The one where several trillions of deficit spending were fully financed by the Fed.
>Help me understand why a large holder of debt would want it to pay less?
Because the Fed is not a commercial organization and it's heavily influenced by politics. I will not be surprised, if in the following years financing of fiscal deficits by the Fed will be painted as a way "to save the economy" and to "fight unemployment".
>If we have a hard landing, which is the historically-suggested outcome, we get lower rates and a recession. Not inflation.
Yes, in the short term we will see deflation. But I predict that the hard lending will be painful enough for the Fed and the government to start stimulation of the economy fueled by bailouts and massive deficit spending. And this in turn will cause resurgence of inflation down the road.
>No, because new money isn't being created. Existing money is not being removed. That's different.
So taking a paper which costs $600 on the mark-to-market basis and giving in exchange $1000 is not a form of QE? Yes, those $1000 is technically a loan, but if you delay its repayment indefinitely, it becomes equivalent to creation of base money.
>How does the discount rate cause deposits to flee?
It's not the discount rate per se, but the Fed rate. If you can get 5.5% in a MMF (i.e. in RRP and short-term bills), why the hell would you keep your money in a bank's deposit for 1-2% together with risks associated with potential bank failure?
To attract deposits banks would have to provide competitive deposit rates, after that they would have to find someone trustworthy enough to give a loan at 10-15% rate. So the banks get squeezed from 3 sides:
- Either raise deposit rates or get money fleeing into MMFs.
- Not enough business is able to work with 10-15% loans in the face of worsening economic situation (especially after the recent near 0% environment).
- You still have to pay 4-5% on BTFP funds, which you had to take to offset fleeing deposits.