8 ms·

What matters isn't the size of the Fed's balance sheet or what it contains. The Fed's balance sheet is "invisible" to the private-sector economy. This expansi

by Suncho 6y ago

What matters isn't the size of the Fed's balance sheet or what it contains. The Fed's balance sheet is "invisible" to the private-sector economy. This expansion of their balance sheet is simply a reflection of the stimulus we're doing. When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar. The important thing to keep in mind is that we are intentionally shutting down parts of the economy. But some of those parts include mechanisms (jobs) that we normally rely on to supply spending money to consumers and businesses. Due to the partial shutdown, the economy's productive capacity has taken a hit. But even so, our economy still has the capacity to provide a decent standard of living for everyone. We don't want to compound the crisis by failing to ensure that consumers have sufficient spending power to activate the remaining capacity. It would be scary if the Fed's balance sheet weren't expanding like this right now. http://www.greshm.org/blog/printing-money-cures-the-covid-19-crash/ http://www.greshm.org/blog/printing-money-cures-the-covid-19... http://bit.ly/intro-to-cmt http://bit.ly/intro-to-cmt

Qasaur 6y ago
>When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar. This is simply not true. The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed) and is effectively injecting money into the economy. This is a bailout as the Fed is making a liquid market (that otherwise would not exist) for assets, saving the balance sheets of firms. Future generations pay this back not through taxes but through inflation. Whether or not the U.S. dollar will collapse or not is another topic, but what can be said is that it is not sustainable to continue bailing out irresponsible businesses like banks and others when they do not exercise good business practices like prudence, not being overleveraged, or having a buffer in case of lost revenue. The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.
- DiogenesKynikos 6y ago
  The most obvious illustration of this is the jump in junk-bond ETFs after the Fed began buying up junk bonds.[1] The Fed is supporting the price of dubious, high-yield corporate debt. Whether or not that's good for the economy is a separate question, but it's not as if the Fed is just replacing assets with cash at 1:1 value. It is encouraging lending to risky enterprises, by itself taking on the risk. 1. https://www.ft.com/content/19e47570-ba23-4929-988e-9b5f468b20d5 https://www.ft.com/content/19e47570-ba23-4929-988e-9b5f468b2...
  - RobertoG 6y ago
    That could be true, but one thing is that the way (or some of the ways) the money is added to the economy is dubious and another that nothing should be done.
- mrfredward 6y ago
  >Future generations pay this back not through taxes but through inflation. I don't think that's a fair characterization. Inflation helps people with student loans (salary grows but debt stays the same) and hurts people with retirement accounts full of bonds. Broadly speaking, inflation helps the young (by closing the wealth gap between haves and have-nots).
  - claudeganon 6y ago
    How’d that theory work out with asset price inflation in the housing market, post-2008?
  - alexmingoia 6y ago
    Not every young person is in debt. Inflation helps those in debt or holding debt denominated assets, young and old. Inflation hurts savers. If you’re young without debt, inflation devalues your savings.
    - throw1234651234 6y ago
nopinsight 6y ago
The velocity of money has gone way down so the current liquidity injection makes great sense. A major question is whether and how the Fed will absorb the excess liquidity back later to prevent too much real inflation, beyond what is measured by consumer price index. (Some inflation is expected as the economy is less productive because of Covid-19 and the stimulus is used to partially offset its impact.)
neffy 6y ago
The Federal Reserve's balance sheet, and its actions matter very much. What is essentially in the process of happening is a massive disconnect between the "operating system" of the economy - the financial system, which is in the process of crashing (bear with it, it's a very slow system it takes a while), and the economy - the computer - which is as you say, essentially fine, but no longer working because... operating system. As far as the balance sheet itself is concerned, it's important to look at all of it - with any magician it's critical to watch both hands - and in this case, the right hand is doing this to the M2 money supply, i.e. creating $2 trillion. https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2 Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly. That's this month. If that has to be done every month for the rest of the year...
- thomashobohm 6y ago
  That is NOT what M2 means! Have you discounted the value of the ETFs and bonds the Fed has purchased? They're not suddenly valueless.
  - neffy 6y ago
    M2 is the total sum of all liability deposit money in the US banking system, and liability money has dominated in all monetary transactions since at least 1890. (Dunbar.)
    - thomashobohm 6y ago
      This isn't your term paper-you don't need to cite your sources. But, if you're going to, at least try to do it correctly (the parentheses go inside the sentence, the period goes outside the parentheses). Regardless, it's this line: "Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly" that I was referring to. That calculation does not reflect what the M2 number actually means. You already have a definition of M2, so I'm sure you can figure out where you went wrong yourself if you just stare at that for a little bit longer.
jkhdigital 6y ago
This would make sense if the Fed's newly-created money went directly to households that need it due to economic shutdowns. But it doesn't, it mostly goes to financial institutions. You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants. Also, your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith, not some falsifiable statement supported by facts. We don't know if that is true or not.
- Suncho 6y ago
  > You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants. They're related. There's both fiscal stimulus and monetary stimulus going on here. The monetary stimulus only makes its way to consumers indirectly. On the fiscal side, as you say, Treasury can spend money on whatever they want. And when they do, they transform some of the financial sector's money into assets (treasuries). If the Fed wants to maintain its accommodative monetary policy, they're going to want to re-monetize those assets. > your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith "decent standard of living" was not crucial to my point. There's some part of our economy's productive capacity that we have consciously decided not to shut down because we've deemed "essential" to consumers. My point is that it would be a mistake for us not to provide consumers with the means (money) to access that capacity.
- thomashobohm 6y ago
  Uh, actually, the notion that the economy has the capacity to provide enough for everyone is a falsifiable statement supported by facts. You can analyze the total amount of resources and the amount of work required to produce them, and figure out how they could be distributed differently. We've known for a long time that, in the US at least, there is enough food, shelter, and healthcare for everyone.
_curious_ 6y ago
"Given that the stimulus is appropriate for the economy, this is all fine." Very casually assumptive, but ok, let's go with it... "It's not anything that future generations have to "pay back. And it's not going to cause a collapse of the dollar." If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??
- RobertoG 6y ago
  The GP is saying that the future generations have not to pay back and that the stimulus is necessary now and it will not be inflationary. It's not saying that it's not possible to spend too much and create undesired inflation. But note that, in the same way it's possible to spend too much, it's possible to spend too little. For some reason there are people who think that is impossible.
- tumetab1 6y ago
  Example of the catch of the FED buying financial assets, it increases their value: Before 1 Google stock was worth 1 Tesla car. After 1 Google stock is worth 2 Tesla cars. The purchasing power of those who hold financial assets is increasing while for those who don't own financial assets stays the same.
- jchook 6y ago
  The Keynesian theory of economics doesn’t exactly have a spotless track record for modeling and predicting outcomes of non-routine interference in the economy.
  - CaptArmchair 6y ago
    As opposed to other theories such as...?
    - jchook 6y ago
      Austrian economics? Scientific method?
api 6y ago
> It's not anything that future generations have to "pay back." I really wish the term "debt" were not used in these contexts. This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt. In this context the term is being used to refer to an accounting construct that looks like debt, but the meaning of this particular accounting entry is completely different. Using this term only creates confusion among the public and even politicians who don't understand the complex and esoteric details of modern economics.
- samsonradu 6y ago
  > This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt. It depends. If you are Lebanon and borrowing USD it’s pretty much like a corporate debt and future generations are paying it back. However, if you can print the world’s reserve currency while borrowing in it at the same time then there are different terms.
  - nybble41 6y ago
    In the end it's still a debt. The nominal value in USD may not be all that important, since the Fed can manipulate it more or less at will, but you're still borrowing productivity from the future—by consuming capital—and that debt will be repaid one way or another.
    - api 6y ago
      The fallacy here is assuming that capital is finite over all time. It's not. Capital is created. Of course not all economic activity creates capital at the same rate, and I do definitely agree that the type of economic activity you get during and after a recession with massive QE is likely of a lower quality than what you'd get otherwise. But it may still be that more capital (wealth) is created this way then if you allow the economy to completely shut down. I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies. Dead or dying companies do die under such circumstances, but so do really innovative ventures that have not yet reached comfortable sustainable profitability. A mega-recession right now might take out a lot of junk, but we'd also risk losing stuff like SpaceX, Tesla, Boom Supersonic, and hundreds of small innovative startups. We might also lose the whole renewable energy revolution and any work being done on next-gen nuclear power like small modular reactors. In short we'd lose both the bottom and the top end of the innovation curve, keeping just the boring middle.
tempsy 6y ago
This is a pretty naive take. You are suggesting that all these trillions are somehow ending up in the hands of people when the primary effect has been to prop up asset prices e.g. the stock, mortgage, and corporate bond markets. The second order consequences of a massive balance sheet will be felt not in the immediate future but at some point down the line when the Fed attempts to shrink the balance sheet. We have a very recent example of the Fed trying to do exactly that in late 2018, and the market immediately crashed on rate increases and assets rolling off at maturity.
- enraged_camel 6y ago
  Another way of putting it is that it took the Fed 10 years to even think about trying to extricate themselves, and they realized they couldn't. Now they have gotten their hands much deeper in.
  - tempsy 6y ago
    Yes. The next recession will just be worse since Fed cannot lower rates any more and if they signal any sign of pulling back on propping up corporate bonds or mortgages those markets will just crash.
    - legolas2412 6y ago
      One thing i dont understand is why is federal reserve so involved with stock markets, first propping them up and then panicking if it crashes. The federal reserve should only be concerned about the economy right?
      - tempsy 6y ago
        The wealth owners care about the stock market more than the “economy”
      - j15t 6y ago
        The Fed is not focused on the stock market. When they improve the status of the economy through monetary policy, they indirectly improve the value of publically listed companies. This makes sense, because companies are the central entities in the economy. I don't know how the Fed could improve the state of the economy without affecting the prices of shares.

by Suncho 6y ago

Qasaur 6y ago

>When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar. This is simply not true. The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed) and is effectively injecting money into the economy. This is a bailout as the Fed is making a liquid market (that otherwise would not exist) for assets, saving the balance sheets of firms. Future generations pay this back not through taxes but through inflation. Whether or not the U.S. dollar will collapse or not is another topic, but what can be said is that it is not sustainable to continue bailing out irresponsible businesses like banks and others when they do not exercise good business practices like prudence, not being overleveraged, or having a buffer in case of lost revenue. The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.

DiogenesKynikos 6y ago
The most obvious illustration of this is the jump in junk-bond ETFs after the Fed began buying up junk bonds.[1] The Fed is supporting the price of dubious, high-yield corporate debt. Whether or not that's good for the economy is a separate question, but it's not as if the Fed is just replacing assets with cash at 1:1 value. It is encouraging lending to risky enterprises, by itself taking on the risk. 1. https://www.ft.com/content/19e47570-ba23-4929-988e-9b5f468b20d5 https://www.ft.com/content/19e47570-ba23-4929-988e-9b5f468b2...
- RobertoG 6y ago
  That could be true, but one thing is that the way (or some of the ways) the money is added to the economy is dubious and another that nothing should be done.
mrfredward 6y ago
>Future generations pay this back not through taxes but through inflation. I don't think that's a fair characterization. Inflation helps people with student loans (salary grows but debt stays the same) and hurts people with retirement accounts full of bonds. Broadly speaking, inflation helps the young (by closing the wealth gap between haves and have-nots).
- claudeganon 6y ago
  How’d that theory work out with asset price inflation in the housing market, post-2008?
- alexmingoia 6y ago
  Not every young person is in debt. Inflation helps those in debt or holding debt denominated assets, young and old. Inflation hurts savers. If you’re young without debt, inflation devalues your savings.
  - throw1234651234 6y ago

nopinsight 6y ago

The velocity of money has gone way down so the current liquidity injection makes great sense. A major question is whether and how the Fed will absorb the excess liquidity back later to prevent too much real inflation, beyond what is measured by consumer price index. (Some inflation is expected as the economy is less productive because of Covid-19 and the stimulus is used to partially offset its impact.)

neffy 6y ago

The Federal Reserve's balance sheet, and its actions matter very much. What is essentially in the process of happening is a massive disconnect between the "operating system" of the economy - the financial system, which is in the process of crashing (bear with it, it's a very slow system it takes a while), and the economy - the computer - which is as you say, essentially fine, but no longer working because... operating system. As far as the balance sheet itself is concerned, it's important to look at all of it - with any magician it's critical to watch both hands - and in this case, the right hand is doing this to the M2 money supply, i.e. creating $2 trillion. https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2 Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly. That's this month. If that has to be done every month for the rest of the year...

thomashobohm 6y ago
That is NOT what M2 means! Have you discounted the value of the ETFs and bonds the Fed has purchased? They're not suddenly valueless.
- neffy 6y ago
  M2 is the total sum of all liability deposit money in the US banking system, and liability money has dominated in all monetary transactions since at least 1890. (Dunbar.)
  - thomashobohm 6y ago
    This isn't your term paper-you don't need to cite your sources. But, if you're going to, at least try to do it correctly (the parentheses go inside the sentence, the period goes outside the parentheses). Regardless, it's this line: "Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly" that I was referring to. That calculation does not reflect what the M2 number actually means. You already have a definition of M2, so I'm sure you can figure out where you went wrong yourself if you just stare at that for a little bit longer.

jkhdigital 6y ago

This would make sense if the Fed's newly-created money went directly to households that need it due to economic shutdowns. But it doesn't, it mostly goes to financial institutions. You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants. Also, your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith, not some falsifiable statement supported by facts. We don't know if that is true or not.

Suncho 6y ago
> You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants. They're related. There's both fiscal stimulus and monetary stimulus going on here. The monetary stimulus only makes its way to consumers indirectly. On the fiscal side, as you say, Treasury can spend money on whatever they want. And when they do, they transform some of the financial sector's money into assets (treasuries). If the Fed wants to maintain its accommodative monetary policy, they're going to want to re-monetize those assets. > your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith "decent standard of living" was not crucial to my point. There's some part of our economy's productive capacity that we have consciously decided not to shut down because we've deemed "essential" to consumers. My point is that it would be a mistake for us not to provide consumers with the means (money) to access that capacity.
thomashobohm 6y ago
Uh, actually, the notion that the economy has the capacity to provide enough for everyone is a falsifiable statement supported by facts. You can analyze the total amount of resources and the amount of work required to produce them, and figure out how they could be distributed differently. We've known for a long time that, in the US at least, there is enough food, shelter, and healthcare for everyone.

_curious_ 6y ago

"Given that the stimulus is appropriate for the economy, this is all fine." Very casually assumptive, but ok, let's go with it... "It's not anything that future generations have to "pay back. And it's not going to cause a collapse of the dollar." If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??

RobertoG 6y ago
The GP is saying that the future generations have not to pay back and that the stimulus is necessary now and it will not be inflationary. It's not saying that it's not possible to spend too much and create undesired inflation. But note that, in the same way it's possible to spend too much, it's possible to spend too little. For some reason there are people who think that is impossible.
tumetab1 6y ago
Example of the catch of the FED buying financial assets, it increases their value: Before 1 Google stock was worth 1 Tesla car. After 1 Google stock is worth 2 Tesla cars. The purchasing power of those who hold financial assets is increasing while for those who don't own financial assets stays the same.
jchook 6y ago
The Keynesian theory of economics doesn’t exactly have a spotless track record for modeling and predicting outcomes of non-routine interference in the economy.
- CaptArmchair 6y ago
  As opposed to other theories such as...?
  - jchook 6y ago
    Austrian economics? Scientific method?

api 6y ago

> It's not anything that future generations have to "pay back." I really wish the term "debt" were not used in these contexts. This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt. In this context the term is being used to refer to an accounting construct that looks like debt, but the meaning of this particular accounting entry is completely different. Using this term only creates confusion among the public and even politicians who don't understand the complex and esoteric details of modern economics.

samsonradu 6y ago
> This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt. It depends. If you are Lebanon and borrowing USD it’s pretty much like a corporate debt and future generations are paying it back. However, if you can print the world’s reserve currency while borrowing in it at the same time then there are different terms.
- nybble41 6y ago
  In the end it's still a debt. The nominal value in USD may not be all that important, since the Fed can manipulate it more or less at will, but you're still borrowing productivity from the future—by consuming capital—and that debt will be repaid one way or another.
  - api 6y ago
    The fallacy here is assuming that capital is finite over all time. It's not. Capital is created. Of course not all economic activity creates capital at the same rate, and I do definitely agree that the type of economic activity you get during and after a recession with massive QE is likely of a lower quality than what you'd get otherwise. But it may still be that more capital (wealth) is created this way then if you allow the economy to completely shut down. I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies. Dead or dying companies do die under such circumstances, but so do really innovative ventures that have not yet reached comfortable sustainable profitability. A mega-recession right now might take out a lot of junk, but we'd also risk losing stuff like SpaceX, Tesla, Boom Supersonic, and hundreds of small innovative startups. We might also lose the whole renewable energy revolution and any work being done on next-gen nuclear power like small modular reactors. In short we'd lose both the bottom and the top end of the innovation curve, keeping just the boring middle.

tempsy 6y ago

This is a pretty naive take. You are suggesting that all these trillions are somehow ending up in the hands of people when the primary effect has been to prop up asset prices e.g. the stock, mortgage, and corporate bond markets. The second order consequences of a massive balance sheet will be felt not in the immediate future but at some point down the line when the Fed attempts to shrink the balance sheet. We have a very recent example of the Fed trying to do exactly that in late 2018, and the market immediately crashed on rate increases and assets rolling off at maturity.

enraged_camel 6y ago
Another way of putting it is that it took the Fed 10 years to even think about trying to extricate themselves, and they realized they couldn't. Now they have gotten their hands much deeper in.
- tempsy 6y ago
  Yes. The next recession will just be worse since Fed cannot lower rates any more and if they signal any sign of pulling back on propping up corporate bonds or mortgages those markets will just crash.
  - legolas2412 6y ago
    One thing i dont understand is why is federal reserve so involved with stock markets, first propping them up and then panicking if it crashes. The federal reserve should only be concerned about the economy right?
    - tempsy 6y ago
      The wealth owners care about the stock market more than the “economy”
    - j15t 6y ago
      The Fed is not focused on the stock market. When they improve the status of the economy through monetary policy, they indirectly improve the value of publically listed companies. This makes sense, because companies are the central entities in the economy. I don't know how the Fed could improve the state of the economy without affecting the prices of shares.