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The Fed Has Bought 70% of Net Treasury Issuance Since October

nickthemagicman 7y ago
Can anyone explain what this means for a noob?
- Invictus0 7y ago
  I thought this article was a little more layman friendly [0]. [0]: https://www.wsj.com/articles/the-fed-is-buying-bonds-again-just-dont-call-it-quantitative-easing-11571218200 https://www.wsj.com/articles/the-fed-is-buying-bonds-again-j...
- baronmunchausen 7y ago
  The Federal Reserve (the Fed), the central bank of the United States, prints money and buys the national debt (treasuries) in order to increase bank reserves and stimulate the economy. The Fed is doing this to such an extent that they are now monetizing (printing and buying national debt) 70% of all the debt issued since October, roughly when they started . They refuse to call it quantitative easing (QE) (despite it meeting the literal definition of QE). It's why markets are going up despite zero increase in overall corporate profits and mediocre economic growth. Endless artificial stimulus like this, is why the economy shuffles from bubble to bust.
  - acdanger 7y ago
    Admittedly, I haven't read the article yet, but can you explain why they are doing this now? All indicators seem to suggest the economy is strong, so why are they resorting to tactics we last heard about in 2008?
    - baronmunchausen 7y ago
      To cut through all the econ BS, basically because they stopped doing it for a while and markets went down a lot, then short term (overnight) lending rates start to spike higher and they freaked out.
    - aaronblohowiak 7y ago
      i don’t agree with your assessment of the indicators. We haven’t hit target inflation, because labor costs have been resisting upward pressure due to underemployment. The fed thinks it can paper over structural problems with cheap money, resulting in capital asset price inflation and increased wealth disparity...furthering barriers to real wage growth.
      - deleted 7y ago
        [deleted]
    - coolspot 7y ago
      Some think it is because elections are near. Can’t have weak market before that. Same reason why China trade deal phase 1 was signed, which doesn’t solve problems in trade with China.
      - hcknwscommenter 7y ago
        > Can’t have weak market before that That is only true when the President has an (R) next to his name. (D)-type Presidents do not enjoy this privilege from the Fed.
        nwsm 7y ago
        I wish someone would post a counterexample along with their downvote.
    - mdorazio 7y ago
      Not sure why you think indicators suggest a strong economy - if you dig into most of them, the US isn't actually doing that great after you discount for the artificially easy money situation created by the Fed's actions for the last decade and its knock-on effects (ex. debt-funded stock buybacks).
    - alecco 7y ago
      > All indicators seem to suggest the economy is strong It's doing great if you ignore budget deficit, multiple debt balloons (national/municipal/auto/student), and looming trillions of unfunded liabilities. What could possibly go wrong?
    - deleted 7y ago
      [deleted]
    - mywittyname 7y ago
      Some sectors of the economy are strong, but other sectors are doing extremely poorly. Agriculture and mining have been hit by several recessions (two consecutive quarters of negative growth) over the past four years, while sectors like finance and technology are doing very well. The mining and natural resources sector was hit by a recession in ~2015 that was worse than the 2008 crash. The problem is finance is by far the largest sector of the US economy, so when you look at aggregate GDP numbers, the US economy looks great because the modest gains in finance are more than compensating for the huge reduction in output in the smaller sectors. It's the same story for the stock market: the market cap of the stock market is heavily weighted towards technology stocks, which is compensating for the poor performance in lagging sectors.
    - charwalker 7y ago
      Because your analysis is incorrect. The economy is flat, if that, based on stock market information. But most people don't have wealth in stock but a house or car with a 401k waiting. Real income/wages are flat, the many tariffs and economic policy choices made by the current administration has slowed if not stopped manufacturing (steel tariffs especially), the rate of auto loan defaults is at a record high (see 2008 mortgage crisis), and worse. Adding $1 trillion of debt per year is insane and would send 2008-2016 debt hawks into a tizzy yet the current admin vastly increased the deficit over the previous administration. Most of this is tax cuts from the 2017 bill which disproportionately go to corporations and super wealthy. Tax cuts for corporations do not expire whereas those for citizens will sunset. These tax cuts have led to massive stock buybacks which artificially buoy the stock market (which is why it's the only 'good' thing about the economy as a whole right now). The best news of each monthly job report, jobs gained, has been rolled back by later reports allowing the administration to trumpet growth and improvement but leave out how off the numbers really are each cycle. Also, most of the 'new' jobs are part time, low wage, low skill, or gig economy work that often doesn't pay a livable wage or is a supplement to another low paying or part time job. That pattern does not lend itself to a strong, robust economy but can create a short term projection that appears so. We recently hit a known recession indicator where the Treasury yield curve inverted. An inverted yield curve occurs when long-term yields fall below short-term yields like when 1 year bonds have higher interest than 10 year. usually the long term investment has higher returns except when analysts or brokers predict a crash is coming. Since this metric was tracked, we have entered a recession within 24 months every single time the curve has inverted. This includes the negative bond rates we saw after 2008. Today we might be paying too much attention to this indicator for it to still work that way but it's still important. For all intents and purposes, the Trump economy is not good, flat, and falling. We may see a massive correction once stock buybacks end or are banned, corporate taxes are raised by a liberal congress, or any number of policy changes. Manufacturing is set for layoffs and reductions through 2020 (see US Steel closing sites in Michigan) and I'm personally saving for a down payment on a house when the market crashes in my area. I'm curious, what indicators are you going off to think they 'all' suggest the economy is strong? It may be your sources are lying by omission or spinning information to look good when it isn't a real representation of the economy, like pointing to stock market highs that mean almost nothing. We've crossed 26000 in the Dow averages like 5 times in the current admin, that isn't stable at all but a pattern of rise/fall boom/bust that is not sustainable.
  - blackrock 7y ago
    The 2019-nCoV is going to get much worse, before it gets better. Q1 in China is going to be much worse than Q1 last year. Factory output will slow. And this will affect the entire nation’s export engine to the world, and including the US. How do you think this will affect the stock market? It kept going up in a straight line, until the coronavirus outbreak, and then SPY fell 10 points off.
  - hcknwscommenter 7y ago
    The literal definition of QE, AFAIK, is "injecting money supply into the market." What the Fed is doing here is swapping one risk free asset for another. These are very different. There was a hiccup in the repo market, so the Fed is "buying" extremely short term (e.g., O/N repo) instruments. There is no net injection into the market. In contrast, during actual QE, the Fed was buying across the curve so that actually available interest rates for economic actors were depressed (again across the curve), encouraging economic activity. The effect is VERY different. The effect was supercharged with operation twist but that is another story.
    - nwah1 7y ago
      QE is also just swapping of assets, which is why it wasn't noticeably inflationary any of the times it was done.
      - fbonetti 7y ago
        It’s swapping an existing asset (a treasury) for an asset that was created completely out of thin air (reserves). It increases the monetary base. If you don’t believe me, look at the Fed’s own data. https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE QE has not caused excess inflation in terms of the consumer price level, but it has dramatically increased the price of interest-rate sensitive assets like real estate, equities, and bonds.
      - hcknwscommenter 7y ago
        "QE is also just swapping of assets" Sort of. It was a swapping of short term liquidity for assets across the curve. Which is why it was fundamentally different from what the FED is doing today. "which is why it wasn't noticeably inflationary any of the times it was done" This is quite a strong statement. I would disagree. My model says it was inflationary. The counterfactual is "what would the inflation/deflation rate be in the absence of QE all else being the same?". Such counterfactuals are hard to come by, which is why this is such a dismal "science." At any rate, it cannot be denied (IMHO) that actual QE depressed interest rates available to economic actors.
  - smilbandit 7y ago
    so trying to keep things afloat so that it can bust later, say when a new president is elected.
  - cconroy 7y ago
    These policies exacerbate inequality. In fact, I think economic inequality wouldn't be an big issue without this crap.
    - anm89 7y ago
      Yeah, I think if the average person understood this there would be riots in the streets. It's an unbelievably huge regressive welfare program for the .01%. Fortunately it's boring and complicated which is a built in guarantee that a large percentage of people will never care about it.
      - derision 7y ago
        As a small retail investor, and someone who's income puts me in the middle class, I've had big gains in my equities. I consider myself an "average person". Why should this make me want to riot in the streets? Is your implication that only the 0.01% actually own stocks? Even my grandmother, albeit managed by a financial advisor, has a stock portfolio that is benefiting from the current market activity.
        cconroy 7y ago
        Look into Cantillion Effect "...recipients of new money enjoy higher standards of living at the expense of later recipients..."[0] [0] https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_theory https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
        FiatLuxDave 7y ago
        Ah, thank you! That's exactly what I was trying to think of when I posted this question 7 months ago: https://news.ycombinator.com/item?id=20164397 https://news.ycombinator.com/item?id=20164397 +50 internet points for you!
        abofh 7y ago
        Because it's taking huge amounts of treasuries purchased to simply support the market. You're seeing stability, but your children are seeing a higher debt burden.
  - aguyfromnb 7y ago
    >It's why markets are going up despite zero increase in overall corporate profits and mediocre economic growth. It's one of many reasons the markets might be going up, along with slow global growth around the world (where else should you put your money?) and potential global instability (Hong Kong, Iran, China; USD still a safe haven). >artificial stimulus What is the difference between natural and artificial stimulus? >why the economy shuffles from bubble to bust. You see this particular argument all the time, but one look at the data shows that the boom/bust cycles of modern times are few and far between relative to 30,40,50 years ago, and in particular when compared to the pre Federal Reserve days. Booms and busts happen in every economy, ever, throughout history, with or without central banks.
- kurthr 7y ago
  The Fed is at least delaying purchase and interest payments on a significant amount of newly issued (short term) Treasuries against which they allow currency (paper or electronic) to be issued. This borders on issuance of fiat currency since their purchase is itself "unbacked" although the trades could eventually be unwound in the market if/when there is enough inflation that their value is negligible. It is what gold bugs call printing money... or a money drop that goes straight to the leveraged banking system which lends out a multiple of the money from the Treasuries now held at the Fed and earns interest on the full levered amount. That has an inflationary effect, but mostly on financial instruments (stocks & corp bonds) since that's what banks usually buy with their new found money... and the Fed hopes that has ripple (wealth) effects on the rest of the broader economy.
  - coldcode 7y ago
    At this point its helping companies buy their own stock by having cheap loans to use instead of cash. It's not really doing much for the economy such as spurring more investment or hiring.
    - aguyfromnb 7y ago
      What are the mechanics by which loans and stock buybacks do nothing, while investment and hiring do good things? It's all shifting money around, the results of which benefit different groups. That's not to say that in specific cases dollars couldn't be spent better elsewhere, but there is no "this is better than that" formula. "Investing" when there's nothing to invest in is pointless, and if you hadn't heard, unemployment is near all-time lows; companies are hiring.
      - kurthr 7y ago
        Well, actually the stated point of the Fed's move is to spur inflation and that requires monetary velocity (spending and re-spending). For that stock buybacks are not very effective (relative to other Gov spending), because the money just stays in people's investments and doesn't go anywhere. Also, I think you really want to look at the participation rate rather than the un-employment (which has been steady for a year whatever the Fed is doing).
- fbonetti 7y ago
  The Federal Reserve, which is the central bank of the United States, is creating new money in order to purchase US government debt, which is essentially equivalent to the government printing new money in order to finance its own spending. Looking at it another way, it’s no different than some guy printing counterfeit US dollars in his basement and using them to buy real assets. The outcome is the same in either case - the counterfeiter and the government both get to spend newly created money while simultaneously devaluing of the purchasing power of the dollar for everyone else.
- jfengel 7y ago
  It means that the US economy is in much worse shape than various indicators (successful stock market, low unemployment, high price of US government bonds) would indicate. The government regularly spends more than it takes in from taxes by issuing bonds. People buy the bonds because the US government is considered quite safe. That in turn lets the government spend money, which ultimately makes its way into the economy as a whole. People use that money to hire workers, buy stocks, etc, making the economy look good. But the Federal Reserve Bank has the ability to invent money for buying those bonds out of thin air. That means the bond prices stay high (and the interest rates low). That implies that the current strong economy is an illusion, and that's worrying. The expected response of extra money being pushed into the economy without added value is inflation, and the inflation rate has crept up over 2%[1]. It's actually a little surprising that it has taken this long, since this is actually something they've been doing for over a decade. There is considerable debate about that, but it may be that the inflationary chickens are finally coming home to roost -- in which case things might get real bad real quick. tl;dr: this indicates that the economy may not be as strong as we think, caused by economic manipulation by the Federal Reserve to make the economy seem stronger than it is. [1] https://www.bls.gov/news.release/cpi.t01.htm https://www.bls.gov/news.release/cpi.t01.htm
  - tabtab 7y ago
    We need something similar to the Balanced Budget Amendment (BBA). Our system rewards short-term thinking. However, the BBA should take into account stimuluses during slumps. It would probably have to kick in slowly to avoid hurting the representatives who sign it.
    - hcknwscommenter 7y ago
      Why? Do you think it would reasonable to require that all homes be paid in cash? Should we ban auto loans? Why is the government different in this regard? There is nothing wrong with using debt responsibly. I enjoy the opportunity this affords me to buy the debt. it's a good investment for me. When mixed in the proper ratios with the remainder of my portfolio in combination with reasonably applied leverage US debt provides a safe, stable, and inflation protected place for a great many of us to store excess earnings.
- davidw 7y ago
  ... and what it might mean for a retail investor who mostly buys and holds broad market funds?
  - lotsofpulp 7y ago
    It means continue buying and holding broad market index funds because the dollar’s value will be sacrificed to prop up equity’s (stocks, land, etc) value.
    - hcknwscommenter 7y ago
      Do you have any evidence to suggest that the Feds intervention at the short end of the curve is depressing the dollar's value?
      - lotsofpulp 7y ago
        I can't provide evidence that this specific intervention will depress the dollar's value, but since the Fed aims for 2% inflation, I expect my dollars to be worth less every day. https://www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent https://www.stlouisfed.org/open-vault/2019/january/fed-infla... At least it's been true for quite some time: https://www.thebalance.com/what-is-the-value-of-a-dollar-today-3306105 https://www.thebalance.com/what-is-the-value-of-a-dollar-tod... It seems all invested parties are budgeting at least 7% annual growth in asset prices, from the government's pension fund liabilities to people's 401k and IRAs. Since, voters won't like to see their balances go down, the powers that be will do everything they can to prevent it. And in the absence of a growing young population, I don't see many options other than devaluing currency.
  - Spooky23 7y ago
    If you bought into the index lifestyle, live with it.
- ur-whale 7y ago
  Read up on the debasing of the Roman sesterce [1]. This is the modern equivalent (i.e. the vocabulary and implementation means have changed, but not the deed in itself). [1] https://en.wikipedia.org/wiki/Debasement https://en.wikipedia.org/wiki/Debasement
- andrewla 7y ago
  Treasury bonds and bills are sold at auction to the highest bidder. The price they sell for determines the interest rate; the higher the price, the lower the rate. The Treasury department sells bonds to raise cash to pay government expenses, both for short term (until the next chunk of quarterly taxes come in) and the long term (spending in excess of government receipts). A one-year $1,000 T-bill means that in one year from the date of purchase, it can be redeemed for $1,000. So if you pay $980 for it, then that means that your effective interest rate is 20/980 ~= 2%. The Fed wants interest rates to stay low, so they're driving up the price of treasury bonds/notes in order to reflect that. That, in theory, means that financial institutions will prefer to lend to consumers/businesses/etc. for higher yields, rather than put their money into treasuries. Usually these sell at auction and the Fed buys some of them, but otherwise the market determines what the future value of money will be based on general return on capital.
yasp 7y ago
I generally as a rule dislike ZeroHedge, but there is good pertinent information in the following link. https://www.zerohedge.com/markets/944-trillion-reasons-why-fed-quietly-bailing-out-hedge-funds https://www.zerohedge.com/markets/944-trillion-reasons-why-f... (Commence the downvotes.)
- mywittyname 7y ago
  A broken clock is right twice a day. ZH has an overt political bias and is a perennial pessimist, but they do actually perform meaningful economic analysis. Edit: Then again, their articles sometimes feature near complete fabrications, i.e., "Minneapolis Fed president Neel Kashkari [...] said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth", which is not even remotely close to what was actually said.
  - hogFeast 7y ago
    Read further. They explain this view. It is 100% correct, based on the evidence they provide. What they are saying is that this was LTCM but instead of banks coming in and forcing losses at 50 cents on the dollar, the govt came in and bailed everyone out at par. I have no first-hand knowledge of the extent of this trade but a lot of it sounds correct (the key premise of the Fed is that this isn't leaking into the market...whether you believe ZH or not, you should be extremely suspicious of this line).
    - hcknwscommenter 7y ago
      > It is 100% correct, based on the evidence they provide. This is very wrong. The "evidence" they provide is nonexistent. The ZH link is typical ZH garbage. A bunch of assertions without basis with a few misconstrued quotes thrown in.
      - hogFeast 7y ago
        It isn't. Read the quoted section from Russel Clark, the BIS has been talking about this (they specifically mention levered hedge fund positions), and they specifically mention an arb between cash bond and derivatives (do you know the history of this trade? It blew up twice in the 90s)/point out that some funds are running with a lot of leverage (is this repo? I don't know, but it is likely given that this has always been a financing source and the BIS are saying that it is). So not nonexistent. The quotes look completely fine (I have looked at clearinghouses quite a bit, Russel Clark understands them...obv, the guy is not an idiot).
seibelj 7y ago
The US government's yearly deficit is over $1 trillion. 8.5% of the government's budget alone goes to interest on our debt (https://www.usaspending.gov/#/explorer/budget_function https://www.usaspending.gov/#/explorer/budget_function). To pay for the deficit, the treasury sells bonds (debt) which is immediately purchased by the Fed with newly printed money. Notice how equities are at all time highs - money is flowing to whatever it possibly can (stocks, housing, art, VC, anything) in order to chase yield. How people are saying inflation is low... I think they are measuring inflation wrong!
- echelon 7y ago
  How does this get corrected? Do investments wind up losing all of the gains, or do those who didn't have an opportunity to participate get left out and the value of their holdings diminished?
  - dustingetz 7y ago
    macro voices podcast has interviews about this frequently ... the answer is we don’t know but could be a 40 year recession, could be a financial crisis, could be a world war & collapse of countries. Today this aligns with income inequality ... stock market up 4x since 2008, home prices way up, poor people get none of those windfalls
  - seibelj 7y ago
    An extremely controversial topic! If you are middle class to upper middle class, owning assets to protect from the inflation (stocks, bonds, housing, gold, bitcoin) would be one way. If you mean unwinding our current loose-money global monetary system of fiat currencies, I'm not sure that genie can or will ever go back into the bottle. Let's hope the next recession is gentle.
    - jsjohnst 7y ago
      > Let's hope the next recession is gentle. On one hand I agree with you completely, on the other hand a very hard painful reset is kinda needed too. I really hope it doesn’t come to the later, but I’m not sure we can avoid it long term.
fredgrott 7y ago
What concerns me: 2008 Crash and how US Fed handled it means that they have to pump money into stock market for the next 30 years(20 left) until all the mortgages that they hold fully unwind. What could go wrong? Well, the US Fed track record for such strategies being successful over 30 years is vacant as it never has been done before! ie at least our problem with real estate-homes outpacing income gets worse
ur-whale 7y ago
Nothing new under the sun [1] If history repeats itself, next step is empire falls. [1] https://en.wikipedia.org/wiki/Debasement https://en.wikipedia.org/wiki/Debasement
skat20phys 7y ago
Every time I read about this I'm amazed it isn't getting more attention in the wider press.
hurricanetc 7y ago
Can’t wait to see what the Fed will try to do when the next recession hits. They’ve been searching deep into their bag of tricks to keep this phony expansion running. The next recession is going to be a bloodbath. Not sure what else the Fed can really do and it’s not as if Congress can cut taxes too much lower. The last 10 years we’ve been doing the opposite of what we should have. But at least the boomers got one last big fake boom-bust cycle to live through! Just like the glory days.

Can anyone explain what this means for a noob?

Invictus0 7y ago
I thought this article was a little more layman friendly [0]. [0]: https://www.wsj.com/articles/the-fed-is-buying-bonds-again-just-dont-call-it-quantitative-easing-11571218200 https://www.wsj.com/articles/the-fed-is-buying-bonds-again-j...
baronmunchausen 7y ago
The Federal Reserve (the Fed), the central bank of the United States, prints money and buys the national debt (treasuries) in order to increase bank reserves and stimulate the economy. The Fed is doing this to such an extent that they are now monetizing (printing and buying national debt) 70% of all the debt issued since October, roughly when they started . They refuse to call it quantitative easing (QE) (despite it meeting the literal definition of QE). It's why markets are going up despite zero increase in overall corporate profits and mediocre economic growth. Endless artificial stimulus like this, is why the economy shuffles from bubble to bust.
- acdanger 7y ago
  Admittedly, I haven't read the article yet, but can you explain why they are doing this now? All indicators seem to suggest the economy is strong, so why are they resorting to tactics we last heard about in 2008?
  - baronmunchausen 7y ago
    To cut through all the econ BS, basically because they stopped doing it for a while and markets went down a lot, then short term (overnight) lending rates start to spike higher and they freaked out.
  - aaronblohowiak 7y ago
    i don’t agree with your assessment of the indicators. We haven’t hit target inflation, because labor costs have been resisting upward pressure due to underemployment. The fed thinks it can paper over structural problems with cheap money, resulting in capital asset price inflation and increased wealth disparity...furthering barriers to real wage growth.
    - deleted 7y ago
      [deleted]
  - coolspot 7y ago
    Some think it is because elections are near. Can’t have weak market before that. Same reason why China trade deal phase 1 was signed, which doesn’t solve problems in trade with China.
    - hcknwscommenter 7y ago
      > Can’t have weak market before that That is only true when the President has an (R) next to his name. (D)-type Presidents do not enjoy this privilege from the Fed.
      - nwsm 7y ago
        I wish someone would post a counterexample along with their downvote.
  - mdorazio 7y ago
    Not sure why you think indicators suggest a strong economy - if you dig into most of them, the US isn't actually doing that great after you discount for the artificially easy money situation created by the Fed's actions for the last decade and its knock-on effects (ex. debt-funded stock buybacks).
  - alecco 7y ago
    > All indicators seem to suggest the economy is strong It's doing great if you ignore budget deficit, multiple debt balloons (national/municipal/auto/student), and looming trillions of unfunded liabilities. What could possibly go wrong?
  - deleted 7y ago
    [deleted]
  - mywittyname 7y ago
    Some sectors of the economy are strong, but other sectors are doing extremely poorly. Agriculture and mining have been hit by several recessions (two consecutive quarters of negative growth) over the past four years, while sectors like finance and technology are doing very well. The mining and natural resources sector was hit by a recession in ~2015 that was worse than the 2008 crash. The problem is finance is by far the largest sector of the US economy, so when you look at aggregate GDP numbers, the US economy looks great because the modest gains in finance are more than compensating for the huge reduction in output in the smaller sectors. It's the same story for the stock market: the market cap of the stock market is heavily weighted towards technology stocks, which is compensating for the poor performance in lagging sectors.
  - charwalker 7y ago
    Because your analysis is incorrect. The economy is flat, if that, based on stock market information. But most people don't have wealth in stock but a house or car with a 401k waiting. Real income/wages are flat, the many tariffs and economic policy choices made by the current administration has slowed if not stopped manufacturing (steel tariffs especially), the rate of auto loan defaults is at a record high (see 2008 mortgage crisis), and worse. Adding $1 trillion of debt per year is insane and would send 2008-2016 debt hawks into a tizzy yet the current admin vastly increased the deficit over the previous administration. Most of this is tax cuts from the 2017 bill which disproportionately go to corporations and super wealthy. Tax cuts for corporations do not expire whereas those for citizens will sunset. These tax cuts have led to massive stock buybacks which artificially buoy the stock market (which is why it's the only 'good' thing about the economy as a whole right now). The best news of each monthly job report, jobs gained, has been rolled back by later reports allowing the administration to trumpet growth and improvement but leave out how off the numbers really are each cycle. Also, most of the 'new' jobs are part time, low wage, low skill, or gig economy work that often doesn't pay a livable wage or is a supplement to another low paying or part time job. That pattern does not lend itself to a strong, robust economy but can create a short term projection that appears so. We recently hit a known recession indicator where the Treasury yield curve inverted. An inverted yield curve occurs when long-term yields fall below short-term yields like when 1 year bonds have higher interest than 10 year. usually the long term investment has higher returns except when analysts or brokers predict a crash is coming. Since this metric was tracked, we have entered a recession within 24 months every single time the curve has inverted. This includes the negative bond rates we saw after 2008. Today we might be paying too much attention to this indicator for it to still work that way but it's still important. For all intents and purposes, the Trump economy is not good, flat, and falling. We may see a massive correction once stock buybacks end or are banned, corporate taxes are raised by a liberal congress, or any number of policy changes. Manufacturing is set for layoffs and reductions through 2020 (see US Steel closing sites in Michigan) and I'm personally saving for a down payment on a house when the market crashes in my area. I'm curious, what indicators are you going off to think they 'all' suggest the economy is strong? It may be your sources are lying by omission or spinning information to look good when it isn't a real representation of the economy, like pointing to stock market highs that mean almost nothing. We've crossed 26000 in the Dow averages like 5 times in the current admin, that isn't stable at all but a pattern of rise/fall boom/bust that is not sustainable.
- blackrock 7y ago
  The 2019-nCoV is going to get much worse, before it gets better. Q1 in China is going to be much worse than Q1 last year. Factory output will slow. And this will affect the entire nation’s export engine to the world, and including the US. How do you think this will affect the stock market? It kept going up in a straight line, until the coronavirus outbreak, and then SPY fell 10 points off.
- hcknwscommenter 7y ago
  The literal definition of QE, AFAIK, is "injecting money supply into the market." What the Fed is doing here is swapping one risk free asset for another. These are very different. There was a hiccup in the repo market, so the Fed is "buying" extremely short term (e.g., O/N repo) instruments. There is no net injection into the market. In contrast, during actual QE, the Fed was buying across the curve so that actually available interest rates for economic actors were depressed (again across the curve), encouraging economic activity. The effect is VERY different. The effect was supercharged with operation twist but that is another story.
  - nwah1 7y ago
    QE is also just swapping of assets, which is why it wasn't noticeably inflationary any of the times it was done.
    - fbonetti 7y ago
      It’s swapping an existing asset (a treasury) for an asset that was created completely out of thin air (reserves). It increases the monetary base. If you don’t believe me, look at the Fed’s own data. https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE QE has not caused excess inflation in terms of the consumer price level, but it has dramatically increased the price of interest-rate sensitive assets like real estate, equities, and bonds.
    - hcknwscommenter 7y ago
      "QE is also just swapping of assets" Sort of. It was a swapping of short term liquidity for assets across the curve. Which is why it was fundamentally different from what the FED is doing today. "which is why it wasn't noticeably inflationary any of the times it was done" This is quite a strong statement. I would disagree. My model says it was inflationary. The counterfactual is "what would the inflation/deflation rate be in the absence of QE all else being the same?". Such counterfactuals are hard to come by, which is why this is such a dismal "science." At any rate, it cannot be denied (IMHO) that actual QE depressed interest rates available to economic actors.
- smilbandit 7y ago
  so trying to keep things afloat so that it can bust later, say when a new president is elected.
- cconroy 7y ago
  These policies exacerbate inequality. In fact, I think economic inequality wouldn't be an big issue without this crap.
  - anm89 7y ago
    Yeah, I think if the average person understood this there would be riots in the streets. It's an unbelievably huge regressive welfare program for the .01%. Fortunately it's boring and complicated which is a built in guarantee that a large percentage of people will never care about it.
    - derision 7y ago
      As a small retail investor, and someone who's income puts me in the middle class, I've had big gains in my equities. I consider myself an "average person". Why should this make me want to riot in the streets? Is your implication that only the 0.01% actually own stocks? Even my grandmother, albeit managed by a financial advisor, has a stock portfolio that is benefiting from the current market activity.
      - cconroy 7y ago
        Look into Cantillion Effect "...recipients of new money enjoy higher standards of living at the expense of later recipients..."[0] [0] https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_theory https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
        FiatLuxDave 7y ago
        Ah, thank you! That's exactly what I was trying to think of when I posted this question 7 months ago: https://news.ycombinator.com/item?id=20164397 https://news.ycombinator.com/item?id=20164397 +50 internet points for you!
      - abofh 7y ago
        Because it's taking huge amounts of treasuries purchased to simply support the market. You're seeing stability, but your children are seeing a higher debt burden.
- aguyfromnb 7y ago
  >It's why markets are going up despite zero increase in overall corporate profits and mediocre economic growth. It's one of many reasons the markets might be going up, along with slow global growth around the world (where else should you put your money?) and potential global instability (Hong Kong, Iran, China; USD still a safe haven). >artificial stimulus What is the difference between natural and artificial stimulus? >why the economy shuffles from bubble to bust. You see this particular argument all the time, but one look at the data shows that the boom/bust cycles of modern times are few and far between relative to 30,40,50 years ago, and in particular when compared to the pre Federal Reserve days. Booms and busts happen in every economy, ever, throughout history, with or without central banks.
kurthr 7y ago
The Fed is at least delaying purchase and interest payments on a significant amount of newly issued (short term) Treasuries against which they allow currency (paper or electronic) to be issued. This borders on issuance of fiat currency since their purchase is itself "unbacked" although the trades could eventually be unwound in the market if/when there is enough inflation that their value is negligible. It is what gold bugs call printing money... or a money drop that goes straight to the leveraged banking system which lends out a multiple of the money from the Treasuries now held at the Fed and earns interest on the full levered amount. That has an inflationary effect, but mostly on financial instruments (stocks & corp bonds) since that's what banks usually buy with their new found money... and the Fed hopes that has ripple (wealth) effects on the rest of the broader economy.
- coldcode 7y ago
  At this point its helping companies buy their own stock by having cheap loans to use instead of cash. It's not really doing much for the economy such as spurring more investment or hiring.
  - aguyfromnb 7y ago
    What are the mechanics by which loans and stock buybacks do nothing, while investment and hiring do good things? It's all shifting money around, the results of which benefit different groups. That's not to say that in specific cases dollars couldn't be spent better elsewhere, but there is no "this is better than that" formula. "Investing" when there's nothing to invest in is pointless, and if you hadn't heard, unemployment is near all-time lows; companies are hiring.
    - kurthr 7y ago
      Well, actually the stated point of the Fed's move is to spur inflation and that requires monetary velocity (spending and re-spending). For that stock buybacks are not very effective (relative to other Gov spending), because the money just stays in people's investments and doesn't go anywhere. Also, I think you really want to look at the participation rate rather than the un-employment (which has been steady for a year whatever the Fed is doing).
fbonetti 7y ago
The Federal Reserve, which is the central bank of the United States, is creating new money in order to purchase US government debt, which is essentially equivalent to the government printing new money in order to finance its own spending. Looking at it another way, it’s no different than some guy printing counterfeit US dollars in his basement and using them to buy real assets. The outcome is the same in either case - the counterfeiter and the government both get to spend newly created money while simultaneously devaluing of the purchasing power of the dollar for everyone else.
jfengel 7y ago
It means that the US economy is in much worse shape than various indicators (successful stock market, low unemployment, high price of US government bonds) would indicate. The government regularly spends more than it takes in from taxes by issuing bonds. People buy the bonds because the US government is considered quite safe. That in turn lets the government spend money, which ultimately makes its way into the economy as a whole. People use that money to hire workers, buy stocks, etc, making the economy look good. But the Federal Reserve Bank has the ability to invent money for buying those bonds out of thin air. That means the bond prices stay high (and the interest rates low). That implies that the current strong economy is an illusion, and that's worrying. The expected response of extra money being pushed into the economy without added value is inflation, and the inflation rate has crept up over 2%[1]. It's actually a little surprising that it has taken this long, since this is actually something they've been doing for over a decade. There is considerable debate about that, but it may be that the inflationary chickens are finally coming home to roost -- in which case things might get real bad real quick. tl;dr: this indicates that the economy may not be as strong as we think, caused by economic manipulation by the Federal Reserve to make the economy seem stronger than it is. [1] https://www.bls.gov/news.release/cpi.t01.htm https://www.bls.gov/news.release/cpi.t01.htm
- tabtab 7y ago
  We need something similar to the Balanced Budget Amendment (BBA). Our system rewards short-term thinking. However, the BBA should take into account stimuluses during slumps. It would probably have to kick in slowly to avoid hurting the representatives who sign it.
  - hcknwscommenter 7y ago
    Why? Do you think it would reasonable to require that all homes be paid in cash? Should we ban auto loans? Why is the government different in this regard? There is nothing wrong with using debt responsibly. I enjoy the opportunity this affords me to buy the debt. it's a good investment for me. When mixed in the proper ratios with the remainder of my portfolio in combination with reasonably applied leverage US debt provides a safe, stable, and inflation protected place for a great many of us to store excess earnings.
davidw 7y ago
... and what it might mean for a retail investor who mostly buys and holds broad market funds?
- lotsofpulp 7y ago
  It means continue buying and holding broad market index funds because the dollar’s value will be sacrificed to prop up equity’s (stocks, land, etc) value.
  - hcknwscommenter 7y ago
    Do you have any evidence to suggest that the Feds intervention at the short end of the curve is depressing the dollar's value?
    - lotsofpulp 7y ago
      I can't provide evidence that this specific intervention will depress the dollar's value, but since the Fed aims for 2% inflation, I expect my dollars to be worth less every day. https://www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent https://www.stlouisfed.org/open-vault/2019/january/fed-infla... At least it's been true for quite some time: https://www.thebalance.com/what-is-the-value-of-a-dollar-today-3306105 https://www.thebalance.com/what-is-the-value-of-a-dollar-tod... It seems all invested parties are budgeting at least 7% annual growth in asset prices, from the government's pension fund liabilities to people's 401k and IRAs. Since, voters won't like to see their balances go down, the powers that be will do everything they can to prevent it. And in the absence of a growing young population, I don't see many options other than devaluing currency.
- Spooky23 7y ago
  If you bought into the index lifestyle, live with it.
ur-whale 7y ago
Read up on the debasing of the Roman sesterce [1]. This is the modern equivalent (i.e. the vocabulary and implementation means have changed, but not the deed in itself). [1] https://en.wikipedia.org/wiki/Debasement https://en.wikipedia.org/wiki/Debasement
andrewla 7y ago
Treasury bonds and bills are sold at auction to the highest bidder. The price they sell for determines the interest rate; the higher the price, the lower the rate. The Treasury department sells bonds to raise cash to pay government expenses, both for short term (until the next chunk of quarterly taxes come in) and the long term (spending in excess of government receipts). A one-year $1,000 T-bill means that in one year from the date of purchase, it can be redeemed for $1,000. So if you pay $980 for it, then that means that your effective interest rate is 20/980 ~= 2%. The Fed wants interest rates to stay low, so they're driving up the price of treasury bonds/notes in order to reflect that. That, in theory, means that financial institutions will prefer to lend to consumers/businesses/etc. for higher yields, rather than put their money into treasuries. Usually these sell at auction and the Fed buys some of them, but otherwise the market determines what the future value of money will be based on general return on capital.

yasp 7y ago

I generally as a rule dislike ZeroHedge, but there is good pertinent information in the following link. https://www.zerohedge.com/markets/944-trillion-reasons-why-fed-quietly-bailing-out-hedge-funds https://www.zerohedge.com/markets/944-trillion-reasons-why-f... (Commence the downvotes.)

mywittyname 7y ago
A broken clock is right twice a day. ZH has an overt political bias and is a perennial pessimist, but they do actually perform meaningful economic analysis. Edit: Then again, their articles sometimes feature near complete fabrications, i.e., "Minneapolis Fed president Neel Kashkari [...] said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth", which is not even remotely close to what was actually said.
- hogFeast 7y ago
  Read further. They explain this view. It is 100% correct, based on the evidence they provide. What they are saying is that this was LTCM but instead of banks coming in and forcing losses at 50 cents on the dollar, the govt came in and bailed everyone out at par. I have no first-hand knowledge of the extent of this trade but a lot of it sounds correct (the key premise of the Fed is that this isn't leaking into the market...whether you believe ZH or not, you should be extremely suspicious of this line).
  - hcknwscommenter 7y ago
    > It is 100% correct, based on the evidence they provide. This is very wrong. The "evidence" they provide is nonexistent. The ZH link is typical ZH garbage. A bunch of assertions without basis with a few misconstrued quotes thrown in.
    - hogFeast 7y ago
      It isn't. Read the quoted section from Russel Clark, the BIS has been talking about this (they specifically mention levered hedge fund positions), and they specifically mention an arb between cash bond and derivatives (do you know the history of this trade? It blew up twice in the 90s)/point out that some funds are running with a lot of leverage (is this repo? I don't know, but it is likely given that this has always been a financing source and the BIS are saying that it is). So not nonexistent. The quotes look completely fine (I have looked at clearinghouses quite a bit, Russel Clark understands them...obv, the guy is not an idiot).

seibelj 7y ago

The US government's yearly deficit is over $1 trillion. 8.5% of the government's budget alone goes to interest on our debt (https://www.usaspending.gov/#/explorer/budget_function https://www.usaspending.gov/#/explorer/budget_function). To pay for the deficit, the treasury sells bonds (debt) which is immediately purchased by the Fed with newly printed money. Notice how equities are at all time highs - money is flowing to whatever it possibly can (stocks, housing, art, VC, anything) in order to chase yield. How people are saying inflation is low... I think they are measuring inflation wrong!

echelon 7y ago
How does this get corrected? Do investments wind up losing all of the gains, or do those who didn't have an opportunity to participate get left out and the value of their holdings diminished?
- dustingetz 7y ago
  macro voices podcast has interviews about this frequently ... the answer is we don’t know but could be a 40 year recession, could be a financial crisis, could be a world war & collapse of countries. Today this aligns with income inequality ... stock market up 4x since 2008, home prices way up, poor people get none of those windfalls
- seibelj 7y ago
  An extremely controversial topic! If you are middle class to upper middle class, owning assets to protect from the inflation (stocks, bonds, housing, gold, bitcoin) would be one way. If you mean unwinding our current loose-money global monetary system of fiat currencies, I'm not sure that genie can or will ever go back into the bottle. Let's hope the next recession is gentle.
  - jsjohnst 7y ago
    > Let's hope the next recession is gentle. On one hand I agree with you completely, on the other hand a very hard painful reset is kinda needed too. I really hope it doesn’t come to the later, but I’m not sure we can avoid it long term.

fredgrott 7y ago

What concerns me: 2008 Crash and how US Fed handled it means that they have to pump money into stock market for the next 30 years(20 left) until all the mortgages that they hold fully unwind. What could go wrong? Well, the US Fed track record for such strategies being successful over 30 years is vacant as it never has been done before! ie at least our problem with real estate-homes outpacing income gets worse

ur-whale 7y ago

Nothing new under the sun [1] If history repeats itself, next step is empire falls. [1] https://en.wikipedia.org/wiki/Debasement https://en.wikipedia.org/wiki/Debasement

skat20phys 7y ago

Every time I read about this I'm amazed it isn't getting more attention in the wider press.

hurricanetc 7y ago

Can’t wait to see what the Fed will try to do when the next recession hits. They’ve been searching deep into their bag of tricks to keep this phony expansion running. The next recession is going to be a bloodbath. Not sure what else the Fed can really do and it’s not as if Congress can cut taxes too much lower. The last 10 years we’ve been doing the opposite of what we should have. But at least the boomers got one last big fake boom-bust cycle to live through! Just like the glory days.