[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%.

[tempsy]

Asset managers are front running the Fed. The Fed hasn’t even bought junk corporate bonds yet. They’ve only signaled that they are willing to do so, which immediately sent the price of junk corporate bond ETFs skyrocketing.

If the Fed steps in to save this market they’ll overpay for debt from companies included in these bond ETFs that will likely go under anyway.

It also creates a moral hazard situation where poor performing companies can raise cheap debt because everyone now thinks the Fed will step in and guarantee it.

[andreilys]

The fed is buying junk corporate bonds that would otherwise plummet in value.

[thomashobohm]

This is not accurate. A "plummet" in value when it comes to the fallen angels that the Fed is purchasing is more like a 10% drop, and even if you treat the difference between the "true" value of the bonds (if the Fed didn't purchase them) and what the Fed pays as a surplus, the aggregate value of all those surpluses is still tiny in the grand scheme of things.

[andreilys]

LQD, a corporate bond ETF, plunged -20%.

It likely would have fallen even further, until the fed decided to intervene and buy corporate bond ETFs.

Now LQD has fully recovered and is back to pre-corona virus levels.

More interesting is the rebound in HYG, another Corp bond ETF, which is 50% BB rating, and the remaining 50% below BB rating. I imagine those will get downgraded and be even worst.

Now what happens when companies can’t meet their debt obligations is that covenants will get triggered and that can mean a whole lot of bad things for corporate debt. Which the federal reserve now holds because nobody else wants it.

[thomashobohm]

Yes, this is a good methodology: we should take the lowest point of a random ETF, extrapolate it out, and use that number in our analysis of the Fed's actions.

edit: they edited their comment extensively after I sent this haha.

[thoughtstheseus]

What covenants? All kidding aside, it’ll still take time for financial reporting to report a full period impact of this.

[DiogenesKynikos]

> That's not necessarily true

The Fed is driving up the price of junk bonds, so it clearly is true.

[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

[skrtskrt]

It's worth noting that part of the reason that inflation statistics are so "low" is that there's an official adjustment done when things cost more but (supposedly) have increased quality, called a "Hedonic quality adjustment"

This adjustment has been made multiple times in recent decades for housing, which is a large part of any given adult's spending.

So the Fed economists keep saying "wow inflation is so low even after we pump gazillions of dollars in during QE", while ignoring the fact that easy money has lead to massive multinationals consolidating control of real estate and jacking prices up.

So even if it is somehow true that houses have gotten better in some ways (I'm not really convinced), that doesn't matter to people lower on the income scale where the price of housing is the difference between having a roof over their head and not - they can't really afford to care about the latest greatest improvements in housing. They have a different demand curve - be homeless or spend most of their income on rent.

Rent vs income since 1960: https://www.apartmentlist.com/rentonomics/rent-growth-since-...

Skepticism about the application of hedonic adjustments https://www.sgtreport.com/2019/12/what-worries-me-about-hedo...

"The theory is that the vast majority of that 70% price increase of a Camry since 1990 is due to quality improvements, with buyers today getting a far superior Camry; and that only a smaller part of that 70% price increase is due to monetary inflation, namely the dollar losing its purchasing power"

[TheFlyingFish]

Just anecdotally, I wouldn't be surprised if a Camry really were "more valuable" (as measured by some sort of ideal fixed value-marker not subject to inflation) than in 1990. I seem to recall when I was growing up that the average expected lifetime of a car if well-maintained was about 100k miles; now it seems to be about 200k.

Housing may be a more debatable case, though.

[skrtskrt]

I agree that’s an opinion many people familiar with cars would share.

However the usefulness of that improvement is going to be a lot lower to someone who just needs a car to get somewhere rather than someone who can afford to buy a car with the long view of how it will affect their finances over many years.

The “purchasing power of the dollar”, even if you accept the accuracy of hedonic adjustments, is an extremely limiting view of the value many participants in the economy are deriving from that dollar.

I agree housing is a better example because the cost floor is much higher.

[perl4ever]

"the usefulness of that improvement is going to be a lot lower to someone who just needs a car to get somewhere rather than someone who can afford to buy a car with the long view of how it will affect their finances over many years."

I don't understand how a longer lifespan could not affect TCO regardless of how long you keep your car or what portion of its life you use. What does it mean to say people can't afford to spend less money?

[esoterica]

> So the Fed economists keep saying "wow inflation is so low even after we pump gazillions of dollars in during QE", while ignoring the fact that easy money has lead to massive multinationals consolidating control of real estate and jacking prices up.

This is not remotely grounded in fact. The majority of real estate is controlled by homeowners and small-time landlords, not massive multinationals. Landlords don't have monopoly pricing power, rents have gone up (in specific cities) because anti-development policies restrict supply.

[skrtskrt]

If you only look at home rentals, yes corporations make up less than 10% of ownership. But even the small percentage of ownerships really affect things, in Chicago we can see it has repeatedly taken just a few new luxury high rises to blow up cost of living in entire neighborhoods - it has a follow-on gentrifying effect where stores rush in to serve the new monied residents and the people living there can no longer afford to participate in their local micro-economy.

Again, real, actual lived experiences tell the store more than the super-super high level macro numbers might suggest.

There's still the effects on non-home real estate too, in which there is significant consolidation:

https://cxre.co/houston/commercial-property-management/the-b...

"During the past ten to twelve years, Blackstone has grown tremendously. Since going public in 2007, it has quadrupled in size. On top of that, Blackstone’s real estate division has exploded from a $17.7B venture to a $100B portfolio. According to BizNow, since 2009, it has spent more than $50 billion on commercial real estate. In addition, Blackstone closed a real estate fund worth about $16B in 2015. As a result, Blackstone now has the crown of ‘Largest Real Estate Owner in the World.’ Business Insider has even called the group’s Chairman and CEO Steve Schwarzman, ‘America’s landlord.’"

[esoterica]

> If you only look at home rentals, yes corporations make up less than 10% of ownership. But even the small percentage of ownerships really affect things, in Chicago we can see it has repeatedly taken just a few new luxury high rises to blow up cost of living in entire neighborhoods - it has a follow-on gentrifying effect where stores rush in to serve the new monied residents and the people living there can no longer afford to participate in their local micro-economy.

You are confusing cause and effect. The luxury high rises are the result of rising demand and rising prices, not the cause. If you could magically cause prices to increase by building luxury apartments, you would see luxury apartments sprouting up all over the impoverished parts of the South side. But you don't, because the demand is not there. If you stop luxury apartments from being built in desirable neighborhoods and desirable cities, people will just bid up the prices of crappy older housing stock and drive poorer people out anyway (see: San Francisco).

Building new housing decreases the price of existing housing by expanding supply. It does not increase it. People who have a vested interest in seeing housing costs go up (landlords, existing homeowners) understand that fact, which is why NIMBYs keep voting against development. Unfortunately many people who do not want housing costs to go up do not understand the basic economic fundamentals and are motivated by reflexive hate of wealthy developers, so they sabotage their own interests by voting against new housing to the delight of their landlords.

[thomashobohm]

That's not how any of this works; inflation statistics are calculated by the Bureau of Labor Statistic, independently of the Federal Reserve.

There's no conspiracy among Fed economists to try and hide inflation.

[skrtskrt]

I didn't say the Fed calculated it. I did say they reference it to say their policies (or whoever's policies) aren't causing inflation.

When a majority of leading economists subscribe to economic views that don't reflect the lived reality of an average person, it may not be a conspiracy, but the effect (groupthink) is similar.

[fuzzybear3965]

I had the same question a few weeks ago! Apparently, the delay between monetary stimulus and the time we'd notice inflation is estimated to be greater than 12 months. I found one of the sources whose abstract I scanned when I had this question[0].

Hedge: I'm not saying it's true or that I've verified any of the research, only saying that economists have studied the effects of central bank stimulus action on inflation rates and the economic response seems to take a while.

[0] https://www.google.com/url?q=https://www.lancaster.ac.uk/sta...

[toomuchtodo]

Direct link: https://www.lancaster.ac.uk/staff/ecajt/inflation%20lags%20m...

[neffy]

It's complicated. Hyperinflation occurs generally when the banking system's regulation is gets out of control and goes into a lending/money creation spiral. That can happen very quickly - within several month. All things considered what's more likely to happen at the moment though is a monetary implosion, as massive debt defaults occur destroying the money in the banking system. Which is why people are muttering about Great Depressions.

[IanDrake]

You can print money indefinitely and not cause inflation as long as there is an equal demand for what you're printing.

USD demand is very high globally and domestically right now. Let's hope that doesn't change over night.

[thedudeabides5]

Demand for dollars won't evaporate overnight. The thing about being a reserve currency is in a crisis, the entire levered world is short your currency.

That, combined with the fact that it's not like any major developed economy is doing that much better, means US goods, services and financial assets are still pretty competitive with the rest of the world.

The dollar is up 40% vs the lows of 2008. When DXY is back at 70, it's time to worry about a crack in the dollar reserve system.

https://www.tradingview.com/symbols/TVC-DXY/

[OscarCunningham]

The worry isn't demand dropping over night, since in that case the Fed could just sell the assets it's been buying. The worry is that the value of the Fed's assets will drop overnight.

[thomashobohm]

This is inaccurate; most economists think we're most likely to see deflation over the next several months as demand collapses. Considering the position of the dollar, a "monetary implosion" like you're describing is still exceedingly unlikely.

[andreilys]

Most economists also thought we had banished volatility, until 2008 happened.

I wouldn’t put too much trust in that expert class given their track record.

[thomashobohm]

"Most economists" never believed that. Lots of people in finance did, sure, but they're not economists.

[neffy]

Most economists don't understand how banks write off debt.

[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.

[toomuchtodo]

> They can sell off some of their balance sheet or raise interest rates to reduce the amount of money in the system.

The Fed was unable to unwind more than ~$650B out of $4T from their balance sheet in one of the longest expansion periods in US history. How will they do this? This is not a rhetorical question, I am genuinely curious in how people think this will be done if the Federal Reserve itself can't do it (either reducing the balance sheet or influencing the target rate above low single digits).

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

[cm2187]

And if they can’t do it in good times. Like how much better than 2019 the economy needs to be to unwind more?

[OscarCunningham]

They couldn't do it without causing deflation which they didn't want. But if they were combatting hyperinflation then they would want to cause deflation, so it would be fine.

[tempsy]

Look at what happened in December 2018 when the Fed tried to raise interest rates and let assets bought during the financial crisis roll off at maturity...the market immediately crashed.

Fed is backed into a corner where it can’t raise rates without crashing the market and can’t lower rates now that we’re at 0.

[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.)”

[Qasaur]

The fact that it has been going on for decades doesn't make the point less valid. This kind of monetary intervention is compounding in nature, and it can be clearly seen as how each financial crash over the past 2-3 decades has been worse than the one before.

[dragonwriter]

> The fact that it has been going on for decades doesn't make the point less valid. This

No, the fact it what you describe has not been going on for decades. It is an occasional response to extreme events, not a continuous mode of operation, and your criticism is all about the potential risk it has as a continuous mode of operation. There've been a couple major cases fairly recently, but that was in response to the biggest financial crisis in 70 years and the most significant acute global pandemic in over a century happening to fall a little over a decade apart, not some change in general approach.

[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...

[RobertoG]

That could be true, but one thing is that the way (or some of the ways) the money is added to the economy is dubious and another that nothing should be done.

[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).

[alexmingoia]

Not every young person is in debt. Inflation helps those in debt or holding debt denominated assets, young and old. Inflation hurts savers.

If you’re young without debt, inflation devalues your savings.

[throw1234651234]

That's the argument for crypto and the gold standard.

[thomashobohm]

The actual reason why inflation hurts young people has to do with economic stability and its cascading effects on the economy. A period of significant inflation can wipe out generational mobility. Inflation has a minimal effect on "closing the wealth gap" in comparison and I think it's irresponsible to act like hyperinflation would be a reasonable way to solve economic inequality.

[mrfredward]

Yes, fully agree that economic instability from hyperinflation hurts far more than reducing the wealth gap could help.

In recent times, the fed has been below its 2% inflation target.If it missed on the other side, and inflation went to 3-4%, I think that would be totally reasonable economic policy. Double digit inflation, however, would end up making everyone poorer.

[thomashobohm]

Totally agree! I just don’t want people to get the wrong impression-easy to think that the takeaway is “inflation is always good for young people.”

[claudeganon]

How’d that theory work out with asset price inflation in the housing market, post-2008?

[_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.

[_curious_]

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

And then what happens?

[OscarCunningham]

Depends how bad the virus is.

[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.

[CaptArmchair]

As opposed to other theories such as...?

[jchook]

Austrian economics? Scientific method?

[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.

[nybble41]

In the end it's still a debt. The nominal value in USD may not be all that important, since the Fed can manipulate it more or less at will, but you're still borrowing productivity from the future—by consuming capital—and that debt will be repaid one way or another.

[api]

The fallacy here is assuming that capital is finite over all time. It's not. Capital is created.

Of course not all economic activity creates capital at the same rate, and I do definitely agree that the type of economic activity you get during and after a recession with massive QE is likely of a lower quality than what you'd get otherwise. But it may still be that more capital (wealth) is created this way then if you allow the economy to completely shut down.

I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies. Dead or dying companies do die under such circumstances, but so do really innovative ventures that have not yet reached comfortable sustainable profitability. A mega-recession right now might take out a lot of junk, but we'd also risk losing stuff like SpaceX, Tesla, Boom Supersonic, and hundreds of small innovative startups. We might also lose the whole renewable energy revolution and any work being done on next-gen nuclear power like small modular reactors.

In short we'd lose both the bottom and the top end of the innovation curve, keeping just the boring middle.

[nybble41]

I suspect you may have intended to reply to a different comment, but since you're here…

> The fallacy here is assuming that capital is finite over all time.

Capital is "finite"—as opposed to "infinite", "unlimited", "superabundant"—but I agree that it isn't fixed. There is no law of conservation of capital; it can be created or destroyed.

With that said, taking on debt is not necessarily a bad thing; it depends on how you use it, and whether you have a viable plan to repay the debt out of future earnings. QE fails on both counts; there's no real direction beyond "inject more money into the economy", and no viable repayment plan.

> I also disagree with the premise that recessions/depressions are good because they clear out dead or dying companies.

I'm not sure whose premise that was, but I would also disagree. Clearing out underperforming companies would be a silver lining at best, and not enough to make recessions or depressions "good". In any case the companies hit the hardest are not necessarily the ones with marginal profits but rather the ones which are incapable of adapting to changing circumstances. That can include old companies set in their ways as well as new, experimental ones which depend on emerging opportunities.

[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.

[tempsy]

Yes. The next recession will just be worse since Fed cannot lower rates any more and if they signal any sign of pulling back on propping up corporate bonds or mortgages those markets will just crash.

[legolas2412]

One thing i dont understand is why is federal reserve so involved with stock markets, first propping them up and then panicking if it crashes.

The federal reserve should only be concerned about the economy right?

[j15t]

The Fed is not focused on the stock market. When they improve the status of the economy through monetary policy, they indirectly improve the value of publically listed companies. This makes sense, because companies are the central entities in the economy. I don't know how the Fed could improve the state of the economy without affecting the prices of shares.

[jazzyk]

Take a look at December 2018. There was no pandemic. The Fed tried to very slowly reduce its balance sheet. The stock market threw a major tantrum (by dropping 20% or so) and voila, the Fed reversed its course.

The same in 2016, and other times

How can you say they are not focused on the stock market? They are primarily focused on propping up the markets.

[tempsy]

They shouldn’t be but this is not true now. What they’ve done has directly propped up asset prices. No question. This isn’t a second order effect. They know what they are doing.

[tempsy]

The wealth owners care about the stock market more than the “economy”

[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.

[neffy]

M2 is the total sum of all liability deposit money in the US banking system, and liability money has dominated in all monetary transactions since at least 1890. (Dunbar.)

[thomashobohm]

This isn't your term paper-you don't need to cite your sources. But, if you're going to, at least try to do it correctly (the parentheses go inside the sentence, the period goes outside the parentheses).

Regardless, it's this line: "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 I was referring to. That calculation does not reflect what the M2 number actually means. You already have a definition of M2, so I'm sure you can figure out where you went wrong yourself if you just stare at that for a little bit longer.