All I know is that the "real value" of my low risk assets (bonds, CDs, savings) is going down via "inflation" in my retirement years. I view it as the value of money going down rapidly.
Being retired makes me too late for maintaining my retirement savings in Equities or Land when my planning horizon is about a decade, at the long end. The "real wealth" of a lifetime of savings that is being stolen by inflations appears to be transfered to the government and the connected elites.
What happens when a reserve currency like the $ goes inflationary unstable? In Brazil in the 60's when the money was crashing in value and planning for future projects, businesses, budgets or future estimation became impossible, in the cruzeiro. However, we had dollars to plan a cement plant, when we had no idea of the cruzerio cost of a piece of rebar just a month in the future.
How will the world plan future facilities or investments when the dollar becomes becomes a non-viable store of value? Will we all become like the Brazilian poor who would buy rebar or scrap steel to maintain some real value in the curzerios they earned.
Why is it too late to invest in equities? Why not just roll X% (whatever you're comfortable with and can afford to do) into equities funds like the S&P 500?
More concretely, think about why you're not comfortable with doing that. It's probably because you have the sense that equities are "unsafe" while bonds and CDs and your savings will be backstopped in case of a loss.
But... I'd argue that the current monetary regime has made pretty clear that 1) they're not going to let stocks fall indefinitely and 2) they're not going to protect the value of traditionally "safe" assets.
That is, what's safe and what's unsafe have, in practice, almost reversed themselves.
Sorry, Arnold. The transition from the pre-1980 to today's financial intermediation system has been quite difficult to understand for those that still rely on the old analytical approach based on commercial banking and its special relationship with the central bank. A new approach has yet to emerge but it must separate the modern systems of payments from financial intermediation and recognize that today central banks borrow from "their" lower-level intermediaries (not last but often first) just to lend their government or invest in a few types of financial assets issued by some corporations. Given the huge size of some central banks, starting with the Fed and the ECB, they can play games selling and buying government bonds and those financial assets but their impact on their prices and yields are not as important as old economists like you want to believe (the size of most relevant markets is too large for them "to control" prices and yields). To understand today prices and yields you have to study carefully what has happened in the past 40 years, including how expectations have often been frustrated or exceeded. BTW, remember that to understand liquidity management of all asset holders and issuers we need information that we don't have.
Agree with most of this, but they (the Fed) wouldn't be doing things if they didn't have an impact. Arnold is right on about the Rube Goldbergesque nature of everything at this point.
A good first step would probably be to go through and actually catalogue and analyze Fed actions. How do they work (whether or not each facility was designed for its current purpose, as Taylor asks)? How sustainable are they?
As to the basic question "If the Fed is borrowing $1.5 trillion more in September than it did in March, why don’t interest rates go way up?"
1. I read Taylor saying "from March... to September" so really what happened is the Fed borrowed a cumulative $1.4T or about $233B/month. Which is still a lot, but not quite so outlandish in the face of a $20T+ economy.
2. Further, I'm sure it's a coincidence that the Federal deficit for 2021 ($2.77T) would comes out to a monthly increase in the deficit of... $230.8B/month.
The USG pours an ocean's worth of water into the ocean. The Fed drains an ocean's worth of water out of the ocean into a vast secondary reservoir. The question is whether the Fed can indefinitely absorb maintain that reservoir. In the past, and at points in the future, the Fed will also have to act from time to time to open the reservoir (in a controlled fashion) and release water when the sea level falls.
Sorry, MikeDC. In my previous comment, I didn't address Tim Taylor's review of the referred Fed paper. It'd take too much time to analyze the paper and my first impression was that the authors were trying to apply the old approach to explain changes in the size and composition of a broad aggregate as instruments to adjusting the Fed's target rate. Changes in this rate may have some effects on other rates but most likely they are minor and temporary. Borrowers have issued too many types of assets and we don't know their degree of substitution in investors' portfolios.
That sort of policy making amounts to attempt to control the price index of a basket of many different goods by manipulating the price of just one good. In the 1930s, several countries established X-boards to regulate the price of X but never to regulate the price of a basket of many goods.
It's just my dumb opinion, but I don't think the policy-making apparatus is anything close to that sophisticated. They aren't targeting a particular mix of assets, but rather saying, something like,
"Oh... if we don't buy these guys money, they aren't going to buy the $230B/mo of bonds the Treasury is going to put out there."
They see that, and they respond by creating a facility to do it.
Savings multiplier seems likely to be mostly true.
Yet the interest rates don't go up because the wave of cash money did not cause most consumer good prices to go up, because the wealth created was mostly added to the financial accounts of folks like Gates & Buffett have long ago bought all the consumables they want. Almost no additional demand by the wealthy for most Main Street goods, nor services. There's no shortage of consumer goods - and only with a shortage, at that price, does the price go up.
In the 60s and 70s, the huge wave of boomers becoming middle class resulted in constant demand push and price increases, along with higher interest rates and lots of projects with good ROIs. Not nearly so many good projects today, unless it's a mega project approved by and supported by the gov't. Like Elon Musk projects.
The cash goes into financial assets & crypto ... and houses (in good areas). And, if there are gov't influenced supply chain problems and reduced energy production (with higher prices), lots of general prices increase just like inflation. It is inflation - but still less than expected by the gov't spending.
“Congress authorized trillions in new government spending during the pandemic. This creates paper wealth without producing anything.” No comprendo. The government spent more, but the extra money was obtained largely from the public by borrowing from private parties. So the money was not spent as it would have been done by these private parties--instead, it was spent by the government. But that does not “create paper wealth.”
Now if, thanks to over-expansive monetary policy, government spending had been financed not by borrowing but by money-creation, *that* would have created paper wealth. Then we could tell an Austrian story, about how prices were slow to rise and so (certain) people temporarily *felt wealthier*, and wanted to save more than usual. The cause would be--not government spending, but—excessive money-creation.
If the government borrows a dollar from you and sends a one-dollar check to me, both of us think we have a dollar. You think you have a $1 IOU from the government, and I think I have my $1 check. Wealth goes up by $1
So it is government give-aways, not government spending in general, that create this *false wealth* effect. And Ricardian Equivalence is completely wrong: in evaluating their economic well-being, people ignore future taxes.
"The government spent more, but the extra money was obtained largely from the public by borrowing from private parties."
Was it? One interpretation of (some of) the Fed's behavior is that it's creating a plausible fiction of "borrowing from private parties" but it's really just money creation.
Step by step:
1. Private Parties are holding cash and other assets. Private party looks at the government's offer of a bond for cash and says, "Nope. I'm holding on to my cash."
2. The Fed steps in and says, "Hey Private, I've got a deal for you. I'll give you cash if you give me some of your bonds you're holding on to right now. Then, you can go out and buy those new issue bonds from Government." (This is the Repo action).
3. Private says, "Hey man, I like the way you think. I might only make a penny on this deal, but a Penny is still a penny. But... say, what do I do with all these new issue bonds? I still think I'd rather have cash. As you may know, I actually make a little bit of money by loaning out my excess cash to you".
4. Fed says, "Never fear Bro, I'll take the new issues off your hands as well, and give you that much more cash. Which you can, of course, earn more interest on by letting me hold onto it for you.
This certainly seems like money creation, simply with a mechanism to "wash" it through private parties and then (maybe) control (some of) the second order effects.
I too am skeptical about anyone truly understanding fully the prestidigitations of Fed policy. I suspect it's much more psychological than anything else. On the other hand, we know that people make financial decisions based on their perceptions of their wealth, including not only asset prices but prospects for their future income and the cost of future expenses. That calculation, too, is more of a feeling than a calculation.
All I know is that the "real value" of my low risk assets (bonds, CDs, savings) is going down via "inflation" in my retirement years. I view it as the value of money going down rapidly.
Being retired makes me too late for maintaining my retirement savings in Equities or Land when my planning horizon is about a decade, at the long end. The "real wealth" of a lifetime of savings that is being stolen by inflations appears to be transfered to the government and the connected elites.
What happens when a reserve currency like the $ goes inflationary unstable? In Brazil in the 60's when the money was crashing in value and planning for future projects, businesses, budgets or future estimation became impossible, in the cruzeiro. However, we had dollars to plan a cement plant, when we had no idea of the cruzerio cost of a piece of rebar just a month in the future.
How will the world plan future facilities or investments when the dollar becomes becomes a non-viable store of value? Will we all become like the Brazilian poor who would buy rebar or scrap steel to maintain some real value in the curzerios they earned.
Why is it too late to invest in equities? Why not just roll X% (whatever you're comfortable with and can afford to do) into equities funds like the S&P 500?
More concretely, think about why you're not comfortable with doing that. It's probably because you have the sense that equities are "unsafe" while bonds and CDs and your savings will be backstopped in case of a loss.
But... I'd argue that the current monetary regime has made pretty clear that 1) they're not going to let stocks fall indefinitely and 2) they're not going to protect the value of traditionally "safe" assets.
That is, what's safe and what's unsafe have, in practice, almost reversed themselves.
Sorry, Arnold. The transition from the pre-1980 to today's financial intermediation system has been quite difficult to understand for those that still rely on the old analytical approach based on commercial banking and its special relationship with the central bank. A new approach has yet to emerge but it must separate the modern systems of payments from financial intermediation and recognize that today central banks borrow from "their" lower-level intermediaries (not last but often first) just to lend their government or invest in a few types of financial assets issued by some corporations. Given the huge size of some central banks, starting with the Fed and the ECB, they can play games selling and buying government bonds and those financial assets but their impact on their prices and yields are not as important as old economists like you want to believe (the size of most relevant markets is too large for them "to control" prices and yields). To understand today prices and yields you have to study carefully what has happened in the past 40 years, including how expectations have often been frustrated or exceeded. BTW, remember that to understand liquidity management of all asset holders and issuers we need information that we don't have.
Agree with most of this, but they (the Fed) wouldn't be doing things if they didn't have an impact. Arnold is right on about the Rube Goldbergesque nature of everything at this point.
A good first step would probably be to go through and actually catalogue and analyze Fed actions. How do they work (whether or not each facility was designed for its current purpose, as Taylor asks)? How sustainable are they?
As to the basic question "If the Fed is borrowing $1.5 trillion more in September than it did in March, why don’t interest rates go way up?"
1. I read Taylor saying "from March... to September" so really what happened is the Fed borrowed a cumulative $1.4T or about $233B/month. Which is still a lot, but not quite so outlandish in the face of a $20T+ economy.
2. Further, I'm sure it's a coincidence that the Federal deficit for 2021 ($2.77T) would comes out to a monthly increase in the deficit of... $230.8B/month.
The USG pours an ocean's worth of water into the ocean. The Fed drains an ocean's worth of water out of the ocean into a vast secondary reservoir. The question is whether the Fed can indefinitely absorb maintain that reservoir. In the past, and at points in the future, the Fed will also have to act from time to time to open the reservoir (in a controlled fashion) and release water when the sea level falls.
Sorry, MikeDC. In my previous comment, I didn't address Tim Taylor's review of the referred Fed paper. It'd take too much time to analyze the paper and my first impression was that the authors were trying to apply the old approach to explain changes in the size and composition of a broad aggregate as instruments to adjusting the Fed's target rate. Changes in this rate may have some effects on other rates but most likely they are minor and temporary. Borrowers have issued too many types of assets and we don't know their degree of substitution in investors' portfolios.
That sort of policy making amounts to attempt to control the price index of a basket of many different goods by manipulating the price of just one good. In the 1930s, several countries established X-boards to regulate the price of X but never to regulate the price of a basket of many goods.
It's just my dumb opinion, but I don't think the policy-making apparatus is anything close to that sophisticated. They aren't targeting a particular mix of assets, but rather saying, something like,
"Oh... if we don't buy these guys money, they aren't going to buy the $230B/mo of bonds the Treasury is going to put out there."
They see that, and they respond by creating a facility to do it.
Savings multiplier seems likely to be mostly true.
Yet the interest rates don't go up because the wave of cash money did not cause most consumer good prices to go up, because the wealth created was mostly added to the financial accounts of folks like Gates & Buffett have long ago bought all the consumables they want. Almost no additional demand by the wealthy for most Main Street goods, nor services. There's no shortage of consumer goods - and only with a shortage, at that price, does the price go up.
In the 60s and 70s, the huge wave of boomers becoming middle class resulted in constant demand push and price increases, along with higher interest rates and lots of projects with good ROIs. Not nearly so many good projects today, unless it's a mega project approved by and supported by the gov't. Like Elon Musk projects.
The cash goes into financial assets & crypto ... and houses (in good areas). And, if there are gov't influenced supply chain problems and reduced energy production (with higher prices), lots of general prices increase just like inflation. It is inflation - but still less than expected by the gov't spending.
“Congress authorized trillions in new government spending during the pandemic. This creates paper wealth without producing anything.” No comprendo. The government spent more, but the extra money was obtained largely from the public by borrowing from private parties. So the money was not spent as it would have been done by these private parties--instead, it was spent by the government. But that does not “create paper wealth.”
Now if, thanks to over-expansive monetary policy, government spending had been financed not by borrowing but by money-creation, *that* would have created paper wealth. Then we could tell an Austrian story, about how prices were slow to rise and so (certain) people temporarily *felt wealthier*, and wanted to save more than usual. The cause would be--not government spending, but—excessive money-creation.
If the government borrows a dollar from you and sends a one-dollar check to me, both of us think we have a dollar. You think you have a $1 IOU from the government, and I think I have my $1 check. Wealth goes up by $1
So it is government give-aways, not government spending in general, that create this *false wealth* effect. And Ricardian Equivalence is completely wrong: in evaluating their economic well-being, people ignore future taxes.
"The government spent more, but the extra money was obtained largely from the public by borrowing from private parties."
Was it? One interpretation of (some of) the Fed's behavior is that it's creating a plausible fiction of "borrowing from private parties" but it's really just money creation.
Step by step:
1. Private Parties are holding cash and other assets. Private party looks at the government's offer of a bond for cash and says, "Nope. I'm holding on to my cash."
2. The Fed steps in and says, "Hey Private, I've got a deal for you. I'll give you cash if you give me some of your bonds you're holding on to right now. Then, you can go out and buy those new issue bonds from Government." (This is the Repo action).
3. Private says, "Hey man, I like the way you think. I might only make a penny on this deal, but a Penny is still a penny. But... say, what do I do with all these new issue bonds? I still think I'd rather have cash. As you may know, I actually make a little bit of money by loaning out my excess cash to you".
4. Fed says, "Never fear Bro, I'll take the new issues off your hands as well, and give you that much more cash. Which you can, of course, earn more interest on by letting me hold onto it for you.
This certainly seems like money creation, simply with a mechanism to "wash" it through private parties and then (maybe) control (some of) the second order effects.
not Rube Goldberg machine but smoke and mirrors
I too am skeptical about anyone truly understanding fully the prestidigitations of Fed policy. I suspect it's much more psychological than anything else. On the other hand, we know that people make financial decisions based on their perceptions of their wealth, including not only asset prices but prospects for their future income and the cost of future expenses. That calculation, too, is more of a feeling than a calculation.