The lesson here is that the next SBF should make sure to hold a monopoly in the use of force within a sovereign territory before engaging in financial shenanigans.
A bailout is the wrong metaphor for the Fed's losses being absorbed by the Treasury. Not withstanding some legal subtleties, the government owns the Federal Reserve Board of Governors. Saying the government bailed out the Fed is like saying you bailed out your right hand when it ran out of cash.
The government "sweeps" all the profits of the Fed, leaving it with no capital. Given that the Fed has remitted over a trillion dollars since 2009, it seems myopic to only consider the current year where losses are 60 billion and expected to peak below 200 billion.
With some other form of organization they could have a buffer of capital and there wouldn't be a Treasury loss until that was exhausted. I prefer that entirely government entities not have capital because consolidating the government's borrowing leads to lower borrowing costs from more liquid issues. But other forms are possible.
I think the correct way to criticize what one thinks was borrowing to finance an activity with NPV<0 is to observe that future income would have been greater if the activity had not been financed and the resources used to fund it had rather been left for the private sector to invest. The future financial transactions between taxpayers and bond holders is close to irrelevant.
> Now the Fed is bankrupt. It has to be bailed out by the Treasury (you and me). Unlike FTX, the Treasury can still get away with issuing tokens.
I'd quibble with this a bit. The government can issue new money (seignorage) as a last resort. It's best to think about the government's power over money as a residual power of government like war. Just like in war, the government can ask you to volunteer. Loan them money. Or, the government can draft you. In monetary terms, raise your taxes. If all else fails, because money is intangible, they can issue new money and devalue the existing stock in your pockets.
The fiat USD is quite a bit more like crypto than it used to be, and even more so with QE and the Fed (gov't) owning huge quantities of "private assets". Along with Fed - Treasury - Banks trading gov't bonds. The need to pay US taxes in US $ is a huge backing for the value of USD. No other "money" has that quality, thus are arguably less safe / more volatile. Even gold (& silver & gems & art & ...) are subject to trust/ mob valuations. [A recent note on the value of the Mona Lisa points out how 150 years ago it was much much much less valuable, and less than many other artists' works.]
Biggest difference is that there are many alternatives to all other currencies, especially the USD as an alternate to Bitcoin, or Euros, Rubles, Rupees, Renminbi (/Yuan), or Yen. Almost all of the rich and powerful people in the world depend on USD stability for a huge part of their wealth.
I totally trust that the rich will take actions to insure the USD doesn't crash like the FTX token, or even as Bitcoin might, or the Ruble, or Renminbi or Euro or any other currency. Because, and as long as, there is no realistic alternative that is NOT based on "fiat" / trust value.
This doesn't mean investing in USD now is most likely to have the best ROI / risk value -- tho it's also not clear that any other investment has less risk and/or more ROI.
I'm wondering about the relevant counterfactual for these discussions. The current Fed balance sheet in a world without QE? The current state of the macroeconomy in a world without QE? It feels like the crux of this is the effectiveness or ineffectiveness of the policy.
Approximately 100% of all non-bitcoin crypto currencies are a scam. FTT is no exception. The dollar is the strongest fiat currency on the planet and it is in terrible shape. A money that cannot be debased or confiscated is the best answer to this monetary conundrum. Bitcoin is that monetary asset. The faster that the rest of these scams are uncovered and eliminated, the better. Don't be fooled by the SBFs or the FEDs of the world. Do your own research, custody your own assets.
Fiat currency have no backing other than the trust that holders might have in using it as a mean of exchange or store of value. Taxation can only help in plugging a hole in government budget deficits, normally one of the symptoms. Argentina, Venezuela, Zimbabwe, Lebanon, Turkey are examples of countries where fiat ccy at a certain point might be worth the paper they are printed on. Stable coins like USDC have collateral as far as I know in the form of treasury bills or cash deposit, they are audited.
"The Treasury is like FTX, issuing tokens that it calls bonds."
It would seem to me that the tokens are much more like dollars issued by the Fed. The tokens don't pay interest like bonds, do they? The principal never has to be paid back, does it?
FTX issued dollar debt using tokens as collateral, which seems sort of like Treasury bonds, sort of not.
I haven't been following Kling long but this has to be the worst piece he has written. It seems he is completely wrong but maybe he just hasn't explained himself clearly.
First, start with what OneEyedMan said in another comment. I completely agree and add to that here: As I noted under "The Fed Isn't Dead" (Nov 4), the Fed holds $8.8T in debt assets and they are paying interest on $3.1T of bank reserves. (Both numbers as of Sep 2022.) This is not bankrupt. Instead, they have a negative cash flow which is a completely different but related problem, though it does raise questions regarding how they got in that position. And one can and should be concerned about Federal debt but that is also an entirely different but related problem.
I had the opportunity to ask John Cochrane and Tyler Godspeed about QE a few months ago... now, I’m not an economist but know enough to be dangerous.
I was a little perturbed that my (likely badly phrased) question about why QE had continued so long & why it gets sidelined in general interest rate/fed reserve discussions, and shouldn’t we be a little bit worried about interest rate exposure, especially in a time of inflation and rising rates, was answered more or less as follows:
Eh, it’s not that big a deal and didn’t really do much. Worry about entitlements and congressional spending on the fiscal side, and worry about acting too slow on interest rates on the monetary side.
There were a few academic references to studies on QE/monetary policy thrown in that I didn’t follow... but I was left very disappointed (and I still respect John Cochrane’s views a lot) and feeling like I was getting smoke and hand waving.
Exactly so. Fiat currencies are way worse than cryptos as they don't have any collateral to back them other than the willingness of the public to hold them and accept them as mean of exchange. the FTX story is much about governance and internal controls but as often happens it will be taken as an opportunity for the Government to step in with a couple of thousands pages of regulations. i'd rather much see a Darwinian process where investors also learn.
The lesson here is that the next SBF should make sure to hold a monopoly in the use of force within a sovereign territory before engaging in financial shenanigans.
As Tyler Cowen described him in March- "The Excellent Sam Bankman-Fried".
A bailout is the wrong metaphor for the Fed's losses being absorbed by the Treasury. Not withstanding some legal subtleties, the government owns the Federal Reserve Board of Governors. Saying the government bailed out the Fed is like saying you bailed out your right hand when it ran out of cash.
The government "sweeps" all the profits of the Fed, leaving it with no capital. Given that the Fed has remitted over a trillion dollars since 2009, it seems myopic to only consider the current year where losses are 60 billion and expected to peak below 200 billion.
With some other form of organization they could have a buffer of capital and there wouldn't be a Treasury loss until that was exhausted. I prefer that entirely government entities not have capital because consolidating the government's borrowing leads to lower borrowing costs from more liquid issues. But other forms are possible.
I think the correct way to criticize what one thinks was borrowing to finance an activity with NPV<0 is to observe that future income would have been greater if the activity had not been financed and the resources used to fund it had rather been left for the private sector to invest. The future financial transactions between taxpayers and bond holders is close to irrelevant.
> Now the Fed is bankrupt. It has to be bailed out by the Treasury (you and me). Unlike FTX, the Treasury can still get away with issuing tokens.
I'd quibble with this a bit. The government can issue new money (seignorage) as a last resort. It's best to think about the government's power over money as a residual power of government like war. Just like in war, the government can ask you to volunteer. Loan them money. Or, the government can draft you. In monetary terms, raise your taxes. If all else fails, because money is intangible, they can issue new money and devalue the existing stock in your pockets.
Good tho long article on crypto & finance by Matt Levine:
https://www.bloomberg.com/features/2022-the-crypto-story/?leadSource=uverify%20wall
The fiat USD is quite a bit more like crypto than it used to be, and even more so with QE and the Fed (gov't) owning huge quantities of "private assets". Along with Fed - Treasury - Banks trading gov't bonds. The need to pay US taxes in US $ is a huge backing for the value of USD. No other "money" has that quality, thus are arguably less safe / more volatile. Even gold (& silver & gems & art & ...) are subject to trust/ mob valuations. [A recent note on the value of the Mona Lisa points out how 150 years ago it was much much much less valuable, and less than many other artists' works.]
Biggest difference is that there are many alternatives to all other currencies, especially the USD as an alternate to Bitcoin, or Euros, Rubles, Rupees, Renminbi (/Yuan), or Yen. Almost all of the rich and powerful people in the world depend on USD stability for a huge part of their wealth.
I totally trust that the rich will take actions to insure the USD doesn't crash like the FTX token, or even as Bitcoin might, or the Ruble, or Renminbi or Euro or any other currency. Because, and as long as, there is no realistic alternative that is NOT based on "fiat" / trust value.
This doesn't mean investing in USD now is most likely to have the best ROI / risk value -- tho it's also not clear that any other investment has less risk and/or more ROI.
I'm wondering about the relevant counterfactual for these discussions. The current Fed balance sheet in a world without QE? The current state of the macroeconomy in a world without QE? It feels like the crux of this is the effectiveness or ineffectiveness of the policy.
Post #100 where I totally agree with Arnold, but:
1. I believe it strengthens the case for Bitcoin.
2. He would totally disagree with me.
Approximately 100% of all non-bitcoin crypto currencies are a scam. FTT is no exception. The dollar is the strongest fiat currency on the planet and it is in terrible shape. A money that cannot be debased or confiscated is the best answer to this monetary conundrum. Bitcoin is that monetary asset. The faster that the rest of these scams are uncovered and eliminated, the better. Don't be fooled by the SBFs or the FEDs of the world. Do your own research, custody your own assets.
Fiat currency have no backing other than the trust that holders might have in using it as a mean of exchange or store of value. Taxation can only help in plugging a hole in government budget deficits, normally one of the symptoms. Argentina, Venezuela, Zimbabwe, Lebanon, Turkey are examples of countries where fiat ccy at a certain point might be worth the paper they are printed on. Stable coins like USDC have collateral as far as I know in the form of treasury bills or cash deposit, they are audited.
"The Treasury is like FTX, issuing tokens that it calls bonds."
It would seem to me that the tokens are much more like dollars issued by the Fed. The tokens don't pay interest like bonds, do they? The principal never has to be paid back, does it?
FTX issued dollar debt using tokens as collateral, which seems sort of like Treasury bonds, sort of not.
I haven't been following Kling long but this has to be the worst piece he has written. It seems he is completely wrong but maybe he just hasn't explained himself clearly.
First, start with what OneEyedMan said in another comment. I completely agree and add to that here: As I noted under "The Fed Isn't Dead" (Nov 4), the Fed holds $8.8T in debt assets and they are paying interest on $3.1T of bank reserves. (Both numbers as of Sep 2022.) This is not bankrupt. Instead, they have a negative cash flow which is a completely different but related problem, though it does raise questions regarding how they got in that position. And one can and should be concerned about Federal debt but that is also an entirely different but related problem.
I had the opportunity to ask John Cochrane and Tyler Godspeed about QE a few months ago... now, I’m not an economist but know enough to be dangerous.
I was a little perturbed that my (likely badly phrased) question about why QE had continued so long & why it gets sidelined in general interest rate/fed reserve discussions, and shouldn’t we be a little bit worried about interest rate exposure, especially in a time of inflation and rising rates, was answered more or less as follows:
Eh, it’s not that big a deal and didn’t really do much. Worry about entitlements and congressional spending on the fiscal side, and worry about acting too slow on interest rates on the monetary side.
There were a few academic references to studies on QE/monetary policy thrown in that I didn’t follow... but I was left very disappointed (and I still respect John Cochrane’s views a lot) and feeling like I was getting smoke and hand waving.
Glenn Reynolds has <a href=https://nypost.com/2022/11/14/uncle-sam-is-playing-the-same-game-as-broke-disgraced-crypto-king/>a similar take</a>.
Exactly so. Fiat currencies are way worse than cryptos as they don't have any collateral to back them other than the willingness of the public to hold them and accept them as mean of exchange. the FTX story is much about governance and internal controls but as often happens it will be taken as an opportunity for the Government to step in with a couple of thousands pages of regulations. i'd rather much see a Darwinian process where investors also learn.