The US Federal Reserve is openly buying crap (junk bonds!) and wildly overpaying for it without pretending otherwise.
Its balance sheet will have grown by as much as an order of magnitude by the end of the month, far above any levels seen during the global financial crisis of 2008. (If you don't know what this means, think of the Fed's liabilities as "all forms of money issuance.") It's issuing fresh money to buy crap from the people who are stuck holding it. The sellers will come out whole, the buyer -- i.e., the US government -- will suffer the losses.[a]
Meanwhile, the US Treasury is borrowing and trying to spend on the order of an additional 10% of GDP as quickly as possible, increasing the US federal deficit and borrowings by that much as quickly as possible.[b]
And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary.
Not "buying crap," we are talking fallen angels AKA companies that were previously rated investment grade that have been downgraded due to the crisis. "... rated at least BBB-/Baa3 as of March 22, 2020 ..." in the press release. It's not like the Fed is buying WeWork bonds, just closing a loophole in the previous investment grade bond buying facility to cover bonds that were recently downgraded. Which is kind of the point, extending credit to otherwise-strong firms that are impacted by the social distancing measures.
Yes, we are. But we come with navigational guides.
Quantitative easing was born out of Bernanke's deep study of the Great Depression, where exogenous events prompted a liquidity crisis that kept causing pain long after its cause had subsided.
The demand destruction we're seeing today, as a result of the novel coronavirus, is unprecedented in the modern era. We don't want to spend decades after the infection has passed rebuilding productive capital destroyed for lack of liquidity. That's what these measures aim to prevent.
> And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary.
The fed buying crap bonds isn't even doing anything to prevent economic collapse. The economy has already collapsed, due to to the shutdowns. This is nothing but a transfer of wealth from people who own US dollars, to people who own US equities.
All it does, is prop up the stock market. The real economy could go to zero, but as long as the Fed is buying assets, the stock market will keep looking green.
The signal the Fed is sending to everyone in the market is: don't worry about risk or bad decisions! As long as you are in the same boat as other financial institutions, the Fed will rescue you. Even if we survive this new crash (I still remember 2008), the economy seems to be headed to destruction in not such a long term.
Agreed, but that is their job. The Fed frequently plays the role of buyer/lender of last resort. They are trying to prevent a collapse and will worry about unwinding later.
Whoever came up with the name “junk bonds” for high-yield corporate debt was a master of propaganda. The truth is, the bonds the Fed is buying are more like what Ben Graham would call “senior securities with speculative features” (although classically that referred to preferred stock) and really aren’t that different from the BBB-rated bonds they were buying last week. (Indeed, they’re buying bonds that were investment-grade until a couple weeks ago.) These aren’t contingent claims on a company’s assets, like Alphabet stock or a S&P 500 index fund, they’re senior claims, which are structurally and legally less risky than equities, if not actually less risky than every equity security.
Personally, it seems to me that if you’re not willing to let capitalism work itself out in a crisis, you should stop pretending to have a capitalist system at all; Norway is a pretty entrepreneurial country despite being a certain shade of pink. But the arbitrary dividing line between “investment grade” bonds and “junk” bonds is not some Platonic boundary between “safe securities” and “crap.” It’s there for complicated historical reasons which are perfectly reasonable to ignore during a crisis caused by an unforeseen and unprecedented economic slowdown.
"buying crap" is a wild exaggeration. The Fed is injecting liquidity into markets where credit ratings are creating second and third order effects that will result in liquidity crunches.
To make this clear with an example...many bond funds, active or passive (E.g., ETF, mutual fund, etc.), have strict covenants guiding their investments.
In a simplified system of:
Investment grade: A, B
non-investment grade: C, D
the funds may only be able to purchase A and B rated bonds. Additionally, they may be forced to sell a bond which has a rating change from B to C or below.
Since many ratings agencies are revising ratings lower across the board, there is mass selling of these bonds, just as the companies attempt to raise money to finance their operations. It's also very typical for ratings agencies to essentially trail the capital markets. So as a bond decreases in value, the probability of a credit rating change increases.
This alone could cause manufacturing, energy, or any capital intensive business to fail as their interest payments skyrocket and they lose access to financing.
The probability of default for these companies skyrockets in this scenario. If the fed props these markets up temporarily, it's extremely likely the defaults will be far less severe.
> And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary.
There are other options. One such option is to let non-essential businesses stay open and stop it with the travel bans. There'd be other benefits besides preventing economic collapse, delayed or otherwise - less domestic violence, people in Africa won't starve because of other countries are hoarding food (and Africa being a net importer a food will suffer), local farmers won't suffer a severe shortage of transient workers, etc.
Do I recommend that? I don't know.
I do know there's a big vacuum in the discussions of COVID-19. We are trying to preserve lives, so why don't we ever talk about the deaths extreme isolation measure will cause? If they pale in comparison to the COVID-19 deaths, fine.
Is there a list somewhere with all the purchasing going on above the stimulus? It seems from my rather faulty memory we've exceeded the $2 trillion stimulus by a lot.
Can you or someone else tell me what exactly that means for me?
I have my savings in a 401k with a mix of index funds stocks and bonds and to be honest I am quite happy that the government is stepping in and not letting everything go down.
I'm sure there is a downside, but can you make it clear what that is?
I noticed a lot of HN folks just love to be alarmist when it comes to the economy. I am sure this time you are right, but I've been reading HN comments like yours every single week for almost a decade now, always suggesting that we are on the verge of an impending doom...
how much money disappeared from the stock market in the past few weeks? i wonder if the numbers that we're talking about match up. there might be little actual printing involved, just using that idle money parked at bank accounts instead of stocks.
The Fed's balance sheet is now at $6T, which is too large for them to unwind. This only ends in one of two ways:
1. A massive asset bubble and a fundamental re-evaluation of risk/reward ratios for all investments. Historically, the average P/E ratio for S&P 500 companies is around 16. Roughly speaking, this means that investors are comfortable making their investment back in 16 years in static market conditions. Does this decision calculus change if you know that the Fed will bail you out as soon as times get tough? You bet it does. Similarly, corporations are much more incentivized to take on as much debt as possible in hopes of inflating their stock prices. When times are good, massive bonuses for execs all around. When times are bad...hey, bailout! I expect the "new normal" for P/E ratios to be in the 30-50 range. In the short term (next decade or so), this means the party continues, and we see massive growth in the stock market. But when the bubble pops, it'll pop harder than ever...
2. The second scenario is that debt-holders worldwide lose faith in the dollar and start dumping Treasuries, leading to hyperinflation. This doesn't seem to be happening as of today, in fact, the more money the Fed prints, the stronger the dollar. Central banks worldwide are printing money as well, so the dollar looks like the "least ugly" choice by comparison. The big unknown is how long the Fed can keep printing before debt-holders start second guessing the dollar's value.
3. Dollar devaluation through expansion of the balance sheet even further.
The BoJ balance sheet is about 100% of GDP. The Fed balance sheet is about 30% of GDP. That gives a lot of room to add assets before the US looks anything like Japan in that department.
This balance sheet expansion could happen against a backdrop of stock prices that would otherwise be falling. Expanding the balance sheet through stock purchases allows the Fed to correct the global dollar short squeeze while preventing calamitous stock repricing at the same time.
Nominally, things wouldn't look much different to those in the US. But in real terms, the result would be crushing. It seems, however, that politicians and many voters only consider nominal returns, not real returns.
This is one of the reasons I find it hard to believe people who claim the Fed is "out of ammunition." We're at the level of bazookas now, but the Fed has everything from that to nuclear ICBMs and more to play with courtesy of the dollar's reserve currency status.
imho we are going to see something like both scenarios... scenario 1, then scenario 2.
Also, when you say "in fact, the more money the Fed prints, the stronger the dollar", I don't think this is quite the case. The supply of US dollars isn't enough to match the global demand for US dollars. The Fed is having to "print" (basically enter some numbers into a computer) dollars to meet this demand otherwise it causes havoc... perfect example is the repo market spiking and the Fed having to intervene.
For a good explanation search for the 'dollar milkshake theory' by Brent Johnson.
I agree that the Fed's interventions can't keep on going... each intervention creates market distortions that end up requiring more interventions. However, one of my economics professors used to say, “In economics things take longer than you expect, and go quicker than you expect”. So, I take that to mean that the Fed will ‘save the day’, continue to distort the market, and we will have a catastrophic unwinding of the debt.
In terms of how I'm going to protect myself, I looked long and hard at Ray Dalio’s ‘All Weather Portfolio,’ but I've decided to implement Chris Cole's ‘Dragon Portfolio’ (search for ‘The Allegory of the Hawk and the Serpent’) with a tactical overlay taken from Seth Klarman's out-of-print investing book, 'Margin of Safety' which I highly recommend.
I think this is what it looks like when the government becomes more activist in the overall running of the economy.
The pendulum swings. We had a lot of government involvement in the 40/50s. It declined through the 60s and 70s until we got peak deregulation in the 80s. People forget that near-free telephone calls and cheap flights everywhere were a direct result of all the deregulation. Now I see things swinging back. Maybe it's generational, we forget/become blind to how good we have it, and only see the disadvantages, and then swing back the other direction.
My sense is that we're heading toward something more like China with all the good and bad that entails. Much closer cooperation/coordination between the federal government, industry, finance, and academia. Government that doesn't let big business fail, more stable and "guaranteed" employment/income for people, more state direction of the economy. More emphasis on big firms, "national champions" (Trump creating the CEO advisory council with Apple/Tesla/etc. CEOs, bailing out Boeing), America-first (China-first!) industrial policy, and limited scope for foreign ownership/takeovers (US blocking ZTE's takeover of Qualcomm, arresting Huawei execs in Canada). With the accompanying reduction in freedom of expression, individual rights, ease of hiring and firing, economic freedom, and overall dynamism/ability to adapt and invent new things.
It's been heading this way for a while and frankly, seems to be what people want. Massive escalating bailouts every 10 years, and a serious push for a socialist, worker-first government. It seems there's been some kind of deep shift in our culture away from risk-taking and more toward the stable academic/government/state-directed way of life.
Look at all the main street businesses around you, especially hotels, dry cleaners, diners, gas stations, auto repair shops. It's striking how many were started from about 1940-1970 or so. Nobody wants to own or operate this stuff anymore. Everyone would rather go to college, get a stable job at a big, high-paying, high-productivity company, usually that offers good insurance, paid parental leave, etc. and work there for a long time, or hop between various versions of this same arrangement for a few years at a time.
100% spot on analysis. This is bailing out the rich strategy again. Gotta be ready to ride this wave up if you can, but oh man is this gonna hurt when it pops.
Scenario 2 is your number 1, just one step further in the past. Dumping treasuries leads to you having dollars, you've basically switched from interest-bearing (admittedly super low interest rate right now) to non-interest bearing (cash). You still need to put the money somewhere, hence asset bubble.
Also, why does the government debt "bubble" ever have to "pop"? Does everyone still believe the government has to "pay off the debt"?
They don't. Ever. For a large number of reasons, to name just a couple:
- No more treasuries or bonds (how many people would freak out if those no longer exist)
- They can print more money forever. Besides, at this point it's just numbers in the FED computer system. Hardly any of it even exists as a physical object (paper, coins).
Also, I'll let you in on little secret. The Fed is never going to fully unwind its balance sheet.
> Its Secondary Market facility may purchase U.S.-listed ETFs. While the preponderance of those holdings will be those primarily focused on U.S. investment-grade corporate bonds, the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
In other words, the Fed is buying junk bonds through ETF. There's one more stage to go: buying equity ETFs, like the Bank of Japan has been doing for years.
Is a pure political move? At least watching the daily WH meetings this seems to be priority numero uno. Doesn't this cause more problems in the long run propping up businesses that can't survive two months without a bailout, err loan?
> Loan sizes will range from $1 million to $150 million.
$150 million is obviously no longer about protecting employee payrolls like these business relief loans started out with.
What isn't getting considered is that this is only possible here because U.S. currency is the world's reserve currency. Other countries may try this to some degree but risk hyperinflation. The U.S. actually won't get inflation because many countries use the dollar for debt, so cash is king.
The Fed is buying a limited universe of high yield by issuers that were recently downgraded. The cutoff date happens to coincide around where Ford got downgraded. They are not (at least currently) buying wider universe HY. The HY ETF purchases are last in their purchase waterfall. Limited HY for "fallen angels" makes sense as these corporate facilities were announced a while ago and did not have much details at the time.
That's pretty outrageous without presenting an economic model that justifies the decision at such volume. Are they picking winners and losers or are they really optimising something? No way to know.
Which states? That's a legit question these days. I live in Colorado, can I count on some of this stimulus? Maybe. If I lived in California, probably not.
Seems like the US should have UBI at this point. How can the purchasing of junk bonds be justified but not a UBI? Give every citizen a fed bank account, type in some numbers and poof! 2k/month.
I've played a few thought experiments thought my head in the case the Fed leads to the decline in dollar confidence and I can't think of any country in the world that wouldn't be affected. Most countries use USD as the reserve currency, and this leads to some big dollar demand around the world. Is this the secret to low inflation? Keep USD as the world's currency and outsource labor to cheap companies to reduce upward price pressure?
Isn't it obvious this will lead to hyperinflation? I am BAFFLED why this isn't being reported on cnn or whatever. All I see is corona virus. The sad thing is is that there will probably be more lives lost to hyperinflation than covid-19.
Inflation happens when you increase money supply and have velocity of money. With the global lockdown, you're not taking into account the demand and supply curve will shift down to a new lower price equilibrium.
In other words, in the short term I think there will either be deflation, or no change to inflation (due to all the money printing).
The question will be what will happen once the global lockdown is lifted, and how quickly the velocity of money picks up. There might very well be high inflation or hyperinflation in certain things, but not in others (due to how quickly global supply chains are repaired and how substitutable certain products are. In 2008 the money was given to the banks (to recapitalise them) and then transmitted to financial assets due to the search for yield. This meant that the velocity of the new money was very low, which is why there wasn't high levels of inflation. If there is MMT or helicopter money, we could very well see high levels of velocity and inflation.
No, it is not at all obvious. Read up on the papers written about QE after the 2008 crisis. Monetary base increases significantly but the money multiplier falls in tandem. The net effect is that the price level is not strongly impacted by this type of program, outside of pre-empting deflation by providing liquidity to counter a potential fall in economic activity due to seizing credit markets.
See also "banks don't lend out reserves." The linkage from "cash" (i.e. bank reserves) to the market price level of goods is not very strong.
>Isn't it obvious this will lead to hyperinflation?
I thought that QE was going to lead to a lot of inflation, and it hasn't seemed to. If inflation has shown up anywhere, it's been in the stock market and housing prices due to low interest rates. Even then, I'm hesitant to say that it's primarily responsible for the rise in housing prices because I think demand from my generation (millenials) is helping to cause the sharp spike in markets such as NYC LA, Atlanta, etc.
How does this impact someone like AirBnb? Other commentators made note of the fact that its loan with 10% interest rate is essentially non-investment grade. If the fed will buy junk bonds, does this prompt lenders to issue more of such instruments, thereby allowing companies like AirBnB or WeWork to float for as long as the Fed buys?
Let us give thanks to the the Fed. They just impoverished all of us. Because of this, then the rich will just keep getting richer. The oligarchs of America wins again.
What should you learn from this? Take out cheap low interest loans to buy up assets. Your dollar just got cheaper, while all prices will go up. In 10 years, your $700,000 USD house, will be priced at $1,400,000 USD.
With the enormous amounts of debt the US already has I simply fail to see how the country will recover any time soon (10 to 20 years). I am genuinely worried that the US will enter a spiral it never thought possible (worse than the cultural decline that led to Trump’s election).
Ah we begin the long journey of having a system so politically broken that the central bank must command its balance sheet to stop the rotten structure from collapsing, a la Weimar Republic or Zimbabwe.
This liquidity isn't a life boat. It's propping up corporations and people who have been dangerously over leveraged for years and who are beginning to become habituated to the notion of getting a government bailout when times get hard.
To the enlightened HN participants proclaiming that this is a necessary step to save an ailing economy facing an unprecedented crisis, consider the following:
1) this crisis was not that unprecedented and many companies had large enough balance sheets that they were able to weather it. Why are we rewarding corporate mismanagement? Have any of the corporations eligible for asset filed for bankruptcy or attempted an asset selloff to recover some liquidity?
2) the Main St. loan pool is much smaller than the Wall St one. Why do we expect smaller businesses to be better able to weather this crisis?
3) what is this cash infusion actually doing to tackle the exponential rise in unemployment? How does it help the taxpayer? It's not going to stimulate consumption in people who have lost their jobs and kickstart a recovery - the unemployed will likely be unemployed for months to come and the loan recipients will likely be so saddled with debt at the end of this that they won't experience growth again for years. There's no mandate that companies receiving emergency loans have to maintain their current workforce. The taxpayer receives no equity in the companies they have gone into debt to save.
4) given the size of these loans we may well be in another recession in 10-20 years and still have the majority of these loans outstanding. Do we then forgive these loans when the usual suspects need another round of cash infusions?
5) the Fed has set interest rates close to rock bottom for the better part of a decade (and backed down from raising them last year when Trump threatened bloody war) leading to a massive asset bubble and a business climate addicted to cheap liquidity. The message this bailout sends is that corporate over-leveraging is rewarded with a cash infusion, but god help the individual who took out a mortgage, car loan, etc. and lost their ability to keep up payments from coronavirus unemployment. Why is one type of entity granted access to public money in order to be spared from their bad decisions?
The scale of this debt is almost unfathomable and adds to an already overloaded Federal Reserve balance sheet. Other commenters have rightly pointed out how precarious this situation is in the longer term. I'm more worried about the callousness of the average person on this issue. American economics are so polluted with worship of great titans of business that nobody really seems that concerned that millions of Americans are facing perhaps permanent homelessness and long-term unemployment in the next few months.
Pumping failing businesses full of cash when millions of our citizens are struggling to buy food should not be normal. It is not a stepping stone of necessity to preserve our way of life. It is a choice to use capital to violate perhaps the most central tenet of capitalism: businesses must face the consequences when the punch bowl runs dry. This is socialism for corporations and we're all footing the bill.
Thank you for this explanation. So much of what I’ve been reading about the fed / stimulus response has felt rotten to the core, but I’ve lacked a clear explanation for exactly why.
It’s impossibly l to know how this will all play out over the next several decades, but the house of cards is teetering dangerously and when it crashes, it will be a tremendous fall.
[+] [-] cs702|6 years ago|reply
Its balance sheet will have grown by as much as an order of magnitude by the end of the month, far above any levels seen during the global financial crisis of 2008. (If you don't know what this means, think of the Fed's liabilities as "all forms of money issuance.") It's issuing fresh money to buy crap from the people who are stuck holding it. The sellers will come out whole, the buyer -- i.e., the US government -- will suffer the losses.[a]
Meanwhile, the US Treasury is borrowing and trying to spend on the order of an additional 10% of GDP as quickly as possible, increasing the US federal deficit and borrowings by that much as quickly as possible.[b]
And all of this is urgently necessary to prevent economic collapse in the US. Urgently necessary.
We are in uncharted waters.
[a] You'll see it here: https://fred.stlouisfed.org/series/WALCL
[b] You'll see it here: https://fred.stlouisfed.org/series/GFDEGDQ188S
[+] [-] AngrySkillzz|6 years ago|reply
[+] [-] JumpCrisscross|6 years ago|reply
Yes, we are. But we come with navigational guides.
Quantitative easing was born out of Bernanke's deep study of the Great Depression, where exogenous events prompted a liquidity crisis that kept causing pain long after its cause had subsided.
The demand destruction we're seeing today, as a result of the novel coronavirus, is unprecedented in the modern era. We don't want to spend decades after the infection has passed rebuilding productive capital destroyed for lack of liquidity. That's what these measures aim to prevent.
[+] [-] vkou|6 years ago|reply
The fed buying crap bonds isn't even doing anything to prevent economic collapse. The economy has already collapsed, due to to the shutdowns. This is nothing but a transfer of wealth from people who own US dollars, to people who own US equities.
All it does, is prop up the stock market. The real economy could go to zero, but as long as the Fed is buying assets, the stock market will keep looking green.
[+] [-] coliveira|6 years ago|reply
[+] [-] jotto|6 years ago|reply
* March 4th assets: 4.2T
* Today: 5.8T
* Proposed: 2.3T more
so that's 3.9T since March 4th. Doubling. Not "order of magnitude"
[+] [-] BurningFrog|6 years ago|reply
Isn't the Fed buying with money it prints?
If so, it's not the US government that will suffer the losses.
[+] [-] snarf21|6 years ago|reply
[+] [-] intuitionist|6 years ago|reply
Personally, it seems to me that if you’re not willing to let capitalism work itself out in a crisis, you should stop pretending to have a capitalist system at all; Norway is a pretty entrepreneurial country despite being a certain shade of pink. But the arbitrary dividing line between “investment grade” bonds and “junk” bonds is not some Platonic boundary between “safe securities” and “crap.” It’s there for complicated historical reasons which are perfectly reasonable to ignore during a crisis caused by an unforeseen and unprecedented economic slowdown.
[+] [-] mrfusion|6 years ago|reply
[+] [-] RayVR|6 years ago|reply
To make this clear with an example...many bond funds, active or passive (E.g., ETF, mutual fund, etc.), have strict covenants guiding their investments. In a simplified system of: Investment grade: A, B non-investment grade: C, D
the funds may only be able to purchase A and B rated bonds. Additionally, they may be forced to sell a bond which has a rating change from B to C or below.
Since many ratings agencies are revising ratings lower across the board, there is mass selling of these bonds, just as the companies attempt to raise money to finance their operations. It's also very typical for ratings agencies to essentially trail the capital markets. So as a bond decreases in value, the probability of a credit rating change increases.
This alone could cause manufacturing, energy, or any capital intensive business to fail as their interest payments skyrocket and they lose access to financing.
The probability of default for these companies skyrockets in this scenario. If the fed props these markets up temporarily, it's extremely likely the defaults will be far less severe.
[+] [-] swsieber|6 years ago|reply
There are other options. One such option is to let non-essential businesses stay open and stop it with the travel bans. There'd be other benefits besides preventing economic collapse, delayed or otherwise - less domestic violence, people in Africa won't starve because of other countries are hoarding food (and Africa being a net importer a food will suffer), local farmers won't suffer a severe shortage of transient workers, etc.
Do I recommend that? I don't know.
I do know there's a big vacuum in the discussions of COVID-19. We are trying to preserve lives, so why don't we ever talk about the deaths extreme isolation measure will cause? If they pale in comparison to the COVID-19 deaths, fine.
[+] [-] OscarCunningham|6 years ago|reply
[+] [-] base698|6 years ago|reply
[+] [-] unknown|6 years ago|reply
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[+] [-] unknown|6 years ago|reply
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[+] [-] deanmoriarty|6 years ago|reply
I have my savings in a 401k with a mix of index funds stocks and bonds and to be honest I am quite happy that the government is stepping in and not letting everything go down.
I'm sure there is a downside, but can you make it clear what that is?
I noticed a lot of HN folks just love to be alarmist when it comes to the economy. I am sure this time you are right, but I've been reading HN comments like yours every single week for almost a decade now, always suggesting that we are on the verge of an impending doom...
[+] [-] baq|6 years ago|reply
[+] [-] samfisher83|6 years ago|reply
[+] [-] smabie|6 years ago|reply
[+] [-] nakedshorts|6 years ago|reply
1. A massive asset bubble and a fundamental re-evaluation of risk/reward ratios for all investments. Historically, the average P/E ratio for S&P 500 companies is around 16. Roughly speaking, this means that investors are comfortable making their investment back in 16 years in static market conditions. Does this decision calculus change if you know that the Fed will bail you out as soon as times get tough? You bet it does. Similarly, corporations are much more incentivized to take on as much debt as possible in hopes of inflating their stock prices. When times are good, massive bonuses for execs all around. When times are bad...hey, bailout! I expect the "new normal" for P/E ratios to be in the 30-50 range. In the short term (next decade or so), this means the party continues, and we see massive growth in the stock market. But when the bubble pops, it'll pop harder than ever...
2. The second scenario is that debt-holders worldwide lose faith in the dollar and start dumping Treasuries, leading to hyperinflation. This doesn't seem to be happening as of today, in fact, the more money the Fed prints, the stronger the dollar. Central banks worldwide are printing money as well, so the dollar looks like the "least ugly" choice by comparison. The big unknown is how long the Fed can keep printing before debt-holders start second guessing the dollar's value.
[+] [-] aazaa|6 years ago|reply
3. Dollar devaluation through expansion of the balance sheet even further.
The BoJ balance sheet is about 100% of GDP. The Fed balance sheet is about 30% of GDP. That gives a lot of room to add assets before the US looks anything like Japan in that department.
This balance sheet expansion could happen against a backdrop of stock prices that would otherwise be falling. Expanding the balance sheet through stock purchases allows the Fed to correct the global dollar short squeeze while preventing calamitous stock repricing at the same time.
Nominally, things wouldn't look much different to those in the US. But in real terms, the result would be crushing. It seems, however, that politicians and many voters only consider nominal returns, not real returns.
This is one of the reasons I find it hard to believe people who claim the Fed is "out of ammunition." We're at the level of bazookas now, but the Fed has everything from that to nuclear ICBMs and more to play with courtesy of the dollar's reserve currency status.
https://www.lynalden.com/global-dollar-short-squeeze/
[+] [-] icu|6 years ago|reply
Also, when you say "in fact, the more money the Fed prints, the stronger the dollar", I don't think this is quite the case. The supply of US dollars isn't enough to match the global demand for US dollars. The Fed is having to "print" (basically enter some numbers into a computer) dollars to meet this demand otherwise it causes havoc... perfect example is the repo market spiking and the Fed having to intervene.
For a good explanation search for the 'dollar milkshake theory' by Brent Johnson.
I agree that the Fed's interventions can't keep on going... each intervention creates market distortions that end up requiring more interventions. However, one of my economics professors used to say, “In economics things take longer than you expect, and go quicker than you expect”. So, I take that to mean that the Fed will ‘save the day’, continue to distort the market, and we will have a catastrophic unwinding of the debt.
In terms of how I'm going to protect myself, I looked long and hard at Ray Dalio’s ‘All Weather Portfolio,’ but I've decided to implement Chris Cole's ‘Dragon Portfolio’ (search for ‘The Allegory of the Hawk and the Serpent’) with a tactical overlay taken from Seth Klarman's out-of-print investing book, 'Margin of Safety' which I highly recommend.
[+] [-] eldavido|6 years ago|reply
The pendulum swings. We had a lot of government involvement in the 40/50s. It declined through the 60s and 70s until we got peak deregulation in the 80s. People forget that near-free telephone calls and cheap flights everywhere were a direct result of all the deregulation. Now I see things swinging back. Maybe it's generational, we forget/become blind to how good we have it, and only see the disadvantages, and then swing back the other direction.
My sense is that we're heading toward something more like China with all the good and bad that entails. Much closer cooperation/coordination between the federal government, industry, finance, and academia. Government that doesn't let big business fail, more stable and "guaranteed" employment/income for people, more state direction of the economy. More emphasis on big firms, "national champions" (Trump creating the CEO advisory council with Apple/Tesla/etc. CEOs, bailing out Boeing), America-first (China-first!) industrial policy, and limited scope for foreign ownership/takeovers (US blocking ZTE's takeover of Qualcomm, arresting Huawei execs in Canada). With the accompanying reduction in freedom of expression, individual rights, ease of hiring and firing, economic freedom, and overall dynamism/ability to adapt and invent new things.
It's been heading this way for a while and frankly, seems to be what people want. Massive escalating bailouts every 10 years, and a serious push for a socialist, worker-first government. It seems there's been some kind of deep shift in our culture away from risk-taking and more toward the stable academic/government/state-directed way of life.
Look at all the main street businesses around you, especially hotels, dry cleaners, diners, gas stations, auto repair shops. It's striking how many were started from about 1940-1970 or so. Nobody wants to own or operate this stuff anymore. Everyone would rather go to college, get a stable job at a big, high-paying, high-productivity company, usually that offers good insurance, paid parental leave, etc. and work there for a long time, or hop between various versions of this same arrangement for a few years at a time.
[+] [-] rayuela|6 years ago|reply
[+] [-] howeyc|6 years ago|reply
Also, why does the government debt "bubble" ever have to "pop"? Does everyone still believe the government has to "pay off the debt"?
They don't. Ever. For a large number of reasons, to name just a couple:
- No more treasuries or bonds (how many people would freak out if those no longer exist)
- They can print more money forever. Besides, at this point it's just numbers in the FED computer system. Hardly any of it even exists as a physical object (paper, coins).
Also, I'll let you in on little secret. The Fed is never going to fully unwind its balance sheet.
[+] [-] eganist|6 years ago|reply
Can I ask for a journal or study source/citation for this?
[+] [-] acd|6 years ago|reply
[+] [-] aazaa|6 years ago|reply
In other words, the Fed is buying junk bonds through ETF. There's one more stage to go: buying equity ETFs, like the Bank of Japan has been doing for years.
[+] [-] tren-hard|6 years ago|reply
> Loan sizes will range from $1 million to $150 million.
$150 million is obviously no longer about protecting employee payrolls like these business relief loans started out with.
[+] [-] lubujackson|6 years ago|reply
Check out this amazing interview about this may unfold: https://youtu.be/_hA3TV1bGsg
[+] [-] whatok|6 years ago|reply
[+] [-] vladimirralev|6 years ago|reply
[+] [-] bediger4000|6 years ago|reply
[+] [-] deevolution|6 years ago|reply
[+] [-] brocklobsta|6 years ago|reply
[+] [-] steveeq1|6 years ago|reply
[+] [-] icu|6 years ago|reply
In other words, in the short term I think there will either be deflation, or no change to inflation (due to all the money printing).
The question will be what will happen once the global lockdown is lifted, and how quickly the velocity of money picks up. There might very well be high inflation or hyperinflation in certain things, but not in others (due to how quickly global supply chains are repaired and how substitutable certain products are. In 2008 the money was given to the banks (to recapitalise them) and then transmitted to financial assets due to the search for yield. This meant that the velocity of the new money was very low, which is why there wasn't high levels of inflation. If there is MMT or helicopter money, we could very well see high levels of velocity and inflation.
[+] [-] AngrySkillzz|6 years ago|reply
See also "banks don't lend out reserves." The linkage from "cash" (i.e. bank reserves) to the market price level of goods is not very strong.
[+] [-] dragonwriter|6 years ago|reply
No, because this kind of thing has been done before without hyperinflation.
What you are ignoring is what the expected inflation/deflation course would be without the policy.
[+] [-] jdhn|6 years ago|reply
I thought that QE was going to lead to a lot of inflation, and it hasn't seemed to. If inflation has shown up anywhere, it's been in the stock market and housing prices due to low interest rates. Even then, I'm hesitant to say that it's primarily responsible for the rise in housing prices because I think demand from my generation (millenials) is helping to cause the sharp spike in markets such as NYC LA, Atlanta, etc.
[+] [-] londons_explore|6 years ago|reply
Buy enough of them and you might prop up the economy long enough for the bonds to come to term and be repaid.
Buying any one individual bond would have been lossmaking, but buying in such volume proves profitable due to a kind of network effect?
Is this likely/possible? Is it possible someone other than the fed could have done this? Like maybe a foreign government (China, EU, Saudi Arabia)?
[+] [-] xiaolingxiao|6 years ago|reply
[+] [-] neonate|6 years ago|reply
[+] [-] blackrock|6 years ago|reply
Let the new dawn of Infinite QE begin!
===
Let us give thanks to the the Fed. They just impoverished all of us. Because of this, then the rich will just keep getting richer. The oligarchs of America wins again.
What should you learn from this? Take out cheap low interest loans to buy up assets. Your dollar just got cheaper, while all prices will go up. In 10 years, your $700,000 USD house, will be priced at $1,400,000 USD.
[+] [-] arunkd13|6 years ago|reply
[+] [-] andarleen|6 years ago|reply
[+] [-] jgacook|6 years ago|reply
This liquidity isn't a life boat. It's propping up corporations and people who have been dangerously over leveraged for years and who are beginning to become habituated to the notion of getting a government bailout when times get hard.
To the enlightened HN participants proclaiming that this is a necessary step to save an ailing economy facing an unprecedented crisis, consider the following:
1) this crisis was not that unprecedented and many companies had large enough balance sheets that they were able to weather it. Why are we rewarding corporate mismanagement? Have any of the corporations eligible for asset filed for bankruptcy or attempted an asset selloff to recover some liquidity?
2) the Main St. loan pool is much smaller than the Wall St one. Why do we expect smaller businesses to be better able to weather this crisis?
3) what is this cash infusion actually doing to tackle the exponential rise in unemployment? How does it help the taxpayer? It's not going to stimulate consumption in people who have lost their jobs and kickstart a recovery - the unemployed will likely be unemployed for months to come and the loan recipients will likely be so saddled with debt at the end of this that they won't experience growth again for years. There's no mandate that companies receiving emergency loans have to maintain their current workforce. The taxpayer receives no equity in the companies they have gone into debt to save.
4) given the size of these loans we may well be in another recession in 10-20 years and still have the majority of these loans outstanding. Do we then forgive these loans when the usual suspects need another round of cash infusions?
5) the Fed has set interest rates close to rock bottom for the better part of a decade (and backed down from raising them last year when Trump threatened bloody war) leading to a massive asset bubble and a business climate addicted to cheap liquidity. The message this bailout sends is that corporate over-leveraging is rewarded with a cash infusion, but god help the individual who took out a mortgage, car loan, etc. and lost their ability to keep up payments from coronavirus unemployment. Why is one type of entity granted access to public money in order to be spared from their bad decisions?
The scale of this debt is almost unfathomable and adds to an already overloaded Federal Reserve balance sheet. Other commenters have rightly pointed out how precarious this situation is in the longer term. I'm more worried about the callousness of the average person on this issue. American economics are so polluted with worship of great titans of business that nobody really seems that concerned that millions of Americans are facing perhaps permanent homelessness and long-term unemployment in the next few months.
Pumping failing businesses full of cash when millions of our citizens are struggling to buy food should not be normal. It is not a stepping stone of necessity to preserve our way of life. It is a choice to use capital to violate perhaps the most central tenet of capitalism: businesses must face the consequences when the punch bowl runs dry. This is socialism for corporations and we're all footing the bill.
[+] [-] rsanheim|6 years ago|reply
It’s impossibly l to know how this will all play out over the next several decades, but the house of cards is teetering dangerously and when it crashes, it will be a tremendous fall.
[+] [-] ghouse|6 years ago|reply