[Suncho]

What matters isn't the size of the Fed's balance sheet or what it contains. The Fed's balance sheet is "invisible" to the private-sector economy. This expansion of their balance sheet is simply a reflection of the stimulus we're doing.

When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.

The important thing to keep in mind is that we are intentionally shutting down parts of the economy. But some of those parts include mechanisms (jobs) that we normally rely on to supply spending money to consumers and businesses.

Due to the partial shutdown, the economy's productive capacity has taken a hit. But even so, our economy still has the capacity to provide a decent standard of living for everyone. We don't want to compound the crisis by failing to ensure that consumers have sufficient spending power to activate the remaining capacity.

It would be scary if the Fed's balance sheet weren't expanding like this right now.

http://www.greshm.org/blog/printing-money-cures-the-covid-19...

http://bit.ly/intro-to-cmt

[Qasaur]

>When the Fed expands their balance sheet, what they're doing is replacing private-sector assets with liquid cash. Given that the stimulus is appropriate for the economy, this is all fine. It's not anything that future generations have to "pay back." And it's not going to cause a collapse of the dollar.

This is simply not true. The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed) and is effectively injecting money into the economy. This is a bailout as the Fed is making a liquid market (that otherwise would not exist) for assets, saving the balance sheets of firms. Future generations pay this back not through taxes but through inflation.

Whether or not the U.S. dollar will collapse or not is another topic, but what can be said is that it is not sustainable to continue bailing out irresponsible businesses like banks and others when they do not exercise good business practices like prudence, not being overleveraged, or having a buffer in case of lost revenue. The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.

[czinck]

> The Fed is buying assets at a premium (otherwise counterparties wouldn't sell the assets to the Fed)

That's not necessarily true, economic transactions aren't necessarily zero-sum. I would assume for most of the assets being sold to the Fed, the banks need liquid cash more than they need the asset and so would be willing to take a haircut.

>The only way this ends is either a depression the scales of which we've never seen in history before[...], or a hyperinflationary collapse of the U.S. dollar

Why specifically do you think this will happen now when it didn't happen post 2008? Sure the scale so far seems bigger, but also the scale of the hit the "real" economy is taking is much bigger. And, in March, when some of these asset purchases had already started, CPI declined by 0.4%.

[mariojv]

I'm not saying I agree or disagree given mild inflation trends over the past decade, but how long do you think inflation takes to really get in gear if you're right? We experienced deflation last month according to the consumer price index despite fiscal stimulus and Fed buying assets. [0]

The consumer price index is definitely flawed. However, one thing I've heard is that the massive drop in demand and velocity of money is necessary to consider when analyzing inflation. I also was initially worried about inflation given the massive stimulus numbers we're seeing but have been reconsidering this.

I'm not well-versed in this at all, but demand-pull inflation under Keynesian economics [1] or a drop in V (velocity of money) in the equation of exchange in the monetarist theory of money [2] seem to be what is supporting why folks are worried about deflation. I would venture to guess that this is part of why the Fed is doing these massive buys right now, too.

Tangentially, pointers to good econ learning resources from anyone would be helpful. I've only started with Khan Academy and what I remember from old classes so far.

[0] https://fred.stlouisfed.org/graph/?g=qH1p [1] https://en.wikipedia.org/wiki/Inflation#Keynesian_view [2] https://en.wikipedia.org/wiki/Inflation#Monetarist_view

[Jeema101]

I don't think the problem at the current time is inflation - it's deflation. There's less money chasing the same amount of goods and services. That was the case during the Great Depression - and the Fed exacerbated things at that time by not intervening in controlling the money supply because they were bound by rules which prevented them from doing so.

If inflation suddenly increases, then the Fed has tools to combat that. They can sell off some of their balance sheet or raise interest rates to reduce the amount of money in the system. Inflation only occurs because there's too much money chasing goods and services.

[dragonwriter]

> The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up.

Uh, the latter is not a distinct option from the former.

Also, you've left out: “the government continues as it has for generations, occasionally bailing out out wide sectors of the economy in black swan events with wide impact but mostly letting businesses big and small that are not prudent fail while cushioning some of the impacts of that failure with bankruptcy (both regular rule-based bankruptcy and similar, ad hoc restructuring in special cases; the latter is often also referred to as a ‘bailout’, but is meaningfully distinct from other bailouts.)”

[anoraca]

So, in your opinion, the only two possible outcomes are extreme cases that are bad? That seems like hyperbole to me.

[eli_gottlieb]

>The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.

Most countries are actually passing larger fiscal stimulus measures than the USA so far, at least relative to their existing currency base, so wouldn't this mean every currency hyperinflates all at once?

[kyuudou]

>The only way this ends is either a depression the scales of which we've never seen in history before (which would liquidate and clear out bad businesses), or a hyperinflationary collapse of the U.S. dollar whereby more and more money is injected to prop everything up. I'm betting on the latter as the former is too politically inconvenient.

Or, like last time, a global war.

Also, I cannot emphasize more fervently your accurate correction here:

>Future generations pay this back not through taxes but through inflation.

It's a form of theft, really. Increasing the velocity of money is important to Keynesians and the faster that stuff degrades in value the faster those who are paying attention want to get rid of it in tangible or better-performing assets rather than, say, saving it long-term for something like capitalizing a small business.

And, whether an individual or organization, taking out loan after loan and not worrying so much about bankruptcy is easier to tolerate since sooner or later the gambling will pay off and it'll be easier to pay off in the future with easy money. When a dozen eggs cost 50$, 100,000$ in student loans will be easier to pay off.

I read something today about how China is gambling on the dollar collapsing and have been hoarding lots of gold in anticipation of some kind of at least partially gold-backed currency that's likely to be digital.

[esoterica]

> Future generations pay this back not through taxes but through inflation.

Inflation expectations have collapsed in recent months. We didn't see steep inflation when the government pumped trillions of dollars into the economy after 2008, why do you think we'll see steep inflation now?

[DiogenesKynikos]

The most obvious illustration of this is the jump in junk-bond ETFs after the Fed began buying up junk bonds.[1]

The Fed is supporting the price of dubious, high-yield corporate debt. Whether or not that's good for the economy is a separate question, but it's not as if the Fed is just replacing assets with cash at 1:1 value. It is encouraging lending to risky enterprises, by itself taking on the risk.

1. https://www.ft.com/content/19e47570-ba23-4929-988e-9b5f468b2...

[mrfredward]

>Future generations pay this back not through taxes but through inflation.

I don't think that's a fair characterization. Inflation helps people with student loans (salary grows but debt stays the same) and hurts people with retirement accounts full of bonds. Broadly speaking, inflation helps the young (by closing the wealth gap between haves and have-nots).

[_curious_]

"Given that the stimulus is appropriate for the economy, this is all fine."

Very casually assumptive, but ok, let's go with it...

"It's not anything that future generations have to "pay back. And it's not going to cause a collapse of the dollar."

If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??

[OscarCunningham]

> If this is true, then what's the catch? What then are the adverse affects of the Fed printing money? Does it not inadvertently devalue the dollar? Why not double, triple, or quadruple the "stimulus" if it is, as you claim, appropriate and without any noted trade-offs??

This is a good question. The answer is that the virus and lockdown are currently causing lots of deflation. So the Fed needs to cause lots of inflation to cancel it out. But if they did four times more then that would be too much and would cause inflation to be far too high.

Personally I suspect the the Fed has undershot and we'll see net deflation over this year and the next.

[tumetab1]

Example of the catch of the FED buying financial assets, it increases their value:

Before 1 Google stock was worth 1 Tesla car. After 1 Google stock is worth 2 Tesla cars.

The purchasing power of those who hold financial assets is increasing while for those who don't own financial assets stays the same.

[RobertoG]

The GP is saying that the future generations have not to pay back and that the stimulus is necessary now and it will not be inflationary. It's not saying that it's not possible to spend too much and create undesired inflation.

But note that, in the same way it's possible to spend too much, it's possible to spend too little. For some reason there are people who think that is impossible.

[jchook]

The Keynesian theory of economics doesn’t exactly have a spotless track record for modeling and predicting outcomes of non-routine interference in the economy.

[nopinsight]

The velocity of money has gone way down so the current liquidity injection makes great sense.

A major question is whether and how the Fed will absorb the excess liquidity back later to prevent too much real inflation, beyond what is measured by consumer price index. (Some inflation is expected as the economy is less productive because of Covid-19 and the stimulus is used to partially offset its impact.)

[api]

> It's not anything that future generations have to "pay back."

I really wish the term "debt" were not used in these contexts. This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt.

In this context the term is being used to refer to an accounting construct that looks like debt, but the meaning of this particular accounting entry is completely different. Using this term only creates confusion among the public and even politicians who don't understand the complex and esoteric details of modern economics.

[samsonradu]

> This type of "debt" is fundamentally different from private sector debt or other ordinary forms of debt.

It depends. If you are Lebanon and borrowing USD it’s pretty much like a corporate debt and future generations are paying it back.

However, if you can print the world’s reserve currency while borrowing in it at the same time then there are different terms.

[tempsy]

This is a pretty naive take. You are suggesting that all these trillions are somehow ending up in the hands of people when the primary effect has been to prop up asset prices e.g. the stock, mortgage, and corporate bond markets.

The second order consequences of a massive balance sheet will be felt not in the immediate future but at some point down the line when the Fed attempts to shrink the balance sheet.

We have a very recent example of the Fed trying to do exactly that in late 2018, and the market immediately crashed on rate increases and assets rolling off at maturity.

[enraged_camel]

Another way of putting it is that it took the Fed 10 years to even think about trying to extricate themselves, and they realized they couldn't. Now they have gotten their hands much deeper in.

[jkhdigital]

This would make sense if the Fed's newly-created money went directly to households that need it due to economic shutdowns. But it doesn't, it mostly goes to financial institutions. You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants.

Also, your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith, not some falsifiable statement supported by facts. We don't know if that is true or not.

[thomashobohm]

Uh, actually, the notion that the economy has the capacity to provide enough for everyone is a falsifiable statement supported by facts. You can analyze the total amount of resources and the amount of work required to produce them, and figure out how they could be distributed differently. We've known for a long time that, in the US at least, there is enough food, shelter, and healthcare for everyone.

[Suncho]

> You're confusing the Fed's ability to monetize assets with the Treasury's ability to spend money on whatever it wants.

They're related. There's both fiscal stimulus and monetary stimulus going on here. The monetary stimulus only makes its way to consumers indirectly. On the fiscal side, as you say, Treasury can spend money on whatever they want. And when they do, they transform some of the financial sector's money into assets (treasuries). If the Fed wants to maintain its accommodative monetary policy, they're going to want to re-monetize those assets.

> your statement that our economy has the capacity to provide a decent standard of living to everyone is an article of faith

"decent standard of living" was not crucial to my point.

There's some part of our economy's productive capacity that we have consciously decided not to shut down because we've deemed "essential" to consumers. My point is that it would be a mistake for us not to provide consumers with the means (money) to access that capacity.

[neffy]

The Federal Reserve's balance sheet, and its actions matter very much. What is essentially in the process of happening is a massive disconnect between the "operating system" of the economy - the financial system, which is in the process of crashing (bear with it, it's a very slow system it takes a while), and the economy - the computer - which is as you say, essentially fine, but no longer working because... operating system.

As far as the balance sheet itself is concerned, it's important to look at all of it - with any magician it's critical to watch both hands - and in this case, the right hand is doing this to the M2 money supply, i.e. creating $2 trillion.

https://fred.stlouisfed.org/series/M2

Approximately 15% of the real money supply, or about $5,000 for every man, woman and child in the USA, had it been handed to them directly.

That's this month. If that has to be done every month for the rest of the year...

[thomashobohm]

That is NOT what M2 means! Have you discounted the value of the ETFs and bonds the Fed has purchased? They're not suddenly valueless.