The US government's yearly deficit is over $1 trillion. 8.5% of the government's budget alone goes to interest on our debt (https://www.usaspending.gov/#/explorer/budget_function). To pay for the deficit, the treasury sells bonds (debt) which is immediately purchased by the Fed with newly printed money. Notice how equities are at all time highs - money is flowing to whatever it possibly can (stocks, housing, art, VC, anything) in order to chase yield. How people are saying inflation is low... I think they are measuring inflation wrong!
Inflation is largely measured on commodity goods that everyone buys. Thanks to the widening gap in earnings, the masses don’t have more money to spend on groceries and hammers so the prices of these stay relatively stable. But the things people with money try to buy, education, property, financial assets, are mostly of a fixed supply and the prices will just keep spiraling.
I’m potentially crazy here but I’m laughing off every article that calls stocks or bonds or real estate overpriced. As long as the economy keeps running this way there’s a never-ending supply of money and nowhere else for it to go.
How does this get corrected? Do investments wind up losing all of the gains, or do those who didn't have an opportunity to participate get left out and the value of their holdings diminished?
At this point, it's not to chase yield, but simply to try and not shrink.
This is the reason why people are willing to buy debt with negative interest (e.g. EU sovereign debt): they're actually willing to pay money to shield capital from the impending implosion rather than grow it
Edit: or, better said: people are willing to buy debt with negative interest rates to get some sort of a guarantee on the size of the haircut that's coming their way.
Inflation is tracked using the Consumer Price Index, which indexes prices that ordinary consumers face, not housing speculators or art collectors. Inflation is high for the capitalist class and low for the working class.
The Federal Reserve (the Fed), the central bank of the United States, prints money and buys the national debt (treasuries) in order to increase bank reserves and stimulate the economy. The Fed is doing this to such an extent that they are now monetizing (printing and buying national debt) 70% of all the debt issued since October, roughly when they started . They refuse to call it quantitative easing (QE) (despite it meeting the literal definition of QE). It's why markets are going up despite zero increase in overall corporate profits and mediocre economic growth. Endless artificial stimulus like this, is why the economy shuffles from bubble to bust.
Treasury bonds and bills are sold at auction to the highest bidder. The price they sell for determines the interest rate; the higher the price, the lower the rate. The Treasury department sells bonds to raise cash to pay government expenses, both for short term (until the next chunk of quarterly taxes come in) and the long term (spending in excess of government receipts).
A one-year $1,000 T-bill means that in one year from the date of purchase, it can be redeemed for $1,000. So if you pay $980 for it, then that means that your effective interest rate is 20/980 ~= 2%.
The Fed wants interest rates to stay low, so they're driving up the price of treasury bonds/notes in order to reflect that. That, in theory, means that financial institutions will prefer to lend to consumers/businesses/etc. for higher yields, rather than put their money into treasuries.
Usually these sell at auction and the Fed buys some of them, but otherwise the market determines what the future value of money will be based on general return on capital.
The Fed is at least delaying purchase and interest payments on a significant amount of newly issued (short term) Treasuries against which they allow currency (paper or electronic) to be issued. This borders on issuance of fiat currency since their purchase is itself "unbacked" although the trades could eventually be unwound in the market if/when there is enough inflation that their value is negligible.
It is what gold bugs call printing money... or a money drop that goes straight to the leveraged banking system which lends out a multiple of the money from the Treasuries now held at the Fed and earns interest on the full levered amount. That has an inflationary effect, but mostly on financial instruments (stocks & corp bonds) since that's what banks usually buy with their new found money... and the Fed hopes that has ripple (wealth) effects on the rest of the broader economy.
The Federal Reserve, which is the central bank of the United States, is creating new money in order to purchase US government debt, which is essentially equivalent to the government printing new money in order to finance its own spending.
Looking at it another way, it’s no different than some guy printing counterfeit US dollars in his basement and using them to buy real assets. The outcome is the same in either case - the counterfeiter and the government both get to spend newly created money while simultaneously devaluing of the purchasing power of the dollar for everyone else.
It means that the US economy is in much worse shape than various indicators (successful stock market, low unemployment, high price of US government bonds) would indicate.
The government regularly spends more than it takes in from taxes by issuing bonds. People buy the bonds because the US government is considered quite safe. That in turn lets the government spend money, which ultimately makes its way into the economy as a whole. People use that money to hire workers, buy stocks, etc, making the economy look good.
But the Federal Reserve Bank has the ability to invent money for buying those bonds out of thin air. That means the bond prices stay high (and the interest rates low). That implies that the current strong economy is an illusion, and that's worrying.
The expected response of extra money being pushed into the economy without added value is inflation, and the inflation rate has crept up over 2%[1]. It's actually a little surprising that it has taken this long, since this is actually something they've been doing for over a decade. There is considerable debate about that, but it may be that the inflationary chickens are finally coming home to roost -- in which case things might get real bad real quick.
tl;dr: this indicates that the economy may not be as strong as we think, caused by economic manipulation by the Federal Reserve to make the economy seem stronger than it is.
Can’t wait to see what the Fed will try to do when the next recession hits. They’ve been searching deep into their bag of tricks to keep this phony expansion running.
The next recession is going to be a bloodbath. Not sure what else the Fed can really do and it’s not as if Congress can cut taxes too much lower. The last 10 years we’ve been doing the opposite of what we should have. But at least the boomers got one last big fake boom-bust cycle to live through! Just like the glory days.
2008 Crash and how US Fed handled it means that they have to
pump money into stock market for the next 30 years(20 left) until all the mortgages that they hold fully unwind. What could go wrong?
Well, the US Fed track record for such strategies being successful over 30 years is vacant as it never has been done before!
ie at least our problem with real estate-homes outpacing income gets worse
A broken clock is right twice a day. ZH has an overt political bias and is a perennial pessimist, but they do actually perform meaningful economic analysis.
Edit: Then again, their articles sometimes feature near complete fabrications, i.e., "Minneapolis Fed president Neel Kashkari [...] said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth", which is not even remotely close to what was actually said.
ZH is unmitigated garbage. It began by pushing the standard tropes of goldbug interpretations of the economy with the banker bad, armchair (amateur) realist good and an unrealized schadenfreude of global economic pandemic. Now it's realized that its early readership is just a subset of the broader misinformed armchair conspiracy theorist and has expanded its message to them as well.
Just as easily as someone in software can bullshit their way through a presentation with a couple years cursory understanding of SWE topics, same goes with "researching" and writing a ZH econ article. ZH does not do meaningful economic analysis, look elsewhere.
HN is more aligned with ZH than not in the sense that it seems most on here believe the stock market is rigged or a bubble or otherwise not a sound investment.
[+] [-] skat20phys|6 years ago|reply
[+] [-] seibelj|6 years ago|reply
[+] [-] svachalek|6 years ago|reply
I’m potentially crazy here but I’m laughing off every article that calls stocks or bonds or real estate overpriced. As long as the economy keeps running this way there’s a never-ending supply of money and nowhere else for it to go.
[+] [-] echelon|6 years ago|reply
[+] [-] ur-whale|6 years ago|reply
At this point, it's not to chase yield, but simply to try and not shrink.
This is the reason why people are willing to buy debt with negative interest (e.g. EU sovereign debt): they're actually willing to pay money to shield capital from the impending implosion rather than grow it
Edit: or, better said: people are willing to buy debt with negative interest rates to get some sort of a guarantee on the size of the haircut that's coming their way.
[+] [-] eli_gottlieb|6 years ago|reply
[+] [-] xwdv|6 years ago|reply
[+] [-] nickthemagicman|6 years ago|reply
[+] [-] baronmunchausen|6 years ago|reply
[+] [-] andrewla|6 years ago|reply
A one-year $1,000 T-bill means that in one year from the date of purchase, it can be redeemed for $1,000. So if you pay $980 for it, then that means that your effective interest rate is 20/980 ~= 2%.
The Fed wants interest rates to stay low, so they're driving up the price of treasury bonds/notes in order to reflect that. That, in theory, means that financial institutions will prefer to lend to consumers/businesses/etc. for higher yields, rather than put their money into treasuries.
Usually these sell at auction and the Fed buys some of them, but otherwise the market determines what the future value of money will be based on general return on capital.
[+] [-] kurthr|6 years ago|reply
It is what gold bugs call printing money... or a money drop that goes straight to the leveraged banking system which lends out a multiple of the money from the Treasuries now held at the Fed and earns interest on the full levered amount. That has an inflationary effect, but mostly on financial instruments (stocks & corp bonds) since that's what banks usually buy with their new found money... and the Fed hopes that has ripple (wealth) effects on the rest of the broader economy.
[+] [-] fbonetti|6 years ago|reply
Looking at it another way, it’s no different than some guy printing counterfeit US dollars in his basement and using them to buy real assets. The outcome is the same in either case - the counterfeiter and the government both get to spend newly created money while simultaneously devaluing of the purchasing power of the dollar for everyone else.
[+] [-] jfengel|6 years ago|reply
The government regularly spends more than it takes in from taxes by issuing bonds. People buy the bonds because the US government is considered quite safe. That in turn lets the government spend money, which ultimately makes its way into the economy as a whole. People use that money to hire workers, buy stocks, etc, making the economy look good.
But the Federal Reserve Bank has the ability to invent money for buying those bonds out of thin air. That means the bond prices stay high (and the interest rates low). That implies that the current strong economy is an illusion, and that's worrying.
The expected response of extra money being pushed into the economy without added value is inflation, and the inflation rate has crept up over 2%[1]. It's actually a little surprising that it has taken this long, since this is actually something they've been doing for over a decade. There is considerable debate about that, but it may be that the inflationary chickens are finally coming home to roost -- in which case things might get real bad real quick.
tl;dr: this indicates that the economy may not be as strong as we think, caused by economic manipulation by the Federal Reserve to make the economy seem stronger than it is.
[1] https://www.bls.gov/news.release/cpi.t01.htm
[+] [-] Invictus0|6 years ago|reply
[0]: https://www.wsj.com/articles/the-fed-is-buying-bonds-again-j...
[+] [-] davidw|6 years ago|reply
[+] [-] ur-whale|6 years ago|reply
This is the modern equivalent (i.e. the vocabulary and implementation means have changed, but not the deed in itself).
[1] https://en.wikipedia.org/wiki/Debasement
[+] [-] ur-whale|6 years ago|reply
If history repeats itself, next step is empire falls.
[1] https://en.wikipedia.org/wiki/Debasement
[+] [-] hurricanetc|6 years ago|reply
The next recession is going to be a bloodbath. Not sure what else the Fed can really do and it’s not as if Congress can cut taxes too much lower. The last 10 years we’ve been doing the opposite of what we should have. But at least the boomers got one last big fake boom-bust cycle to live through! Just like the glory days.
[+] [-] fredgrott|6 years ago|reply
2008 Crash and how US Fed handled it means that they have to pump money into stock market for the next 30 years(20 left) until all the mortgages that they hold fully unwind. What could go wrong?
Well, the US Fed track record for such strategies being successful over 30 years is vacant as it never has been done before!
ie at least our problem with real estate-homes outpacing income gets worse
[+] [-] yasp|6 years ago|reply
(Commence the downvotes.)
[+] [-] mywittyname|6 years ago|reply
Edit: Then again, their articles sometimes feature near complete fabrications, i.e., "Minneapolis Fed president Neel Kashkari [...] said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth", which is not even remotely close to what was actually said.
[+] [-] agorabinary|6 years ago|reply
Just as easily as someone in software can bullshit their way through a presentation with a couple years cursory understanding of SWE topics, same goes with "researching" and writing a ZH econ article. ZH does not do meaningful economic analysis, look elsewhere.
[+] [-] tempsy|6 years ago|reply
HN is more aligned with ZH than not in the sense that it seems most on here believe the stock market is rigged or a bubble or otherwise not a sound investment.