain was the focus of the Fed until late 2021 when they realized they couldn't wait for the supply chain to fix itself anymore, and they started to lower demand by increasing the interest rates. The ECB followed the course.
The fact that we focused so much on lowering US demand in 2022-2023 by increasing interest rates, should not distract us from the fact that supply chain bottlenecks are the real issue we are trying to fix (by lowering demand, most of which spiked up because of fiscal policy after Covid), which is a global problem. Jerome Powell was not wrong in saying that inflation was transitory, he was just too optimistic on the time it would take to heal the supply chain.
You don’t get to value WeWork at 40B unless interest rates are 0%
The new facility is the Bank Term Funding Program. It won't be revealed how much this facility is used for a year.
Sure, technically, but substantially different from how loans usually work...
Exactly.
> screw over millions of people
People who loaned their money to the banks. Why shouldn't there be consequences for lenders?
Oh who am I kidding? They'll just go back to banks again, every single time.
Um what? How does the Fed inject no strings attached money into “the” market?
QE its strings attached, and this is also QE. They are buying debt from the banks (by giving out a loan)
QE is actually buying assets. https://en.wikipedia.org/wiki/Quantitative_easing
QE is literally just funky loans.
QE creates money from thin air when distressed assets fail. This doesn’t because the asset is still on the banks balance sheet and can thus cause the bank to fail. Which is a critical distinction.
> No QE is purchasing something [generally a debt], not making a new loan.
Bob the bank buys a bond from Alice. Criss at the central bank in charge of QE buys if from Bob. Alice goes bankrupt and Bob doesn’t care.
Bob the bank buys a bond from Alice. Criss at the central bank loans Bob money. Alice goes bankrupt and Bob’s bank fails.
As a rule these banks just don’t own that many government bonds the returns suck.
Reality check: US debt to GDP ratio is over 120% and the US doesn't have the credit to borrow anymore. We're looking at hyperinflation and a long depression unless they stop printing money and we experience massive austerity/spending cuts. We are literally in an economic death spiral (that's what a debt to GDP ratio of > 120% means) and that death spiral will be irreversible by 2028 (with US insolvent by 2042) as that WAS the timeline for when all of our loan payments for all of that printed money/bailouts goes only to the interest on the loans and not the principal. Unless of course, they change all the rules and it's laws for thee but not for me and debt starts getting erased. And/or war, which is historically how they do it.
This is a ridiculous statement. The market for US treasuries is perfectly healthy.
That said, it is a harbinger of substantial problems to the system.
The fed started rate targeting, and asset prices started rising as the economy adapted to Fed policies. 50 years later assets like homes regularly exceed individuals lifetime earning potential.
If interest rates rise, these asset prices must fall. If they fall, then someone is on the hook as a counter party. The fed bailing out the banks with more free money kicks the can down the road.
Best case scenario is a steady inflation that raises incomes closer to assets. However this inflation effects boomers, millennials, and gen z differently- there is no easy solution.
But swinging between 0 interest rates and bailouts won’t help things.
Isn’t that a successful strategy then?
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In reality, it comes from all of those things, to different extents, in different spaces. The price of cars and eggs went up because of supply shortages. The price of houses went up because people can borrow money for 30 year mortgages. The price of employing someone went up because of a tight labor market. The price of stocks went up because the Fed printed money with QE, and kept interest rates at zero.
This is the most false statement ever.
Anything that increases the money supply will increase inflation.
Except we have actual numbers and history to prove that false....
Inflation was caused by the massive fiscal spending (stimmies) not the FED
When the gov’t is willing to buy/underwrite loans with minimal standards or sight unseen at lower rates, it artificially accelerates loans and lowers the cost of money - and increases the money supply and velocity of money in the economy.
This expasionary monetary policy failed to stimulate the economy, which is predictable to anyone who understands that banks having bonds vs reserves has virtually no impact on their lending behaviour. Bonds are, for all intents and purposes, as good as cash.
[0] https://www.investopedia.com/terms/m/m2.asp#toc-the-bottom-l...