For the first time, the Fed is losing money
wsj.com
wsj.com
> the Federal Reserve has suffered operating losses of about $42 billion since September 2022
Between 2020 and 2022 they quantitatively eased $2TT+, and then over the last 12 months have actively quantitatively tightened $0.500 TT [0].
$0.042 TT is literally change to them. They can chose at any time to pay it off by stopping the quantitative tightening. Even a quantitative easing at this level would be inconsequential.
Who is benefiting from a scary headline like this? or am I totally misunderstanding something?
[0] https://www.statista.com/statistics/1121416/quantitative-eas...
My interpretation of "the fed losing money" is "the fed bought some bonds when interest rates were low, interest rates went up, and now they're worth less, so they took a loss". It's true that they can print more money and therefore won't ever go bankrupt from this, but irrespective of that they're still losing money in an accounting sense.
>Who is benefiting from a scary headline like this? or am I totally misunderstanding something?
The headline is "the fed losing money", not "the fed is going bankrupt". You'd really have to be hysterical to think that the headline is scary.
I agree with the GP that it's a scary headline. I wouldn't call myself hysterical; I'm not hyperventilating or anything.
The issue with the headline is not with people who understand finance, it's with people who don't but know enough to see the WSJ as an authority. They won't notice that it's an opinion piece, and they don't really know enough to understand if this is actually a problem or not.
They are paying more than they are taking in and are having a shortfall to the treasury.
This is another interesting dynamic in the Fed’s fight against inflation because ideally they’d like to actively sell some of their portfolio to increase QT but I’m not sure they can because of the losses they would be forced to realize. This is largely why they have taken a “passive” approach to balance sheet drawdown.
For two years everyone bragged about getting 2.5% mortgages and now are loving collecting an easy 4.5% on six month bonds. But people forget there’s always someone on the other side of a trade and now that the tide is going out we are seeing exactly who they are.
This keeps getting repeated all over the internet... but the FED doesn't just "print" money. It creates money, loan it to some counter-party, and that counter-party has to return it. If the counter-party doesn't return the money, the FED losses money. They can print money to themselves, but that doesn't offset the losses.
That sounds like a pointless nitpick to me "ackshually the fed doesn't print money because everything is done digitally and no printing is actually done". What you described can be pretty much summed as "the fed prints money which it then uses to buy assets".
Banks create money by accepting deposits and making loans. Here is a more detailed explanation of the process: http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-1...
The uninformed school of internet libertarianism likes to conflate this process of credit creation with the practice of unstable governments realising they'll never be able to raise enough money from taxes or oil sales to pay for the mansions and five star generals they'd like to buy and so printing some more banknotes (not owed to anyone) to be a bit richer.
What’s important to understand to make any sense of this is that when the bank issues you a loan, that sits on their Balance Sheet as an asset, and on your balance sheet as a liability, so when the bank issues you say $50K in the form of a Loan so you can buy a car and it is deposited into your account, USD$50,000.00 was created as money, but that doesn’t mean $50K of notes was printed. What changed is the following: the Bank’s assets increased by $50K balanced against its liability accounts, and your liabilities increased by $50K balanced against your asset accounts until you pay the money back.
There’s a lot more money than there is currency in circulation, and currency represents one type of money. It’s not a difference of one being physical and one being digital because all of it is documented somewhere whether it’s a PDF of a loan agreement and resulting statements or the cocaine-coated bills and coins in your pocket; they’re subtly distinct concepts of put another way, money is intangible but can be created and bank notes and promissory notes are tangible forms of it documenting money and can be printed. Taking it back to the Fed, actual paper money in circulation is considered a liability against the Fed’s assets which are other people’s (well, institution’s really) debts to the Federal reserve, and I think this is the point where I have to stop because I’m already out of my depth and taking it much further will put me way out into the deep end. Corrections and expansions from others welcome.
Also note that somebody replied to me above with a link to the Bank of England talking about money creation. I haven’t had the chance to read it, but it’s probably worth checking out as well.
This is the process. From an actual central bank [0] [0]:https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Accuse me of cherry picking or paraphrasing to miss the subtlety of the distinction, but the subtlety makes little overall difference, as far as my, admittedly limited, understanding goes. And that snippet just ... works so well.
Fed loans are collateralized. So the counterparty has to not return the money and the collateral has to lose more money than the bank has reserves. This would be a credit loss, and the law requires the Fed to avoid it. (It has.) This article is about something else.
Also, if banks go bankrupt and then the individuals and businesses which they made loans to go bankrupt (which is actually not that uncommon; see SVB), the Fed cannot get that money back, the average citizen is the loser again...
So as you can see, the money is not always paid back.
The Fed just prints money, that's a fact. The "it's just loans" narrative is false rhetoric.
If there was no such thing as bankruptcy and debts were always passed on to borrowers' children and the government couldn't just keep taking out bigger loans to pay back their old loans and give huge contracts to big corporations ad-infinitum, then we could talk. Anything other than that and we have money printing going on; paid for by regular, honest, hard-working citizens through inflation and taxes.
You're thinking of interest on excess reserves (IOER): interest paid to banks (as the Fed's depositors) to encourage them to hold excess reserves and not lend them out. Reverse repos are open-market operations; they're the Fed borrowing money against its collateral, thereby sucking liquidity from the system.
Let's not forget that some of these bankrupt startups were basically tossing suitcases of advertising money at big tech prior to their bankruptcies. This is the people's money they were tossing at Big Tech. Then if they avoid jail (common), the founders of these failed startups will go on to get more funding 'a second chance', then a 'third chance', etc.. from the big VCs as a thank you for propping up their corporate stocks with 'borrowed' money which was never repaid.
Because with IOER, the Fed creates the market. No Fed, no IOER. In reverse repos, the Fed participates in an existing market. There are plenty of people willing to make overnight loans against Treasuries. That's what a repo is.
The Fed is currently participating in that market to raise the cost of borrowing. If it's helping the rich one way, it's hurting them the other.
(I'm not arguing the Fed is an egalitarian institution. But it's inaccurate to describe its operations, particularly reverse repos, as "printing citizens' money and giving it to rich people just for being rich.")
> when the bank goes bankrupt and a bunch of shell startups which it loaned money to go bankrupt
This is a non sequitur. (Also, if you borrow money from a bank, they don't go away if the bank goes under.)
It misses the point of why Reverse Repos were created. IMO, it's to allow the biggest banks who cannot find a way to effectively and safely put their enormous pile of money to work in the economy to still get a return on it. A risk-free (and literally free) return paid for by citizens.
It artificially props up the entire system and all of its zombie companies. Not to mention the anti-competitive forces it creates.
>> Also, if you borrow money from a bank, they don't go away if the bank goes under
They do if you go bankrupt. Why do banks go bankrupt? Well often it's because a lot of their borrowers went bankrupt. That's literally what 'subprime mortgages' entail. They literally assume that some percentage of the loans will never be repaid.
But in any case, the main issue I have is that the flaws of the system are hidden under layer upon layer of complexity; seemingly designed precisely to avoid scrutiny.
I read into the SVB as fundamentally different from the traditional borrowers bankrupt issue.
> But the root of its demise goes back several years. Like many other banks, SVB ploughed billions into US government bonds during the era of near-zero interest rates. What seemed like a safe bet quickly came unstuck, as the Federal Reserve hiked interest rates aggressively to tame inflation. When interest rates rise, bond prices fall, so the jump in rates eroded the value of SVB’s bond portfolio. The portfolio was yielding an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%, Reuters reported.
> At the same time, the Fed’s hiking spree sent borrowing costs higher, meaning tech startups had to channel more cash towards repaying debt. At the same time, they were struggling to raise new venture capital funding. That forced companies to draw down on deposits held by SVB to fund their operations and growth....While SVB’s problems can be traced back to its earlier investment decisions, the run on the bank was triggered Wednesday when the lender announced that it had sold a bunch of securities at a loss and would sell $2.25 billion in new shares to plug the hole in its finances. That set off panic among customers, who withdrew their money in large numbers.
From [1]
Instead, lock in $ at extremely low rates on bonds improperly laddered, then firesales turned theoretical losses into actual losses, which then triggered a loss of faith and a liquidity crisis simultaneous to startup cash withdrawals just for payroll. The bank run on it meant there was no way to make customers whole.
[1] https://www.cnn.com/2023/03/13/investing/silicon-valley-bank...
Most banks would have a variety of bonds, long and short term, with varying yeilds. Esp. given the rise of inflation took a little while and it wasn’t unlikely rates would rise.
SVB putting so much into long-term, low-yield treasuries was a major failure of its risk management.
The history is more complicated [1]. Modern repos are also all about finding non-bank channels through which the Fed can influence the economy. (When done with banks, it's to induce them to not lend their reserves to each other.)
Again, your complaint is much more apt for interest on reserves. Repos aren't unique to the Fed. IOER pays banks for parking money in an account at the Fed.
> seemingly designed precisely to avoid scrutiny
I'd argue it's more about competing interests and anachronisms. (The Fed is, almost to a fault, tremendously transparent.) Why does the Fed have private bank shareholders? Because of irrelevant details from a hundred years ago. Is it confusing? Yes. Is it a priority to fix? No.
[1] https://www.richmondfed.org/publications/research/economic_b...
Saylor just got a nice 22% discount on repaying his loan when his bank went away...
Reserves are assets of banks that can only be held by banks. They can't get rid of them in aggregate.
Loans are also assets of banks, and are created against supplied collateral along with the corresponding advance. The amount of reserves a bank has is irrelevant to that operation.
The private banks borrow money from each other and also (especially the biggest ones) from the Fed and loan it out to people, companies or other banks with extra interest added on top. Reserves don't matter until there is a shortage of liquidity and in that case, there are bailouts. In the meantime, banks will just loan however much money they can to however many borrowers they can find who appear to be able to afford it.
Reassigning that advance to another person is how we pay for things with borrowed money.
Once it has been reassigned it called a deposit.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
The more important limits to lending are regulatory capital controls which measure both the asset to liabilities mix but also the credit and interest rate risk of the asset mix and loan to deposit ratio.
The latter is a commonly tracked metric by bank investors and they typically view a ratio of higher than 0.8 with suspicion (down from 0.9 post 2008).
The US banking industry ratio is about .63 right now which is up from a pandemic low of .57 but still down from the pre-pandemic ratio of .75.
That banks were not lending enough was the reason the fed removed the reserve requirement.
And that last point is the 10,000 pound gorilla in the room that almost everyone ignores. The Fed’s primary mandate is not, as is commonly stated, to control inflation and unemployment. Rather, it is maintaining the operational integrity of the payments system. And they absolutely have to do that or people will not be able to transact in dollars. And of course the party that transacts more dollars than anyone else by far happens to be the one that created the Fed and can reorganize or destroy it if the Fed is foolish enough to create the political will to do so.
Now, with the economy slowing, inflation taking value out of investment vehicles, and interest rates being hiked, their assets are no longer increasing in value. This is just another window into the current inflation/interest crisis.
They have a trading desk.
I can’t find the doc now but early pandemic there was some uproar that the desk started to buy “junk” aka things that weren’t worth the price paid.
It's a losing battle to fight this on some basis that these Fed/admin hires are just dumb villains and the whole scheme was poorly thought out by their well connected/educated revolving door who runs it.
The fed propping up stuff like mortgages and Wall St bankers gambling then repeatedly using the financial might of the general US market to stabilize it in the short term doesn't necessarily mean the markets they manipulate (ostensibly for the public's benefit) is better off long term. But it does make rational sense when everyone these people speak to is losing their shirt in the short term, and the FUDy doomers come out in the obedient media to say there’s no other choice but propping up the last decade’s status quo.
But once you start looking at historical interest rates, critical markets like mortgages/the many markets run by well connected pet oligopolies/etc, with all the subsequent risk glossed over via eliminating moral hazards... Ultimately critiquing the fed as if their economic structure is not well calculated is not the best strategy.
Like a lot of more extreme political opinions the reality is much more boring and harder to confront if all you do is invent caricatures disconnected from reality. The enemy is much more informed and adaptable than some conspiring backroom dealing elite we all just need to expose and it will all be over.
America’s historical stockpile of wealth and talent can be leaned on for only so long… just like Russia leaning on their Soviet arms stockpile the first time they confront a real threat (aka themselves).
So they have deliberately decided to pay out interest by creating money in an attempt to reduce inflation.
Still think putting up interest rates stops prices rising?[0]
[0]: https://economicsfromthetopdown.com/2023/02/04/do-high-inter...
Is there a name for this general type of fallacy where defect A results in mitigating response B, but people see the correlation and wrongly conclude that B causes A instead? Examples:
1. Building more apartments "causes" higher rents
2. Covid lockdowns "cause" more excess deaths
3. Higher incarceration rates "cause" higher crime
You've failed to identify a fallacy.
So his cargo cult "experiment" proves absolutely nothing because his results are exactly what is expected, just as a doctor would also be unsurprised to discover that a someone with a snide tone about medicine and a middle school grasp of statistics had reached the remarkable conclusion that patients with prescriptions tended to be less healthy than those without.
https://economicsfromthetopdown.com/2023/02/19/interest-rate...
Trouble is, there hasn't been any secular "inflation cycle" in the last 30ish years in developed countries that have adopted the policy of managing inflation by downregulating it with interest rate changes. Either you accept that the orthodox policy of announcing that inflation will be managed with interest rate rises has been remarkably successful at containing inflation, or you're scrambling for an alternative explanation for why it appears to have been so successful that doesn't use "inflation cycles". It's certainly telling that he uses hypothetical data to illustrate this theory, and then since the real world time series are so unhelpful to his argument he has to chuck hundreds of data points from different countries, years and interest rate policy regimes into a graph where most of the data points sit near the origin[2] and draw conclusions from the outliers!
I'm going to go out on a limb and suggest that Blair Fix hasn't disproved pretty much the one thing economists who fiercely hate each others' theoretical models and policy recommendations came to consensus on as established fact with a graph which showed exactly the results people familiar with the literature - which Fix clearly isn't - would all expect to see.
As the patient group all went into remission for three decades, it's not even as persuasive a statistical argument as the one for drugs being the cause of terminal illness
[1]ironically, the most plausible explanation for a tendency towards inflation being cyclical as opposed to steady or tending to accelerate would be countercyclical downward pressure on money supply from the Fisher Effect on market credit prices
[2]the key bit being that most of the points sit near the origin because the policy has been so successful...
In effect the mythical causations you quote are precisely what economists believe
To them more people in prison does cause more gun crime.
https://economicsfromthetopdown.com/2023/02/19/interest-rate...
My wider, lay understanding of this is that the powers-that-be (hereafter "PTB") do not like the FRB's interest rate hikes, so from the PTBs' perspective:
1. Create fear and more fear and further fear among the public in the hopes of triggering further bank runs ("ohnoes the gov can't bailout savings no more!") and other fiscal destruction.
2. FRB is eventually forced to reconsider their current (read: undesirable) fiscal plans. Ideally go back to zero interest rates?
3. ????
4. PTBs PROFIT once more?
All journalism is propaganda and exist strictly to benefit someone out there, so I would be particularly skeptical if that propaganda is also fearmongering.
Money is like equity. Raising the rates is essentially a way for them to consolidate more equity. They distributed more equity than they were comfortable with as stimulus during covid, and now they're calling it back. The pattern has been going on since the 70s at least. They made up the BS idea of "natural rate of unemployment" to justify it and gave a nobel prize to the guy who said to keep the unemployment at 5% to keep down "wage inflation"... a.k.a.. people getting paid more. Pay hasn't tracked productivity ever since. Look at the unemployment vs fed rate charts.
Letting your currency inflate is a populist move for a reason. It's not because people are dumb, it's because while it devalues people's savings, it puts money in the pockets of people without savings, and devalues debt as well. It was used previously in Portugal, Italy and Greece to spur exports whenever the economies were hitting a rough spot. Once they got on the Euro and the powers that be wouldn't inflate, they were screwed, and Germany was able to buy up a bunch of their assets and essentially takes tribute via interest rates on their loans now. It skims off the productivity of their economies. Raising the rates helps them skim more.
Libertartian types tend to have savings. They like to spin a story that justifies what they sense... that raising rates is good for them. It is good for them. People are really good a sniffing out their incentives, even if they don't quite know why. It's also good for the powers that be though.
The reason the wages don't rise with the prices is because that 5% are getting hired, and the under-employed are getting more hours, and they jack up the rates as quickly as possible as soon as they sense that wages are rising. However with the increased hours, and fewer under-employed there are people who couldn't afford toilet paper who are finally able to, and that increase the prices. That's not a bad thing. More overtime has a much bigger effect than increased egg prices to most people in low wage jobs. And lower unemployment improves their working conditions as well. It's still essentially a transfer of shares to the broke, even if the wages don't directly increase. Also, a lot of the inflation that was happening this go-around was due to rich people with their PPP loans being able to speculate. Taxing the rich at a more progressive rate as was done in the 50s and 60s would be an alternative way to stem inflation besides using the fed rate. But of course they haven't touched that one in a while.
It's not just trump and sanders that are populists looking for lower fed rates from the central banks. In most countries I think you'll find that the populist parties (i.e. the party with most representation among the poorest) tend toward pushing for lower interest rates and more government spending. You'll also find that those representing the rich tend to push for austerity. There's a reason for that. And it's not that the populists are all working together. You can tell they have much more disparate values than the centrist globalists who want high rates.
Source? The natural rate of unemployment, like the neutral interest rate, floats with economic conditions and cannot be directly estimated.
Anyway, as for a source, the 2nd paragraph of the wikipedia article on NAIRU states it's generally 5-6%. You can pretty readily google it and see that it's been between 4-6%.
https://www.ft.com/content/facf6989-7cd2-3724-a6d4-dfe7c7551... "Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent." Guess which one they picked. Economics, as it intersects with politics, is not a science at all. Not even close. It's the result of people with agendas funding grants with hopes that someone will show the results they want, and then them cherrypicking those results. If you throw enough money into it, you can find a "scientific" justification for anything. The more academic side of it has some merit... but for the most part it gest brushed aside because it's not telling the people making the policy what they want to hear.
I think both of these are probably roughly true-ish but by brief Googling I couldn't verify either one.
https://commons.wikimedia.org/wiki/File:Federal_funds_rate_v... <-- that's a graph like what I'm talking about. Notice how the blue tends to go up sharply before the grey recession bars. And this tends to happen right as the red line starts to approach 5%. There's an exception recently because trump was in office demanding that they keep the fed rate low, and I guess they decided to listen to him because he was cutting their taxes. But you can tell they didn't love the guy by the way the media covered him. I'm no fan either, but for different reasons.
It's akin to saying that coughing causes lung cancer. Smoking causes coughing and lung cancer. One cause, multiple effects.
I’m not sure if poor or “working class” demographics have enough exposure to fixed rate debt to make inflation a net gain.
If they are homeowners, likely it is: most people knew better to take out ARMs this time around.
Not a homeowner? Tough to conclude that rising rates is a net win here …
The reason they currently support higher rates is twofold: 1) The Fed has kept rates artificially low for an irresponsibly long period of time, leading to inflation and other economic distortions, and 2) The only way to get inflation (which is pernicious) under control is with higher rates.
As for "irresponsibly low" and "(which is pernicious)"... these are your value judgements that you've arrived at based on your perspective. That's fine, but other people have other perspectives. To someone with debt who wants a well-lubricated economy, or to someone who makes money off of exports, it's not irresponsible at all.
If you look at the history of fed rates vs unemployment and recessions, it's a very clear trend that the fed rate has to stay lower longer for a recovery, and it takes less raising of the rates to put us back in a recession. Why would this be? Maybe because it's not the appropriate tool to be using to control inflation. Maybe it's not because the fed is being irresponsible, but it's doing what it has to to keep the economy afloat and that's less and less effective because the country refuses to do what it has to, which is raise taxes on the rich.
This is an unusual claim, to say the least.
Not "the rich" per se, but he is speaking of MMT[1] which maintains that the government of a sovereign printer (sorry, Argentina) does not need taxes at all because they don't "need" the money.
MMT purports that money is created by "printing" it into existence and money is destroyed by taxing it away.
When the federal government pays its debt to the federal reserve, where does that money go?
There is an interesting and compelling theory that you can control inflation with taxes (broadly, MMT[1]) but the cautious and (in my opinion) warranted skepticism that you voice, upthread, about prevailing economic theories should be extended to MMT as well.
We don't really know if money supply creation via "printing" and the corresponding destruction via taxation will work just as MMT suggests it will.
If by "PTB" you mean the market, then of course it hates rate hikes. Also just hates uncertainty.
Actually the fed has a dual mandates: price stability and unemployment. Price stability can also be achieved by taxation.
And in this case the massive inflation we saw was mostly due to supply chain issues. So many businesses shut down during the pandemic. Others were hanging on by a thread. Which sounds like it will help supply chains recover? Increasing interest rates for loans? Or keeping access to lots of liquidity? Hmmm, seems like if we're wanting to expand capacity again, we want liquidity. Then prices can go back down due to capacity going back to normal, rather than artificially reducing demand by getting everyone fired.
If we need critical immediate measures to stem inflation, then we can raise taxes. Get some of that PPP money back. Make everyone who was speculating on housing sell their investment homes. That will drive inflation back down without starving the recovering supply chains.
>then we can raise taxes
I totally agree that raising taxes is the right thing to do (as do my smart friends and most economists ;) ). But that's not the lever the Fed has. And of course it's politically untenable.
> Make everyone who was speculating on housing sell their investment homes. Agree there too. But that's not the lever the Fed has.
If you want to see what they’ve specifically adopted as a wedge issue to divide people, look at what they disagree on.
It’s not the businesses that are the powers that be but their board members. They’ll tank one company if it will help the others
Such a derogatory statement detached from reality. It's like saying all health professionals are out there to get your money by keeping you as sick as possible. Or all teachers are out to indoctrinate your kids. Or all firefighters are arsenists.
I have quite a few journalists as friends or acquaintances, and many of them are the most honest people I know, with strong ethics and admireable ideals.
Of course there are bad apples out there. In any profession. But your statement is just ridiculous.
A few bad apples spoils the bunch. You can have thousands of apples in a barrel, but a couple of bad ones can quickly make the whole barrel worthless.
For example, the New York Times makes the right call on integrity vs profits, access, etc dozens of times a day for years. Then one time 20 years ago they make the wrong call vis a vis Iraq weapons of mass destruction, and they've almost completely destroyed their integrity. Seems unfair, but as a consumer we can no longer trust them, and probably never should have.
This is probably one of the most commonly-used fallacies I see people used to deal with cognitive dissonance caused by information that might make them uncomfortable.
I just scanned his twitter feed and I don't see anything terribly problematic, so I'm not even sure what you're referring to that would make you ignore him.
I would say 99% of them want to be paid.
And that 99%ish of them realize that they need to at least look like they have integrity to be paid.
And if asked, I’m sure 99% of them would admit that the best way to keep getting paid and look like they have integrity is to actually have integrity.
usually where the problems happen is when they can’t see the disconnect between their day to day actions and the long term goal, or when they hit a challenge where they can’t do what they need to do - and then can’t take ownership of what they did and instead hide/project/deny, etc.
I’m guessing less than 90% would really have actual integrity, and the rest should hopefully be kept in check by fear of discovery or whatever. But things slip through regardless.
Are you claiming that none of us has integrity in our professional work?
Articles are not written by institutions. They are written by individuals. Just like the code I write every day. For money.
Otherwise you're saying "can't trust the status quo, can't trust the alternative" - noise, at best.
If you think about the Iraq war whenever your read a piece by a journalist in the NYT, even if that journalist wasn't even out of their diapers at that time, then you may need to re-adjust your grudges.
This doesn't follow. I'm not a fan of the mainstream media by any means, but trust is not an all or nothing thing. It is entirely possible to develop a relatively sophisticated relationship with news media and to assign different levels of trust to different elements of what is encountered. Indeed, one might even vary their level of trust on a sentence by sentence basis!
The idea that the media must be entirely correct and entirely unbiased is jejune. It isn't the world we live in, has never been the world we live in. Take a little epistemological responsibility.
That is to say, every human act is political whether you acknowledge it or not because it either maintains the current system or attempts to change it. So we should question the motives of anyone who is structurally incentivized to give you information that benefits the owners of the periodical.
There obviously is propaganda here and there, but not every person having a bias is engaging in propaganda.
But now those bonds have gone massively underwater because of their own policy- they have drastically raised interest rates on shorter duration bonds while simultaneously stopped buying bonds. So the value of the assets they hold is drastically diminished.
But the fed also borrows money on the short end from banks through the reserve program. Banks keep excess reserves at the fed and the fed pays them interest. In a normal environment that’s not a problem because long bonds usually yield more than short bonds. But because the fed loaded up on low yield bonds they have a negative carry so they are losing money now. Normally they would pay the excess to the treasury but now they have to borrow from it.
The interesting thing is that this is basically what sank svb but on a much larger scale. The difference is obviously that the government can print its own money.
The Fed doesn’t borrow reserves. That it even pays interest on them is at its discretion.
The book value represents the net investment made by the owner of Federal Reserve banks.
That's a great solution for everything as long as one doesn't care about inflation.
It is important, even very important, to realize that this merely changes the laws of economics to which they are subject, at least as people generally imagine them. It does not immunize them against the laws of economics. It does not mean they can just do anything without consequence, or with the full power to select the consequences.
This is in the class of "things that sound obvious when I say them", but I can see that a lot of people seem to throw an exception here and terminate all execution. Having negative equity matters, even if you can print money. It just may matter differently.
"or am I totally misunderstanding something?"
I would say, you're not so much "misunderstanding" something as not realizing that there's a whole complex of interacting systems hiding behind your "but they can just print money" that needs understanding. Whether those systems are deliberately obscured is a matter of some debate, but they certainly don't go out of their way to educate you about these systems. Everything is far more complicated and interconnected then you appear to be seeing.
They can print reserves, which is only usable with-in the Fed's inter-bank settlement system.
The actual money in the economy is created by banks through issuing credit:
> Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans.
* https://www.bankofengland.co.uk/explainers/how-is-money-crea...
This $150bn cost is a consequence of quantitative easing massively expanding reserve balances, and those reserve balances still existing in a period of high inflation which is being fought with high interest rates. The obvious solution is quantitive tightening to shrink the quantity of reserves, however there's justifiable concern about the effects this could have on the still-fragile banking system.
This is real money to the US taxpayer. The Fed used to remit $100bn a year to the US treasury, which it has now stopped doing. Instead, the Fed is sending this money to the US commercial banks which hold US reserves.
by not printing money they are printing money or something..cough...tell me you don't understand monetary policy without telling me you don't understand monetary policy.
the money they lose when rates go up is of no more significance than the profits they make when they create high-powered reserves. everything on the Fed's balance sheet is outside the real economy. what matters to the real economy is the current nominal and real interest rates and the expectations for where they are going.
net income (as opposed to cash flow) is mostly a fiction in general but all the more so when it's the Fed.
these stories amount to "boo! OMG big numbers! Zurg say stop doing economics, they have played us for absolute fools" https://ifunny.co/picture/stop-doing-economics-eyears-of-yet...
When things happen that congress or the Fed never expected (aka the 'experts' and 'planners' in all this)... that should ring alarm bells. Those saying 'nothing to worry about' are putting on a brave face. Shouldn't need to understand economics to see that much.
literally everyone who knew anything expected it, it's built into every model
what is supposed to happen if the Fed reports book losses or negative equity. hard to go bankrupt if you can literally print money. stupidest FUD and agitprop and unfortunately typical of the WSJ opinion section
One thing that’s been fascinating to me as this banking crisis has unfolded is that the same people who swear cryptocurrencies have no intrinsic value and are therefore worthless continuously say “there is no problem because the government can simply create as much money as it wants out of thin air.” So they are implicitly saying that any currency has value because people believe it has value but don’t extend that generosity towards other assets where there is a clearly demonstrated group ascribing value to it.
It’s also somewhat disconcerting that the government seems to show less and less restraint in exchange for instant gratification and short term benefits and as holders of its currency you really have no say as to how it is managed.
Emergency measures are there for just that, emergencies, but it seems the bar for what qualifies for an emergency gets lower and lower.
With crypto, usually be design, you actually have zero ability to alter how it is managed. It’s even less power than your vote gives over the USD.
Of course they fail to realize that the manipulation just gets shifted to the core developers.
Because we didn’t measure for it. (18th-century GDP is post hoc estimated.) The 19th century, during the free banking era, featured multiple 30%+ drawdowns in business activity, greater than the Great Depression, albeit against a smaller baseline [1].
[1] https://en.m.wikipedia.org/wiki/List_of_recessions_in_the_Un...
'Fiat' of course refers to making something come into existence simply by saying it, as G_d supposedly did with the words 'Let there be light'.
My understanding of 'fiat currency' is that it is not the currency as a whole which comes into existence by fiat (which would seemingly apply to most currencies, including Bitcoin and metallic ones), but that individual units of the currency come into existence by fiat. The government (meaning the union of the Fed and the Treasury) can create additional dollars simply by writing 'X has Y dollars'. No one can create Bitcoin in this manner, so it is not a fiat currency.
Maybe you're right about that, I don't know... But even if it was not the case, we'd still expect emergencies to occur more frequently today than in the past, and even more frequently again in the future.
You know, climate change and inconsiderate usage of finite resources within a finite volume and always-increasing entropy and all. The link is direct.
There is no contradiction. Your rant is coming across like all currencies are the same, they are not.
People tend to believe the U.S. Govt more than say Venezuela (no offence).
Even amongst currencies, the USD is special due to the underlying tie to oil sales. See https://www.lynalden.com/what-is-money/ for a much better introduction than I could ever give.
edit: missing word
The other piece that folks often conflate to extrapolate their intuition of how a household or a small business budget operates to how a country budget operates (the comment above on instant gratification). As a household, if you face a risky economic situation (economic depression, loss of jobs etc), the natural response is to reduce spending and increase savings. If you aggregate across households at a country level, this leads to lower demand, so reduction in jobs as less consumption which leads to further economic downturn, reduction in willingness of banks to lend, lower government income (as lower taxes) etc. The right government response is to spend more countercyclically and help create jobs to spur back demand through deficit spending. Then as economy improves, tax receipts go up and deficit goes down.
Arguing about the ROI of a road, education, a new shiny F35 feature, foos stamps, etc. are of course completely valid.
Neither society nor the government is one big hivemind.
There are small government advocates (who usually turn out to be cruel totalitarian dickheads), there's a new wave of young people who parrot "eat the rich" and usually turn out to be clueless idiots cosplaying as leftists, who also say things like "just pay for everything out of thin air".
It's big, it's completex, it's hard, emotions run high, there's a chance of things turning for the worse, while a lot of things are inching toward the better.
I think in almost all cases except where private markets can’t deliver (for example police, army, possibly roads), private markets will almost always use money (or resources) much better.
If you look at the projects funded by the Roosevelt New Deal (where the stated purpose of the spending was to reboot the economy and create employment, rather than chasing a particular return), a lot of them returned many, many times the government's investment. For example, the Tri-Borough Bridge, the Hoover Dam, the paintings of Jackson Pollock.
Food stamps and pension funds are a bit harder, since they mostly boil down to three arguments: ethics, crime and stability. People tend to turn to crime when they have no viable other means, so feeding them is a way to reduce crime, and crime would cost more. Also people who are desperate are more likely to revolt, which is either very costly to the government or entirely prevents them from doing other activities with positive ROI in the future. So they are cost centers, but arguably necessary.
Postal service, telephone, internet and public transit would also fall in the infrastructure category. Societal benefit is often much larger than the willingness of the individual to pay for it, so it makes sense to have them either run or subsidized by the state.
Universal healthcare can deliver positive ROI by being more effective than the private alternative. As a society we want citizens to be healthy, because healthy people are happy and productive, and don't infect other healthy people.
I completely agree that governments should regularly run and publish ROI calculations, or maybe there should be an independent watchdog that does this. And a lot of money seems to be wasted because people on all levels of government have the wrong incentives. On the other hand, one of the major reasons why the idea of governments is so widespread is that they regularly do provide positive ROI overall.
To editorialise for a moment, as I read about various public healthcare systems around the world, the diversity of systems is large, including outcomes. Almost none of them in highly developed countries are good and cheap. In these countries, healthcare is damn expensive, no matter how you do it. It's very difficult to spend less than 10% of GDP (that is huge for these countries) and have "good" healthcare.
Another topic about which academics have debated for decades: Same question as above, except primary/secondary/tertiary education.
Issue: People lose healthcare when they switch their jobs.
Solution: Have people purchase their own healthcare rather than receive it through their employer.
Issue: People don’t like their healthcare plan.
Solution: Allow individuals to choose their own healthcare plans. They know what they need far better than their employer does.
Issue: People cannot afford the healthcare plan they want.
Solutions: Stop throttling the amount of doctors who can attend medical school so that there is a sufficient supply of doctors. Higher supply will lower prices and improve outcomes. Institute outcome-based pricing schemes, i.e. providers get paid when they fix your problem. This will fix insurance companies’ and providers’ misaligned incentives; right now, their goal is to charge you as much as they can for health care and provide you as little as they can. That maximizes their margins. If they were only paid when they solved issues, I’m sure they would prioritize that.
IMO, the debate over “public” vs. “private” healthcare is a false dichotomy. The US does not have a private, free market healthcare system today, but proponents of public healthcare use the current state of it to argue against private systems, since it isn’t public. Proponents of private healthcare ignore anything that could improve the state of healthcare because they do not want to see it socialized and assume all suggestions will come in this form. The people in need of healthcare are left with poor healthcare as politicians fight imaginary healthcare dragons.
There is also a secondary issue in the healthcare discussion: prevention. Why do we have to spend so much on healthcare? It’s not like the human body spontaneously breaks down at such a fast rate. The actions we take as individuals, and as a society, cause a lot of disease. If we are concerned about healthcare prices, it is disingenuous and negligent of us to not look at what is driving our healthcare costs.
A significant amount of healthcare spending in the US takes place in the last years of life which is, indeed, just the body breaking down at a fast rate.
11.4% of medical spending on ages 0-18 (23.11% of population)
21.0% of medical spending on ages 19-44 (36.23% of population)
33.2% of medical spending on ages 45-64 (26.17% of population)
34.4% of medical spending on ages 65+ (14.5% of population)
So there is definitely more spend in older age, which makes sense, but the majority of spend is in populations I wouldn't consider old (<65). Additionally, what we consider "old" is really a reflection of average lifespan, and if we had healthier habits as a whole, maybe "old" would be older than "old" is today. By definition, old is when the body does start to break down at a fast rate, like you say, so I suppose it is tautologically true. However, I don't think it means we have to accept high healthcare costs related to that.
[1]: https://www.cms.gov/research-statistics-data-and-systems/sta...
[2]: https://www.census.gov/data/tables/time-series/demo/popest/2...
In much the same way that environmental costs of business operations are subsidized across society instead of being born by the business itself.
It’s also the case in most of these countries that health insurance is delivered by (highly regulated) private entities.
NHS is an outlier in that the entire system is run by the government.
It's not so good at keeping regular people healthy so that they don't need expensive care to begin with; though I'm not sure if this can be blamed on the "healthcare system" per se, versus cultural or educational factors. The average American is quite unhealthy.
It's quite bad at delivering routine care at reasonable prices. Get in a car wreck and break your leg? Want to deliver a baby at a hospital? It will get done at high standards and short wait times, but the bill if you're uninsured or underinsured will be eye-watering. This is a result of broken incentive systems surrounding healthcare in America, and probably deserves a lot of policy attention.
This is sharply contrary to figures I've seen on the outcomes of government spending.
Got a citation?
Occasionally short term deficits and endless bottomless deficits are not the same beast. The latter is simply a lazy political tool used to buy votes and further enrich the bankers.
Another third is owned by state and local governments, mutual funds, pensions, private citizens etc. That is, other US tax payers that receive benefits from the interest.
Only the last third is held by banks and foreign debt holders.
Large deficit spending may or may not be a problem. Economists and politicians are divided on the issue, but the interest generated from the debt largely goes to US taxpayers and it’s pretty well mixed across the economic spectrum (at least compared to other government economic policies).
If these deficits creates positive externalities (eg. Jobs through expansion of business, new deal program, or even as we've seen in massive programs like NREGA - increasing purchasing power through direct cash deposits). If the deficit spending puts wealth in the pockets of financial speculators, this is often a problem.
Even for external debt denominated in local currency, devaluation is always an option (though may not be attractive). It's only foreign currency denominated debt which is a problem.
If. And if they did there would be endless piles of political fodder. Politicians patting themselves on the back praising their genius. Etc.
That's not happening. Conclusion? If is generally closer to highly unlikely.
As for left pocket / right pocket those shifts have overhead. A program(s) to manage the programs. Let's consider that interest. Let's consider that too little value added to the taxpayers. In other words, the deficit is being used to perpetuate the government and the status quo, and not much more.
In theory I agree with you. Unfortunately, the reality is much different. The fact it has been normalized doesn't mean we should accept it.
As for the rest. The taxpayer is paying the interest to borriw as well. So that's a wash. Then there's the bureaucratic overhead devoted to the deficit. That's a loss.
The reality is, it's a net loss to the taxpayer. That is money is magically moving around and too little value is being delivered. Ask any taxpayer if they're getting value.
Or are you claiming that the US has been in the situation of "risky economic situation (economic depression, loss of jobs etc)" for the past 15 years?
Really? I would bet that most people don't hold their views on government spending based on anything more than a gut feeling and what the political party they support and associated media tell them.
I believe this because time and time again we see surveys that show random groups of people have a very VERY poor idea of what the actual state the economy is in, what the history of the economy is, who increased the national debt, who decreased it and when, what inflation is actually at, how to plan for current and future interest rates and house prices, who can control energy prices, etc. And most importantly (to me anyway) how wealth and income is actually distributed. These are mostly indisputable facts that we can all look up but somehow don't.
So yeah I think we as a group are mostly misguided most of the time.
If the GP is misguided, points out how and why according to the content of his post, not some general platitude about potentially misguided people that aren't relevant here.
The second half certainly wasn't directed to you, just more of a follow up as to why I wrote my original comment.
Of that, ~52% is Social Security, unemployment, and labor programs (or ~40% of the total). ~28% Medicare and other health programs (or ~23% of the total).
Military is ~11% of the total.
Interest payments are a bit over 4% of the total.
International affairs is <1% of the total budget.
https://www.nationalpriorities.org/budget-basics/federal-bud...
https://www.brookings.edu/opinions/what-every-american-shoul...
ACA is a great example. Most of the core tenets are widely supported across the population. But, ask conservatives about the ACA by name and they often claim it's an awful law.
Contrariwise on abortion it doesn’t matter whether you call it abortion, choice, life, murder, or whatever else, the divide in opinions remains.
Federally, some kind of "welfare" comprises 60% of the budget[0]. Sure, you could argue that Social Security and Medicare are benefits paid for by what you put in during your working years, but that's just a facade over the fact that it is a transfer of wealth from those who are working to those who have retired from work.
I'm not sure what your definition of "vastly" is, but certainly there is a substantial amount of transfers from those who earn more to those who earn less. All of this is separate from a discussion on whether that is good for society, but the facts should be laid out.
The common trope is: https://en.wikipedia.org/wiki/Welfare_queen
Shit, last I checked IIRC most people don't even understand how marginal tax rates work, which is something that directly affects most of them, is relevant every single year, and that is pretty easy to understand.
It's a miracle our democracy works even as well as it does. But, these results shouldn't be surprising, when you think about it—the average Christian, for example, hardly knows a thing about the belief system they claim holds the key to eternal life(!!!), which you'd think they might take super seriously and study with fervor, but most apparently do not. Why would we expect people to understand government any better than that?
Slow-moving train wrecks are still train wrecks.
If you're not worried about the long-term consequences of both the fiscal and monetary policy of the United States, I don't know what to say. M2 to the moon.
That said, if the US were in a better financial situation, how would 1-2% inflation (as far as I can tell, this roughly the rate that gold is currently being extracted) lead to people starving in the US?
Obviously, reality is much more complicated, but I just want to understand the reasoning. Assume 0% inflation if you prefer.
The problem is that pegging a currency to gold does not peg inflation. Inflation will still move around based on other economic factors. You will have just eliminated your best tool for influencing it.
If you needed to adjust a currency pegged to gold, you'd have to get more people working in the mines. Which is either not possible, or a human rights violation.
This is called a deflationary spiral. Basically every period of significant deflation in the past has led to dire economic consequences. You really do not want people to stop spending money.
https://www.khanacademy.org/economics-finance-domain/macroec...
Deflationary spirals have happened in the past, but they have stopped since we moved away from the gold standard and we can now intentionally inflate our currency to prevent deflation.
In today's inflation economy, there are tons of tons of businesses that on paper make a profit, but in reality don't create value because that profit is worth less than the numbers tell. And what's worse: Individuals are becoming poorer and poorer without realizing it, because the nominal value of their pay check might be higher, though the value of the money is probably half of what it was 10 years ago.
And as individuals adapt their lifestyle and spending to circumstances we arrive at the ridiculous situation of today, where most young people after maybe a decade of working and advancing their careers still don't own a home, still don't have any children, and don't dream of splurging on luxurious hobbies.
Thank God there is a huge trend right now with workers of all "collars" saying "fuck it" and doing what they can to change companies, change careers, change cities and change countries to get as much as possible for themselves instead of continuing to be exploited.
Shipping gold is expensive and risky, eventually they’ll start saying, “you own this amount of the gold we have stored safely”. The abstractions find a way…
Leaders have been debasing currencies since forever.
You need to understand economics as the metabolism of a larger organism.
This isn't just a hypothetical argument, it is reality. Let's take the digital device you're reading this with as an example. It's not created by any single craftsman. It is the result of millions of people's work. It is a "metabolite" of a larger organism.
You are a node or cell in a larger thing. Everything you know and can do is largely tailored to this system you're currently in.
Consider you are time-teleported back 10,000 years and come across a tribe of humans. Who would be more valuable to whom? Is your understanding of any of the technologies you presently enjoy sufficient enough to reproduce from scratch? Maybe a couple things, but they would most likely have a lot more to teach you than you'd be able to teach them.
I realize the above is very abstract from monetary policy, but the correct premise needs to be set before digging down.
Once you model economics as the metabolism of a larger entity, money reveals its true nature: to control what activities are performed by / within the organism.
There's no such thing as "intrinsic value" -- there is only a medium of exchange or signaling. This signal should not be tied to any physical thing, as that is inefficient to the state of an economy. There are better ways. Imaginary units are a more powerful tool, as they are not constrained by any physical limits.
You may be upset at how these IU's are currently handled, and rightfully so. The current methodology we have is very primitive. Our experts themselves (head of the Fed, treasury) readily admit this. When they take actions they "think" or "expect" it will have this or that effect. And the levers they pull are also very blunt.
When CBDCs come online, then we will start to realize a better economy. They will allow more granular control of things.
I won't argue that imaginary units of money are a powerful tool, they certainly are. So powerful in fact that there is no human on this earth who can be trusted to administer it without rampant abuse. The history of centralized planned economies speaks for itself, and I don't think further consolidation under CBDCs with more 'granular control' is going to improve its track record. The physical limits that constrain the use of commodities as money are what make it a viable as currency, it's a feature not a bug
I think that if people increasingly wanted to use cryptocurrency over dollars, the Fed would nevertheless be able to maintain the value of the dollar even as they got less common. Eventually the currency would disappear when the last dollar was traded to the Fed to pay off the last dollar-denominated bond, and I think dollars could maintain their value until that happened, even as the government started collecting taxes in other currencies.
> Is it legal for a business in the United States to refuse cash as a form of payment?
> There is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law that says otherwise.
In the future as the workforce shrinks and liabilities increase I imagine deficit spending will regularly exceed tax revenues.
Only because enough people believe that's true, and then only because there are aircraft carriers that convince people in other countries that it's in their best interest to use them.
Dollars are not worth anything.
Makes sense, but I do need to think about it.
That said, on the weekend I did listen to a podcast where at one point taxes were (indirectly) described as behaviour modification.
re: The right gov response...
In theory yes, but only if the system's purpose is to maximize the benefit to all. On the other hand, if the system's purpose is to tilt the game to favor the few then responses can take many forms, as long as they enforce the tilt. A simple graph of income inequality and wealth distribution tells us all we need to know.
I wouldn't say it's the purpose, since banks are better at extending loans than the government such that losses are minimized, but getting first dibs on newly created money, and taking a small cut of it, is an incredible privilege.
Just wait until you hear about this thing called the law and the police force...
For example, when the government introduces laws that prevent underage children from working, they do behaviour modification and they will even outright admit it and they won't even think they are wrong. Really insidious stuff, if you ask me.
The fact is, the act isn't that innocent.
Yes the govt has created a moral hazard where they can always just create more money to solve a problem, but inserting a ponzi scheme does not fix that
What do I get out of it?
If you want to live in a society were the banks and wealthy individuals can make significant income by doing literally nothing, that is fine, but the rest of us would like to live in a world where goods and services are produced at a rate similar to how they are produced today.
Young people who have worked hard their whole lives cannot afford a home to start a family. In what way does "the economy" function?
> If you want to live in a society were the banks and wealthy individuals can make significant income by doing literally nothing
You just described exactly how current society works.
Imagine if you went to a grocery store and it was completely empty. That is the situation in Haiti currently. That is a nonfunctional economy.
Functional does not mean that everyone has everything they want at the price they want.
It's like a sheep farmer thinking he is successful because he decided to kill all lambs every spring instead of letting them grow to adults. Sure, the meat tastes nice now, but he has destroyed his future for short term gains.
> Functional does not mean that everyone has everything they want at the price they want.
Nobody is demanding anything close to that, people want the basic necessities and have no way of getting them. Or should they just keep working hard and be grateful that they're not in Haiti.
The absolute best thing a young, enterprising person from a Western country can do today is to move out of that hemisphere and establish themselves in another country. That step gives a massive increase in quality of life, as well as a much better prospects for the future.
When there is deflation you do nothing. You don't even go to work. You don't even look at your bank account or the money. You don't think about it. You just wait and do nothing. It is the equivalent of taking a drug that makes you feel good. You won't find the need to actually accomplish anything.
If there is inflation, then banks actually have to do their bank related tasks to earn the money, people actually have to sit at their desks.
This is not a tiny 1% of the population. I would wager that most people reading this thread has at least one person among their friends or family who live a good life without having contributed much to the economy, or even having never contributed anything at all. Riding the wave of inflation in real estate.
Tell me again why I and others should contribute to the economy to support these people's lifestyle?
What you are talking about is something different, some sort of work police or something that forces everyone to work the same amount or something like that.
What's this statement based on?
As a thought experiment, say a load of survivors wash upon a deserted island, eventually settling into economic roles. I don't think their economy or productivity grinds to a halt because there isn't enough liquid currency. They are constrained by their access and production of real world resources.
But if the island became connected to a trading route he could trade excess fish for gold or another non perishable asset, he could store up those assets. But he would only do that if he believed that those assets had liquidity.
If you get paid $20/hr, you can think of $20 being intrinsically worth an hour of your labor until you quit or get a raise. The dollar isn't actually intrinsically valuable, but it's mostly treated as such anyways because no matter how the currency changes due to inflation or exchange rates, you're still only getting $20. On the other hand, if you get paid in crypto, you'd get paid $20 worth of that crypto. Today it may be 1 coin, tomorrow it could be 2, and in a month it could be .1 coins. In that case, how many coins you get paid in this crypto completely depends on the supply and demand on this crypto.
>the government seems to show less and less restraint in exchange for instant gratification
The good news is that. Raising interest rates is the opposite of short term gratification, which is why so many people want it to stop.
>Emergency measures are there for just that, emergencies, but it seems the bar for what qualifies for an emergency gets lower and lower.
Agreed. But you can't blame the the cardiovascular surgeon for performing a triple bypass surgery. The blame falls under the patient who is addicted to eating barrels of pork.
> If you get paid $20/hr, you can think of $20 being intrinsically worth an hour of your labor until if you quit or get a raise. The dollar isn't actually intrinsically valuable, but it's mostly treated as such anyways because no matter how the currency changes due to inflation or exchange rates, you're still only getting $20. On the other hand, if you get paid in crypto, you'd get paid $20 worth of that crypto. Today it may be 1 coin, tomorrow it could be 2, and in a month it could be .1 coins. In that case, how many coins you get paid in this crypto completely depends on the supply and demand on this crypto.
Piggybacking on this, the same example can be extended towards other currencies & assets: That $20 could've also been paid in pounds / euros / yen / gold / silver / seashells / MTG cards. The first 3 are less volatile than the rest, mainly because of the per-unit density of liquidity that can absorb the exchanges in between A & B (ex. USD-yen, yen-euro). For the currencies, they have much deeper liquidities to exchange with/against concentrated around narrower price ranges, and as such prices are not as volatile as commodities & assets. The exception to this however is if the currency in question is perceived as weak.
I'm not sure whether you're talking about raising the rates or reducing them. But the idea that reducing rates is just instant gratification is just false. The rates simply dictate how willing banks will be to loan money out. It's a tool. Countries have used this to spur foreign demand of their goods for years. Portugal Italy and Greece used to do it all the time. Once they joined the Euro and they were no longer able to inflate at will, their economies tanked.
It's better to think of money like shares. The total amount of shares outstanding doesn't really affect much... it's the relative proportions that people control and the percentage of equity that those shares represent that matters.
Inflation is not evenly distributed. Newly created money goes to the rulers first, then to their lords and vassals etc. The people who actually produce in the economy are the last to receive the new money after it has been completely diluted.
Remove that expectation and almost all of the demand disappears.
Those “other assets” that mention are obscure by definition. You can claim that “your cryptocurrency has millions of users”. Are those real people? Or are those two guys in a data center with a shellscript? Compound that with the extensive marketing, posturing, hyping and gaslighting and the “people believe in it” argument loses strength.
Besides, the main criticism has never been “people don’t trust on them”, it was “there’s no regulation”. The continued rug pulls, scams and steals should already make it clear how this is a problem. And this is by design.
I don't know if I'm one of those people, but I'd say that no currency has any intrinsic value. Land, labour and production capital have intrinsic value, but I don't even see gold as having intrinsic value; it only has value because we agreed to consider it valuable. The value of any currency comes from the economy that uses it to pay for stuff. Dollars are used to pay for a lot of stuff. Bitcoin was supposed to be used to pay for a lot of stuff, but it seems to have turned into an investment toy. Actually using it to pay for stuff is slow and expensive, and only really worth it for transactions where anonymity is important enough to make the cost worth it. And that seems to be mostly market for crime.
But please correct me if this is outdated and there's now a thriving economy of people buying all sorts of goods with Bitcoin.
In the strict sense only physical banknotes, coins, and reserves at the Fed are money. Everything else involves a counterparty and some level of trusted intermediation. If there is ever a significant amount of economic activity that is priced and settled in Bitcoin, we can be sure that most of it will be through trusted intermediaries just like every other currency.
And in a way we currently see that already for bitcoin: lots of people keep their money not in their own wallet, but in that of an exchange, so it can be more easily traded. The downside of that is that you don't control your money anymore, and there's no legal framework to protect your ownership of that money, so people have been losing a lot of money to fraudulent and incompetent exchanges. But that change also kinda defeats the original purpose of bitcoin.
The original purpose of Bitcoin was to take power away from governments who could artificially devalue your money, not to protect you from fraud or ignorance.
Along with that also came the choice - how much do you want to trust someone else with your funds?
You can go full "zero trust" and build your own Bitcoin client from scratch, rely on your node to see what transactions are included in chain, and self-custody your own funds. You can have some trust and only self-custody your funds/use a multi-sign wallet with your family so you lower your personal responsibility to not lose funds, or you can allow someone else to hold funds for you if you fully trust them. You can also make any choice in between.
Having that freedom to choose the level of trust you want to have is one of the major values crypto offers, though most people will go with the "full trust" model since it's the easiest and they don't care about decentralization enough to worry about self-custody.
This was an odd statement to make, then:
> I don't even see gold as having intrinsic value; it only has value because we agreed to consider it valuable.
> But I hope you're aware of gold's role as financial backing
Yes, of course.
For example, you completely glossed over the fact most economists agree that, for money to have value, it needs to be a good:
1. Medium of exchange
2. Unit of account
3. Store of value
To achieve this, a currency needs a certain level of stability and to be accepted by the institutions you need to do business with i.e. governments. Money & Macro has some great videos on this topic. This one on China's attempt to replace the US Dollar as the reserve currency is a good starting point: https://www.youtube.com/watch?v=49iLl-V4xos&t=653s
I don't think we disagree at all. I'm not an economist or finance expert, after all ;-)
The other thing that was driving the inflation was rich people using the PPP loans to speculate. If the goal was really just to control inflation, the fed rate isn't the only way. They could also have made the tax rate more progressive like it was in the 50s and 60s. But of course they haven't gone there in a long time.
Shorter chains. i.e. bring back the local supply that we sold overseas decades ago.
Obviously the fed can't make that change, but I was reacting to your implication that we just need to get back to where we were before Covid. I feel we were already losing altitude before Covid, the overhead airbags had already deployed.
And just to further derail the conversation, was it really Covid itself that caused the supply chain disruption? Perhaps I could be convinced that somehow Covid got us into the current mess but I guess it would still follow then that if a Covid-like pandemic could take out the global economy for (checks watch) 3 years and counting, the problem still ultimately comes down to a dependency on an obviously fragile supply chain.
Wages also have been going up, maybe not as fast as the price of some goods, but still pretty fast. The issue is that people are very quick to internalize a rise in wages (I did this! I changed jobs, got better at my current job, got promoted etc.) and externalize a rise in costs (gov spending is the reason eggs are expensive!) when really the two things are very connected.
People are pushing their representatives to tackle inflation without thinking for a second that this might mean they'll get fired or take a paycut. All the gains they've made since 2020 are personal wins, all the inflation is due to government spending.
Prior to 1971, federal reserve notes were backed by gold. Their value was generated out of thin air even then - a piece of paper with a promissory of gold is not a bar of gold.
Today the US holds thousands of tons of gold at Fort Knox and other places. Why? Why does it do this? I can assure you the 9 billion dollars worth of Dogecoin out there do not have thousands of tons of gold out there implicitly backing them.
Beyond all of this, your point that countries don't have printing presses that can generate am infinite amount of value is valid.
At it's current usage where maybe 2-3% of the global population has ever actually performed a transaction on the bitcoin network, and next to no one uses it as their primary network for transacting, it used the equivalent energy of the entire country of Brazil, which has half the U.S. population (though less than half the energy usage)
To be clear, the energy usage is a function of price more directly than it is of actual usage, it just so happens that the price would continue to increase if people actually used it for real-world transactions.
I also don't think there's anything inherently immoral about energy usage. Bitcoin can theoretically help us access remote natural sources of energy and convert it to wealth instantaneously with just an internet connection when otherwise it would be infeasible to transport
Of course, there are ways the proof of work model is better too. There's tradeoffs both ways. But nothing offered by cryptocurrency makes up for the enormous energy usage of proof of work at scale, so the other consensus mechanisms are the only real, sustainable models for world-wide adoption
With cryptocurrencies there is hardly anyone that uses it for payments or loans. People mostly speculate with it. If people suddenly think it is worth much less then it will have a sudden change in its price level. Worst case, it can go to zero in a day.
Creating money without loans is a bad idea because it makes it much easier to have high inflation as there is no mechanism to take the money back.
You and a few others seem to be the only posters with an proper understanding of the topic. But I could be wrong - you may be as dumb as me.
Could you point me in the direction of some resources that can help me be literate in this topic? I have already read the BoE paper that gets passed around here.
Here are some interesting rabbit holes I've found to be useful.
1. Central Banking 101 [1]. A terrific no non-sense book. The author is an ex-central banker.
2. Same author's blog[2] and twitter[3] handle is full of good insights and details.
3. Lyn Alden[4] writes well but know that she is biased towards Bitcoin which sort of clouds her writings once in a while.
[1] https://www.goodreads.com/book/show/56863052-central-banking...
If you have this insight, you're already ahead of the game.
The background of orthodox macroeconomics, and the rationale for raising rates in response to inflation, comes from Keynes: https://en.wikipedia.org/wiki/The_General_Theory_of_Employme...
That’s not a concern, that’s the system working as designed.
I guess the equivalent argument works for a house too but transaction costs are high (and you need a place to live in the interim). Someone could have sold their house right as tightening began and bought the house back once rates stabilized.
I mean, I know people did but it’s hard to figure out what they were thinking.
What SVB should have done was raise additional capital much earlier. Rates didn’t just start rising in the last year. Even if rates did start falling again they could do a dividend or stock buyback. We expect banks to be conservative.
What does this mean? I'm not familiar.
This is not a loan any sane person would ever write out of his own pocket. It is available because of a web of government programs and incentives, above all Fannie and Freddie.
Is that incorrect?
It’s great for the borrower, which means it’s bad for the lender. There’s some spread of interest over treasuries that might make it worth it for them anyway—like if it was the 30 year bond rate plus 10% or something, but the spreads are narrow.
That’s why I said I don’t think it would exist accept for extensive government intervention, because it’s such a good deal.
As for why the government decided to get so involved, it goes way back to before my time. Now they’d have a hard time extracting themselves without making a lot of homeowners very mad.
This is significant because the losses are born by the taxpayer which violates the constitutional mandate that all spending is approved by the house. The Fed is sidestepping this by booking the operating losses in an accrual account to be booked against future interest earned.
The Fed is currently paying banks 4.9% on their reserves (this rate was always 0% before 2008). and they pay you close to 0% on your checking account. When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point.
Get a better bank then. There's half a dozen that's paying 4.5% or more: https://www.investopedia.com/best-high-yield-savings-account...
> When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point.
Yet the banks listed above don't seem to have much trouble existing.
Matt Levine summarized the Fed's points well [1]. They're sensible reasons, though I suspect they could be solved with the right policy treatment. (For example, limiting depositors to natural persons and paying a lower interest rate on reserves.)
[1] https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
I'm curious how banks like Amex and such provide interest comparable to the Fed rate. Less profit, or higher risk?
The Fed took over these bonds for 100% as a measure of stabilization. There is no issue here because bonds will be repaid for 100% most probably. Basically the Fed is taking over temporary losses of the banks. When the bonds are repaid the negative equity will vanish.
Ah yes. The obscure third of the Fed's dual-mandate.
At a 7% rate of inflation and a 2% average interest rate, it amounts to over a trillion dollars a year discharged in terms of real debt owed to the public.
The deficit always grows in nominal terms because of inflation. Scaled properly [1], the deficit isn't great, but it's improving and far from unprecedented.
https://jabberwocking.com/yes-of-course-big-deficits-are-due...
I am fairly sure there's only one way the Fed-created excess since the GFC will end: with another tax payer bailout.
This statement isn't exactly true because the cost to finance the purchases of Treasuries during quantitative easing was not 4.6% when the purchases were made.
They would be losing money only if they were now selling those Treasuries at market rate, but they aren't doing that - they're just letting them roll off the balance sheet as they reach maturity.
I thought most central bank assets were short-term repos, or is this different for the Fed? Are these outright owned assets from QE?
They are losing money regardless of what they do with their bond assets - they would simply lose even more money if they tried to sell their bond assets below purchase price/book value.
Also these loses accumulate and until the are offset by profits no more money can be given to the government.
That combined with high interest payments on government debt will make the debt ceiling vote a lot harder.
"..to finance", but finance from where!? It's not as if Fed is a household where it has to get money from somewhere at 4.6% interest and invest it. What am I missing here!?
So they have decided to finance their liabilities at 4.6% while only receiving 2% on the assets they hold.
The 2.6% difference is funded by creating new money, which the Fed believes will reduce inflation.
You couldn't make it up.
I could be wrong, but I'd wager if we had a handful of economists in the comments section they'd generally agree, but would have a much better explanation than me.
and then you say:
> America pushed too hard on bad policies, poor public sector services, unaffordable health care, and lower education standards... there's no coming back from that.
Yes, because BRICS doesn't have any of these issues...
USD will be the reserve currency because even if United States has its own problems, it is still better than the rest of the world.
R for Russian Invaders
I for Indian Corruption
C for China CCP...?
S for South Africa Minor, since it has the smallest GDP in this list. Arguably probably the best one of the 5 to live in.
https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
It's not as if any of those previous financial crises are comparable to what we're going through now though. These are very different times where we're coming out of unprecedented events. Maybe the Fed really is doing poorly, but I can't exactly remember a time in my life when everybody loved the Fed and what they were doing either. Is there some kind of golden age when everything was being handled correctly and we didn't have problems that we should be trying to go back to?
In the early 20th century we fought two World Wars. The only thing unprecedented is the scale of the Fed’s operations these days.
If there is any institution that should be under constant and heavy scrutiny at all times, it should be the Fed.
First, I want to say that I agree with you 100% here. I even think maybe the accountability mechanisms might not be designed correctly, although I don't know enough to be sure.
> half the people actually defend them
In their defence though (and notwithstanding what I said above), they're all incredibly intelligent and competent professionals who happen to be at the helm of the ship in uncertain times. :shrug:
It'd be interesting to understand how and why. That's not true of all institutions without oversight.
By massively expanding the Feds balance sheet with mortgage bonds the Federal Reserve massively increased the value of housing and lowered mortgage payments for existing homeowners. Prior to 2008 the Fed only bought US government securities so any market distortions it caused the benefit accrued to the Government.
As the Fed is now having to pay interest on reserves and higher inflation it is making the cost of those decisions more apparent.
Now, if Congress had said in 2008 that they wanted to write checks for a a couple of trillion dollars per year to homeowners and pay for it with a 10% tax (inflation) that would mostly benefit the old and wealthy and hit the young and poor the hardest they would be within their constitutional power to do so. It is unlikely that Congress would ever do so but the Federal Reserve made that decision. That makes me uncomfortable.
Do you not buy stuff?