[gottareply2020]

Normally the US Fed has the following four tools at their disposal: the discount rate, reserve requirements, open market operations, and interest on reserves.

But now due to a very florid interpretation of the CARES Act [0], the US Fed has decided it is legal to buy both corporate debt and stocks[1].

This helps explain why the market is on such a bull run. The Fed has said they will be bailing out 401ks. The republicans (who would normally abhor this type of fiscal overreach) are delighted and the democrats don't know enough to read the writing on the wall.

[0] https://www.bloomberg.com/opinion/articles/2020-06-18/fed-se... [1] https://www.forbes.com/sites/kevincoldiron/2020/07/18/the-fe...

[bertjk]

>> the democrats don't know enough to read the writing on the wall.

What are you suggesting exactly here? That the Fed is hell-bent on inducing general inflation, even at the cost of skyrocketing asset values?

[metrix]

My understanding is that the inflation is causing skyrocketing asset values, it just hasn't trickled down into the economy.

[rjknight]

We are all commenting on an internet forum run by a company whose entire purpose is to funnel money captured from the (predicted and actual) sale of valuable assets into the economy in the form of more new companies.

[esarbe]

This. So much.

[neilwilson]

The action of central banks setting interest rates is an artificial market intervention that necessarily suppresses others asset prices by making risk free assets available that pay free money to banks and financial institutions.

Once the central bank hits zero, asset prices return to their market clearing prices as participants chase yield

[Bombthecat]

And it won't, how should it trickle down?

By the 10 %? By the people entering pension?

I will be K shaped, the rich get richer, pension people will be able to "enjoy" there pension and the poor wont be able to afford rent. Since big corps and funds will invest in housing to "save" money.

[bwb]

Not necessarily. So far it seems like the FED has gotten a lot better at preventing recessions / depressions. That might take some risk out of the market and cause valuations to go up given that risk is less.

Probably a little of both, but it is an interesting time in economics for sure.

[SCAQTony]

Perhaps they want they want to make a "trillion dollars" the new "billion dollars" by inflating the national debt away. YMMV

[toomuchtodo]

To be fair, the Fed is going to bail out social security as well when they buy Treasuries to replenish the SS trust fund gap. The path to an attempted soft landing is inflating away the constraints the economy is encountering. We’re going to print, not repay, our way out of this.

[baconandeggs]

> We’re going to print, not repay, our way out of this.

Try to, we're going to try to print our way out of it.

[ethbro]

If the Fed wants to print their way out of this, the Fed can print their way out of this.

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

[baconandeggs]

Nominally you can do whatever you want, that it solves anything is another question. And in fact, they've been printing money for over a decade and things have only gotten worse. The Enron balance sheet could handle a lot too.

[ahnick]

I am sincerely asking here... as long as the US dollar remains the majority reserve currency won't the US be able to successfully print its way out and basically ignore the balance sheet? If you think the US could experience repercussions while being the majority reserve currency what are the plausible scenario(s) that that would manifest itself?

[neilwilson]

It doesn’t matter whether it is reserve or not.

All floating currencies can do the same.

The issue is that the non government sector tends to hoard money rather than spending it.

The left want to confiscate those savings. The right try to mask them by pushing more and more people into debt.

The other option is that you realise net savings are largely inert in aggregate and essentially act like a tax.

Then you just accommodate them

[TuringNYC]

I think one key consideration is optics. Printing our way out satiates the power base of the population, even if it does cause longer term damage. Swallowing a bitter pill now causes immediate unrest, which is why we’ve a souses this for 12yrs running now.

[dlp211]

Increasing money supply != printing money to get out of debt.

As a countries population and prosperity grow, increasing money supply is expected. The US does not in large quantities print inflationary dollars, they print borrowed dollars. This is a subtle difference, but it is has profound implications. When the borrowed dollars are paid back, the money can be destroyed. Inflationary dollars by definition do not carry this trait.

[hundreddaysoff]

How will these borrowed dollars be paid back short of real non-BS US economic expansion, which as I understand it is not presently occurring? If they are not actually paid back but just kicked down the road, are they still effectively borrowed, or are they effectively inflationary?

Not trying to troll, just trying to get a handle on the basics here.

[dlp211]

So you make a good point. Yes, borrowed dollars CAN become inflationary. We will see this when PPP loans become grants. There are however, also deflationary effects happening at the same time due to the current pandemic...so which will dominate is hard to tell right now.

We are also experiencing supply and demand shocks, so we are experiencing higher prices in certain goods, but this is not inflation, we would expect that prices would return to normal when the constraint of the virus is removed.

I have a hypothesis that modern supply chains combined with weak labor make consumer inflation basically a thing of the past and we worry far too much about inflation that won't materialize in our normally operating global economy.

[ahnick]

What is the difference between a borrowed dollar and an inflationary dollar?

[dlp211]

> When the borrowed dollars are paid back, the money can be destroyed. Inflationary dollars by definition do not carry this trait.

[cinquemb]

Nothing but a debt trap. Exchanging long term debt that yields for reserves that yield IOER and stay on bank balance sheets and enter the economy slower and slower the more they do it.

https://fred.stlouisfed.org/series/M2V

[charwalker]

Luckily, until the world gives up the USD as reserve currency we might float it. Inflation spread over 3-4 billion spenders won't hit as hard as 400 million but it will definitely hit eventually...

[TuringNYC]

They have another tool: Forward guidance. By indicating what they may likely do in the future, they can enact current market behavior and effects.

[monadic2]

Since when are republicans for sane financing of anything? I thought that was just bullshit because it nearly always results in increased spending and cuts to services. They clearly just use this to con their base.

[stubtoe]

Exactly. It’s a transparent ruse they use to bash democrats. They don’t actually care about fiscal “conservatism”. The base falls for it every time.

[evancox100]

But the base doesn’t seem to want fiscal conservatism either, so the only ones who really fell for it were Democrats who took the Republicans’ position seriously, and the conservative intellectual movement pushing the policy.

[hiram112]

Yeah cause it's all those red cities and states that are demanding we bail out their pensions using Covid as an excuse for the fiscal implosions they've been warned about for decades.

At the national level, both sides tend to claim one ideal and ignore it whenever they get into office in order to pay back their base - Republicans give tax breaks to the already-wealthy, Democrats tend to rain cash down on academia, school unions, legal industry, etc.

At the state and locality level, it's generally the rule that more conservative states and counties are in better fiscal shape, and that's with typically far lower taxes.

[stock_toaster]

> At the state and locality level, it's generally the rule that more conservative states and counties are in better fiscal shape, and that's with typically far lower taxes.

Only because the federal government redistributes wealth from coastal states to interior ones.

https://www.forbes.com/sites/shaharziv/2020/05/12/blue-state...