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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/#/explor

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.
- SpicyLemonZest 7y ago
  I think you may be misunderstanding. It's a market-wide effect; there's no specific set of people who had an "opportunity to participate".
  - appleflaxen 7y ago
    the fed has an opportunity to participate. it is a private entity, and not part of the federal government. mind blowing? yes. but if you are not part of the fed, then you are absolutely being denied the opportunity to benefit from printing more fiat.
    - SpicyLemonZest 7y ago
      The Federal Reserve is a private entity in the same sense as the Postal Service. They're not private in the same way as a normal bank; nobody becomes rich just because the Federal Reserve has more assets.
    - Pyxl101 7y ago
      The Federal Reserve is not a private corporation. It is an agency of the United States government, which was established by an act of congress: https://www.federalreserve.gov/faqs/about_14986.htm https://www.federalreserve.gov/faqs/about_14986.htm > The Federal Reserve System is not "owned" by anyone. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to the Congress. Regional federal reserve banks are also not private corporations, although their organization structure shares some features in common with them. Member banks that participate in the federal reserve system, on the other hand, are typical companies.
- Bartweiss 7y ago
  There's some debate down-comments about whether this specific policy is quantitative easing, but we can go back to a broader view. In 2019, the US government spent about $400B on debt interest payments. The overall money supply (M2) grew by $900B, about 6.2%. Constant-dollar GDP growth is ~2.3%, and inflation is ~2.9% so that's about $145B of paper monetary growth not backed by assets or general decline in purchasing power. (Sorta. Maybe. The US can implicitly share in growth not reflected in GDP, which complicates all of this immensely.) Assuming that's fair shorthand, how do we make up the gap? In 2008, the paper 'value' of a whole bunch of physical assets (homes) diminished, closing the difference at the expense of homeowners and investors (and the USG). We could see something like that again: private equity and credit card debt look like plausible options, and student loan debt may be "nondischargeable" but that doesn't stop people from defaulting or dying indebted. The USG could theoretically fail to pay its debts in full; that would only require a Greece-style 'haircut' rather than an outright default, but it's still basically out of the question. If investors arrange to not lose the full debt, various rearrangements (bailout + taxes, diminished public services, bankrupt pensions, etc.) could make up the difference by passing the damage to non-investors. Perhaps we could see a major US bond shareholder wiped out without transfer of the debt? I'm not actually sure what happens to those bonds when the bondholders are embargoed or cease to exist in sufficiently-unstable situations. Fascinatingly, a student loan collapse could be partially covered by university bankruptcies: since the value of a degree greatly exceeds the summed value of four years of courses, students are functionally investors betting on the continued existence of their school. (As ITT Tech students found out to their detriment.) Or, of course, we could see inflation and value growth outpace M2 growth a few times and cancel it all out without any dramatic shift. People aren't in a hurry to call this in, and offsetting it doesn't even require the US to run a surplus.
eli_gottlieb 7y ago
Inflation is tracked using the Consumer Price Index, which indexes prices that ordinary consumers face, not housing speculators or art collectors. Inflation is high for the capitalist class and low for the working class.
- wolfram74 7y ago
  My intuition then is that bidding wars among the capital holders for labor should be more common, but wages are stagnant. Is the value of labor decreasing faster than the value of money for capital holders?
  - jtolmar 7y ago
    The maximum they're willing to pay might have gone up, but they can find someone else instead of paying the maximum, because labor is provided by tons of different, individual people who don't coordinate a price. The rise of pro-union sentiment over the last year could be seen as recognition of that need for coordination.
- andymockli 7y ago
  Related reading: https://www.bls.gov/cpi/additional-resources/revision-1998-item-structure.htm https://www.bls.gov/cpi/additional-resources/revision-1998-i...
xwdv 7y ago
This is why having a million dollars in liquid assets isn’t impressive anymore. You really need to have about three times as much for it to be cool.
svachalek 7y ago
Inflation is largely measured on commodity goods that everyone buys. Thanks to the widening gap in earnings, the masses don’t have more money to spend on groceries and hammers so the prices of these stay relatively stable. But the things people with money try to buy, education, property, financial assets, are mostly of a fixed supply and the prices will just keep spiraling. I’m potentially crazy here but I’m laughing off every article that calls stocks or bonds or real estate overpriced. As long as the economy keeps running this way there’s a never-ending supply of money and nowhere else for it to go.
- adventured 7y ago
  > and nowhere else for it to go Sure there is, it can be destroyed in asset price resets or debased in terms of purchasing power by the Fed (which is what plenty of the stock market gains since 1970 are). You could make the same claim about Japan - an extremely wealthy nation relatively speaking, with one of the world's largest stock markets. Tokyo also has very high priced real-estate. And yet the Bank of Japan is fully capable of decimating their national wealth through Yen debasement, chopping about 1/4 to 1/3 off all their wealth in the past decade. The Japan scenario, which the US is following, is gradually eroded growth prospects as debt consumes all capital available & necessary for investment to grow the economy. Eventually you reach a heat death, perpetual stagnation and conflict with the debt load and its interest costs; which requires constant debasement of the national currency - once you can't afford the interest costs, as the US can't any longer - until you destroy enough of the debt to climb back above water and free up capital for new investment again. That process becomes an accelerating downward spiral until you violently change something in the equation (one time massive currency adjustment, spending cuts with massive tax hikes causing a severe and prolonged recession, etc). There is a reason gold is now normal up at $1400-$1600, instead of $300 20-25 years ago. That's all dollar destruction (also represented by the skyrocketing GDPs of most nations in USD terms from 2002-2008 as the dollar imploded and by numerous other prominent commodities such as oil). That much destruction happened due to a comparatively modest lack of fiscal discipline during the Bush years. Just wait until you see what the present course causes. The rich will not be able to keep up, and corporate earnings sure as hell can't (they're not growing much as it is). To make matters worse, the China miracle is over, the S&P group can't lean on that any longer, there's little to no growth anywhere in the largest economic zones. The Fed will have to get more drastic by the year with its debasement efforts (aka QE aka debt monetization). There will be a tipping point (sooner than later given the rate of debt increase) where the wealth can't outrun it via traditional assets like housing or equities. Might have ten good years left of potential asset floating, where you can semi hide from the Fed in the stock market (give or take a recession or downturn that will claim some of that potential). There is nobody to buy a trillion dollars per year of new US Government debt; and nobody that is eager for $20 trillion of new debt at 0-2% yields. So from here on out, it's a Fed debasement party; asset price increases can outrun it for a while, assisted by perma low rates. That Federal debt load will hit $40 trillion in ~11-12 years however, and the heat death will climb ever closer as GDP growth sinks toward zero Japan style.
ur-whale 7y ago
>in order to chase yield. At this point, it's not to chase yield, but simply to try and not shrink. This is the reason why people are willing to buy debt with negative interest (e.g. EU sovereign debt): they're actually willing to pay money to shield capital from the impending implosion rather than grow it Edit: or, better said: people are willing to buy debt with negative interest rates to get some sort of a guarantee on the size of the haircut that's coming their way.

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.
SpicyLemonZest 7y ago
I think you may be misunderstanding. It's a market-wide effect; there's no specific set of people who had an "opportunity to participate".
- appleflaxen 7y ago
  the fed has an opportunity to participate. it is a private entity, and not part of the federal government. mind blowing? yes. but if you are not part of the fed, then you are absolutely being denied the opportunity to benefit from printing more fiat.
  - SpicyLemonZest 7y ago
    The Federal Reserve is a private entity in the same sense as the Postal Service. They're not private in the same way as a normal bank; nobody becomes rich just because the Federal Reserve has more assets.
  - Pyxl101 7y ago
    The Federal Reserve is not a private corporation. It is an agency of the United States government, which was established by an act of congress: https://www.federalreserve.gov/faqs/about_14986.htm https://www.federalreserve.gov/faqs/about_14986.htm > The Federal Reserve System is not "owned" by anyone. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to the Congress. Regional federal reserve banks are also not private corporations, although their organization structure shares some features in common with them. Member banks that participate in the federal reserve system, on the other hand, are typical companies.
Bartweiss 7y ago
There's some debate down-comments about whether this specific policy is quantitative easing, but we can go back to a broader view. In 2019, the US government spent about $400B on debt interest payments. The overall money supply (M2) grew by $900B, about 6.2%. Constant-dollar GDP growth is ~2.3%, and inflation is ~2.9% so that's about $145B of paper monetary growth not backed by assets or general decline in purchasing power. (Sorta. Maybe. The US can implicitly share in growth not reflected in GDP, which complicates all of this immensely.) Assuming that's fair shorthand, how do we make up the gap? In 2008, the paper 'value' of a whole bunch of physical assets (homes) diminished, closing the difference at the expense of homeowners and investors (and the USG). We could see something like that again: private equity and credit card debt look like plausible options, and student loan debt may be "nondischargeable" but that doesn't stop people from defaulting or dying indebted. The USG could theoretically fail to pay its debts in full; that would only require a Greece-style 'haircut' rather than an outright default, but it's still basically out of the question. If investors arrange to not lose the full debt, various rearrangements (bailout + taxes, diminished public services, bankrupt pensions, etc.) could make up the difference by passing the damage to non-investors. Perhaps we could see a major US bond shareholder wiped out without transfer of the debt? I'm not actually sure what happens to those bonds when the bondholders are embargoed or cease to exist in sufficiently-unstable situations. Fascinatingly, a student loan collapse could be partially covered by university bankruptcies: since the value of a degree greatly exceeds the summed value of four years of courses, students are functionally investors betting on the continued existence of their school. (As ITT Tech students found out to their detriment.) Or, of course, we could see inflation and value growth outpace M2 growth a few times and cancel it all out without any dramatic shift. People aren't in a hurry to call this in, and offsetting it doesn't even require the US to run a surplus.

eli_gottlieb 7y ago

Inflation is tracked using the Consumer Price Index, which indexes prices that ordinary consumers face, not housing speculators or art collectors. Inflation is high for the capitalist class and low for the working class.

wolfram74 7y ago
My intuition then is that bidding wars among the capital holders for labor should be more common, but wages are stagnant. Is the value of labor decreasing faster than the value of money for capital holders?
- jtolmar 7y ago
  The maximum they're willing to pay might have gone up, but they can find someone else instead of paying the maximum, because labor is provided by tons of different, individual people who don't coordinate a price. The rise of pro-union sentiment over the last year could be seen as recognition of that need for coordination.
andymockli 7y ago
Related reading: https://www.bls.gov/cpi/additional-resources/revision-1998-item-structure.htm https://www.bls.gov/cpi/additional-resources/revision-1998-i...

xwdv 7y ago

This is why having a million dollars in liquid assets isn’t impressive anymore. You really need to have about three times as much for it to be cool.

svachalek 7y ago

Inflation is largely measured on commodity goods that everyone buys. Thanks to the widening gap in earnings, the masses don’t have more money to spend on groceries and hammers so the prices of these stay relatively stable. But the things people with money try to buy, education, property, financial assets, are mostly of a fixed supply and the prices will just keep spiraling. I’m potentially crazy here but I’m laughing off every article that calls stocks or bonds or real estate overpriced. As long as the economy keeps running this way there’s a never-ending supply of money and nowhere else for it to go.

adventured 7y ago
> and nowhere else for it to go Sure there is, it can be destroyed in asset price resets or debased in terms of purchasing power by the Fed (which is what plenty of the stock market gains since 1970 are). You could make the same claim about Japan - an extremely wealthy nation relatively speaking, with one of the world's largest stock markets. Tokyo also has very high priced real-estate. And yet the Bank of Japan is fully capable of decimating their national wealth through Yen debasement, chopping about 1/4 to 1/3 off all their wealth in the past decade. The Japan scenario, which the US is following, is gradually eroded growth prospects as debt consumes all capital available & necessary for investment to grow the economy. Eventually you reach a heat death, perpetual stagnation and conflict with the debt load and its interest costs; which requires constant debasement of the national currency - once you can't afford the interest costs, as the US can't any longer - until you destroy enough of the debt to climb back above water and free up capital for new investment again. That process becomes an accelerating downward spiral until you violently change something in the equation (one time massive currency adjustment, spending cuts with massive tax hikes causing a severe and prolonged recession, etc). There is a reason gold is now normal up at $1400-$1600, instead of $300 20-25 years ago. That's all dollar destruction (also represented by the skyrocketing GDPs of most nations in USD terms from 2002-2008 as the dollar imploded and by numerous other prominent commodities such as oil). That much destruction happened due to a comparatively modest lack of fiscal discipline during the Bush years. Just wait until you see what the present course causes. The rich will not be able to keep up, and corporate earnings sure as hell can't (they're not growing much as it is). To make matters worse, the China miracle is over, the S&P group can't lean on that any longer, there's little to no growth anywhere in the largest economic zones. The Fed will have to get more drastic by the year with its debasement efforts (aka QE aka debt monetization). There will be a tipping point (sooner than later given the rate of debt increase) where the wealth can't outrun it via traditional assets like housing or equities. Might have ten good years left of potential asset floating, where you can semi hide from the Fed in the stock market (give or take a recession or downturn that will claim some of that potential). There is nobody to buy a trillion dollars per year of new US Government debt; and nobody that is eager for $20 trillion of new debt at 0-2% yields. So from here on out, it's a Fed debasement party; asset price increases can outrun it for a while, assisted by perma low rates. That Federal debt load will hit $40 trillion in ~11-12 years however, and the heat death will climb ever closer as GDP growth sinks toward zero Japan style.

ur-whale 7y ago

>in order to chase yield. At this point, it's not to chase yield, but simply to try and not shrink. This is the reason why people are willing to buy debt with negative interest (e.g. EU sovereign debt): they're actually willing to pay money to shield capital from the impending implosion rather than grow it Edit: or, better said: people are willing to buy debt with negative interest rates to get some sort of a guarantee on the size of the haircut that's coming their way.