"The Fed is going to get blamed for the mess, in large part because it is a convenient target. But the villain here is the fiscal response to COVID, which began in the Trump Administration. And the hero is Senator Joe Manchin, who stood athwart the insanity saying “Stop!”"
The Fed could have said stop too. It could have said "we are not going to provide monetary support to hide the cost of your lockdowns from constituents. If they feel the full pain of your actions up front they will oppose them." Without the fed, it's not clear to me that Democrats could have politically gotten away with lockdowns.
Instead, the Fed lined up to support its *class* so to speak. The same way Janet Yellen decided that the Fed should take a side in the abortion debate.
Manchin's a hero, but consider that if there were 51 republican senators, we wouldn't even know who he is. Moreover, it's probably more accurate to say that his constituents, who voted 68% to 29% Trump over Biden, are a big motivator of why he bucked his party.
Manchin did vote for the American Rescue Plan in March 2021, which I remind you passed with every single democrat in support and every single republican against.
The bigger issue is that the entire Democratic Party is completely insane. Maybe you think all of the COVID stimulus was insane (a sound view), but certainly stimulus proposed after vaccines was dramatically less defensible then stimulus proposed before vaccines.
But by summer 2020 I wasn't freaked out. In fact I was pretty damn angry and wanted it to end. I think the breaking point on my sanity was watching schools get closed in Fall 2020.
Most of the lockdowns, most of the spending, all of it happened after the initial outbreak. So no I don't put myself in the same bucket. If all lockdowns and spending bills after spring 2020 didn't happen none of this inflation would be happening.
A lesson I did learn from this is that you can't click the undo button. I assumed that when we learned more we would update our policy! What a fool I was.
This strikes me as post #1,000 that Arnold has written which makes me think Bitcoin is a very attractive place (or one of the least unattractive places) to park a piece of my portfolio. But Arnold also doesn't believe in Bitcoin. One more paradox to ponder.
Agreed. I gave Arnold FIVE of my very hard earned (easily printed) dollars just so I could get into his zoom call and listen to his justifications for rejecting a decentralized solution to the problems he complains about almost every day. Unfortunately I missed most of the call (life happens) and it wasn’t recorded or at least I’m not aware of one.
You can see a recording of a different discussion here: https://www.youtube.com/watch?v=b9GGHOlYSbI&t=6s Matt Gelfand, a contemporary of mine, gives the view of Bitcoin that I have. My short answer is that in my opinion cryptocurrencies create more trust problems than they solve
The existence of so many copycat cryptos does cause confusion and related to that is a lack of trust. But the essence of Bitcoin itself is not having to trust anyone. It's the best ever instantiation of Milton Freidman's computer that set the monetary growth rate at 2% with no possibility of meddling. Except in this case, the growth rate is 0%. The terminal quantity of all Bitcoin that will ever be issued is known, easily trackable and enforced by participants in the monetary system.
This downturn will hopefully cull many of the pretenders in this space like has happened in previous bear markets. I'm betting that Bitcoin once again comes out the other side bigger, stronger and harder to kill. This feels better than betting on a bankrupt central bank whose best weapon is massive inflation.
But to be fair, I still have a piece of my portfolio in traditional capital markets. I want Bitcoin to win, but the banksters have such a long track record of "success".
I have to disagree that the Fed can go bankrupt. What, is it going to go into Chapter 11 like Lehman?
Suppose we have a gold standard in which central bank currency is backed by gold on a fractional basis. People can trade cash for gold in either direction. It is possible for there to be a run on the central bank with the bank running out of gold.
In a more modern era, the central bank can issue domestic currency backed by foreign currency bonds. What happens if the foreign bonds default?
None of this matters for the Fed. THERE CANNOT BE A RUN ON THE FED. If you take a $20 bill to the Fed, it will give you two $10 bills. Nothing backs paper money but more paper money. Banks hold Fed reserves; they cannot tell the Fed to take the reserves back. If they want paper currency instead of electronic reserves, the Fed will give them all the paper currency they want.
Asking if the Fed can go bankrupt is as useless as asking if the US Army can go bankrupt.
As for rising interest rates, you might want to remember that paper currency does not get interest. The Fed issues paper currency and buys Treasury securities. It is the greatest carry trade of all time. As interest rates rise, the Fed earns greater income as Treasury securities roll over but paper currency still doesn't get interest. Higher interest rates boost Fed income, with a lag.
As for bank reserves, they get interest, and the rate on reserves must rise as the Fed tightens. Almost always, the rate on reserves will be below Treasury yields, so Fed positive net interest earnings is the rule, even in high-interest-rate or high-inflation scenarios.
If the Fed goes through a period with negative net income from realized losses on assets, it is recorded as a deferred asset on the balance sheet. Remittances to the Treasury will be kept at zero until the deferred asset is eliminated. In that sense, Treasury does "bail out" the Fed.
You like to say that the Fed is just a big Citibank. It is not.
The concern is the fiscal authorities. A government can fail, producing chaos. That fail can be military, as happened in central and eastern Europe after the First World War. Or that fail can be stupidity, like Argentina. In none of these cases is the central bank the failure. If the federal government fails, the Fed will fail also. The Fed is an agent of the federal government.
If the federal government is successful (well, 30-year T bonds yield just 3.0%), you don't have to worry about the Fed going bankrupt.
The Fed creating too much money and causing inflation worries me. The Fed having "negative capital" does not worry me one bit.
"And we've seen that failure in Latin America. Countries get into fiscal problems, they have inflation, they raise interest rates, that just raises debt costs, and the inflation spirals on up."
Is this even an accurate description of what happens? Isn't there a missing piece- that the response of the government is to print more money to cover the rising costs plus additional spending.
This seems like an easy problem to solve. IIRC, the fed pays interest on both required and excess reserves. So stop paying interest on required reserves. If need be, raise the required reserve rate.
Indeed. Financial suppression has a long history, so it seems like a tool that is well understood. If you want to balance the Fed’s budget without increasing inflation, it seems like an easy answer. It’s objectionable from a libertarian perspective, obviously.
I don't see a problem here. Bankruptcy law doesn't apply to the Fed. Bank examiners aren't going to shut it down; the Fed's checks won't bounce. If the bottom line turns red, Powell will simply declare the condition transitory and carry doing whatever it is he thinks he's doing.
I think the problem is that the only way to keep going is to create more and more money, driving higher and higher inflation. When the Fed is earning negative returns, that means it is putting a lot of new money into the banking industry's pockets.
Interested to see Scott's response on the market monetarism angle. I think he'd say that higher rates don't necessarily mean tighter policy, and that the liquidity effect can push bond prices, in the short run, in the opposite direction of of the Fisher effect.
Glad to hear you are happy because others think the Fed may go bankrupt. None can explain what is happening, however. The old textbook's monetary system has been transformed and we must separate payments systems from financial intermediation and markets to understand what has happened since 1980. It has been hard to separate them for analytical purposes because of the increasing reliance on paying our purchases later thanks to credit lines and cards and the extraordinary variety of financial instruments/claims available today. Yes, today's financial intermediation is both complicated and complex. We should not be confused, however, about how governments have continued their historic and historical intervention to secure funds for their official and unofficial spending and to bail themselves out when they cannot pay back.
"The Fed is going to get blamed for the mess, in large part because it is a convenient target. But the villain here is the fiscal response to COVID, which began in the Trump Administration. And the hero is Senator Joe Manchin, who stood athwart the insanity saying “Stop!”"
The Fed could have said stop too. It could have said "we are not going to provide monetary support to hide the cost of your lockdowns from constituents. If they feel the full pain of your actions up front they will oppose them." Without the fed, it's not clear to me that Democrats could have politically gotten away with lockdowns.
Instead, the Fed lined up to support its *class* so to speak. The same way Janet Yellen decided that the Fed should take a side in the abortion debate.
Manchin's a hero, but consider that if there were 51 republican senators, we wouldn't even know who he is. Moreover, it's probably more accurate to say that his constituents, who voted 68% to 29% Trump over Biden, are a big motivator of why he bucked his party.
Manchin did vote for the American Rescue Plan in March 2021, which I remind you passed with every single democrat in support and every single republican against.
The bigger issue is that the entire Democratic Party is completely insane. Maybe you think all of the COVID stimulus was insane (a sound view), but certainly stimulus proposed after vaccines was dramatically less defensible then stimulus proposed before vaccines.
Yeah, I was a freaked out in March 2020.
But by summer 2020 I wasn't freaked out. In fact I was pretty damn angry and wanted it to end. I think the breaking point on my sanity was watching schools get closed in Fall 2020.
Most of the lockdowns, most of the spending, all of it happened after the initial outbreak. So no I don't put myself in the same bucket. If all lockdowns and spending bills after spring 2020 didn't happen none of this inflation would be happening.
A lesson I did learn from this is that you can't click the undo button. I assumed that when we learned more we would update our policy! What a fool I was.
I drastically upgraded my distrust.
This strikes me as post #1,000 that Arnold has written which makes me think Bitcoin is a very attractive place (or one of the least unattractive places) to park a piece of my portfolio. But Arnold also doesn't believe in Bitcoin. One more paradox to ponder.
Agreed. I'd like to see Arnold review The Bitcoin Standard.
Agreed. I gave Arnold FIVE of my very hard earned (easily printed) dollars just so I could get into his zoom call and listen to his justifications for rejecting a decentralized solution to the problems he complains about almost every day. Unfortunately I missed most of the call (life happens) and it wasn’t recorded or at least I’m not aware of one.
You can see a recording of a different discussion here: https://www.youtube.com/watch?v=b9GGHOlYSbI&t=6s Matt Gelfand, a contemporary of mine, gives the view of Bitcoin that I have. My short answer is that in my opinion cryptocurrencies create more trust problems than they solve
The existence of so many copycat cryptos does cause confusion and related to that is a lack of trust. But the essence of Bitcoin itself is not having to trust anyone. It's the best ever instantiation of Milton Freidman's computer that set the monetary growth rate at 2% with no possibility of meddling. Except in this case, the growth rate is 0%. The terminal quantity of all Bitcoin that will ever be issued is known, easily trackable and enforced by participants in the monetary system.
This downturn will hopefully cull many of the pretenders in this space like has happened in previous bear markets. I'm betting that Bitcoin once again comes out the other side bigger, stronger and harder to kill. This feels better than betting on a bankrupt central bank whose best weapon is massive inflation.
But to be fair, I still have a piece of my portfolio in traditional capital markets. I want Bitcoin to win, but the banksters have such a long track record of "success".
So if someone mentioned gold as a possible asset, you would offer to sell them a pet rock?
I have to disagree that the Fed can go bankrupt. What, is it going to go into Chapter 11 like Lehman?
Suppose we have a gold standard in which central bank currency is backed by gold on a fractional basis. People can trade cash for gold in either direction. It is possible for there to be a run on the central bank with the bank running out of gold.
In a more modern era, the central bank can issue domestic currency backed by foreign currency bonds. What happens if the foreign bonds default?
None of this matters for the Fed. THERE CANNOT BE A RUN ON THE FED. If you take a $20 bill to the Fed, it will give you two $10 bills. Nothing backs paper money but more paper money. Banks hold Fed reserves; they cannot tell the Fed to take the reserves back. If they want paper currency instead of electronic reserves, the Fed will give them all the paper currency they want.
Asking if the Fed can go bankrupt is as useless as asking if the US Army can go bankrupt.
As for rising interest rates, you might want to remember that paper currency does not get interest. The Fed issues paper currency and buys Treasury securities. It is the greatest carry trade of all time. As interest rates rise, the Fed earns greater income as Treasury securities roll over but paper currency still doesn't get interest. Higher interest rates boost Fed income, with a lag.
As for bank reserves, they get interest, and the rate on reserves must rise as the Fed tightens. Almost always, the rate on reserves will be below Treasury yields, so Fed positive net interest earnings is the rule, even in high-interest-rate or high-inflation scenarios.
If the Fed goes through a period with negative net income from realized losses on assets, it is recorded as a deferred asset on the balance sheet. Remittances to the Treasury will be kept at zero until the deferred asset is eliminated. In that sense, Treasury does "bail out" the Fed.
You like to say that the Fed is just a big Citibank. It is not.
The concern is the fiscal authorities. A government can fail, producing chaos. That fail can be military, as happened in central and eastern Europe after the First World War. Or that fail can be stupidity, like Argentina. In none of these cases is the central bank the failure. If the federal government fails, the Fed will fail also. The Fed is an agent of the federal government.
If the federal government is successful (well, 30-year T bonds yield just 3.0%), you don't have to worry about the Fed going bankrupt.
The Fed creating too much money and causing inflation worries me. The Fed having "negative capital" does not worry me one bit.
"And we've seen that failure in Latin America. Countries get into fiscal problems, they have inflation, they raise interest rates, that just raises debt costs, and the inflation spirals on up."
Is this even an accurate description of what happens? Isn't there a missing piece- that the response of the government is to print more money to cover the rising costs plus additional spending.
This seems like an easy problem to solve. IIRC, the fed pays interest on both required and excess reserves. So stop paying interest on required reserves. If need be, raise the required reserve rate.
Also known as financial repression. Tax the banks until the pips squeak, as it were.
Indeed. Financial suppression has a long history, so it seems like a tool that is well understood. If you want to balance the Fed’s budget without increasing inflation, it seems like an easy answer. It’s objectionable from a libertarian perspective, obviously.
What's objectionable about the government discontinuing a policy of GIVING FREE MONEY to already fabulously wealthy banks?
IOER is a recent policy. And, in any case, it's distinct from a tax.
I don't see a problem here. Bankruptcy law doesn't apply to the Fed. Bank examiners aren't going to shut it down; the Fed's checks won't bounce. If the bottom line turns red, Powell will simply declare the condition transitory and carry doing whatever it is he thinks he's doing.
I think the problem is that the only way to keep going is to create more and more money, driving higher and higher inflation. When the Fed is earning negative returns, that means it is putting a lot of new money into the banking industry's pockets.
Interested to see Scott's response on the market monetarism angle. I think he'd say that higher rates don't necessarily mean tighter policy, and that the liquidity effect can push bond prices, in the short run, in the opposite direction of of the Fisher effect.
‘ It turns out that I am not the only who has been thinking about the Fed going bankrupt.’
Would that be such a bad thing I wonder? Best way for Government reform, take away its money supply.
‘In response to COVID, the Fed enlarged its portfolio of mortgage-backed securities…’
Because it’s not as if over-reliance on mortgage securities led to the 2008 banking crisis. Of course, this time it’s different.
Glad to hear you are happy because others think the Fed may go bankrupt. None can explain what is happening, however. The old textbook's monetary system has been transformed and we must separate payments systems from financial intermediation and markets to understand what has happened since 1980. It has been hard to separate them for analytical purposes because of the increasing reliance on paying our purchases later thanks to credit lines and cards and the extraordinary variety of financial instruments/claims available today. Yes, today's financial intermediation is both complicated and complex. We should not be confused, however, about how governments have continued their historic and historical intervention to secure funds for their official and unofficial spending and to bail themselves out when they cannot pay back.