4 ms·

It can go negative, or Fed can do another round of QE, there are plenty of tools. The real question is whether the deficit can grow indefinitely without consequ

by liuliu 7y ago

It can go negative, or Fed can do another round of QE, there are plenty of tools. The real question is whether the deficit can grow indefinitely without consequences, and if this is a moral hazard (e.g. no risk priced in borrowing).

cm2187 7y ago
The European experience has shown that negative rates aren't really working, other than killing the local banking system.
- misja111 7y ago
  Well that's not what the former ECB chairman Mario Draghi thought about it. According to him they were a success .. See e.g. http://www.ekathimerini.com/245837/article/ekathimerini/business/draghi-greece-selling-debt-at-negative-rates-is-a-success http://www.ekathimerini.com/245837/article/ekathimerini/busi... But even mr. Draghi might agree that right now the ECB is pretty powerless, given that it's rates are already below zero.
  - RobertoG 7y ago
    That's because it's not a monetary policy problem, but a fiscal policy problem. If you insist in fixing your home with your car jack, don't complain about the results.
    - cm2187 7y ago
      Worthwhile read: https://www.business-standard.com/article/finance/can-banks-survive-negative-rates-instability-in-global-financial-system-119091300319_1.html https://www.business-standard.com/article/finance/can-banks-...
      - speedplane 7y ago
        When we design policy around increasing the value of the stock market, we effectively give stock-holders power. Good policy should create efficient markets, not "high value" ones.
unhashable 7y ago
It can grow larger than people realize. As long as other countries do business in USD and keep buying US debt, the party keeps going. With fiat, you can spend as much as the combined purchasing power of all your citizens through money printing. When you’re the reserve currency, that pool is extended to the purchasing power of many many countries. That’s probably why, from a strategic POV, the US must remain the largest military force and continue to police the world. With dollar hegemony, the US might even introduce new ways (like MMT) of sipping purchasing power of participants.
- kart23 7y ago
  Yeah the party keeps going, but the crash will be worse. Worse crashes means more time to recover, more americans lose their jobs, and so on.
  - unhashable 7y ago
    100%
OscarCunningham 7y ago
What does the deficit have to do with the Fed? QE doesn't grow the deficit.
- liuliu 7y ago
  Deficit is funded through debt (treasury notes). Fed buys treasury notes (through QE) and sets the interest rate on these debt. Lower interest rate in short-term reduces deficit (smaller coupon payment), but in longer-term encourages borrowing.

by liuliu 7y ago

cm2187 7y ago

The European experience has shown that negative rates aren't really working, other than killing the local banking system.

misja111 7y ago
Well that's not what the former ECB chairman Mario Draghi thought about it. According to him they were a success .. See e.g. http://www.ekathimerini.com/245837/article/ekathimerini/business/draghi-greece-selling-debt-at-negative-rates-is-a-success http://www.ekathimerini.com/245837/article/ekathimerini/busi... But even mr. Draghi might agree that right now the ECB is pretty powerless, given that it's rates are already below zero.
- RobertoG 7y ago
  That's because it's not a monetary policy problem, but a fiscal policy problem. If you insist in fixing your home with your car jack, don't complain about the results.
  - cm2187 7y ago
    Worthwhile read: https://www.business-standard.com/article/finance/can-banks-survive-negative-rates-instability-in-global-financial-system-119091300319_1.html https://www.business-standard.com/article/finance/can-banks-...
    - speedplane 7y ago
      When we design policy around increasing the value of the stock market, we effectively give stock-holders power. Good policy should create efficient markets, not "high value" ones.

unhashable 7y ago

It can grow larger than people realize. As long as other countries do business in USD and keep buying US debt, the party keeps going. With fiat, you can spend as much as the combined purchasing power of all your citizens through money printing. When you’re the reserve currency, that pool is extended to the purchasing power of many many countries. That’s probably why, from a strategic POV, the US must remain the largest military force and continue to police the world. With dollar hegemony, the US might even introduce new ways (like MMT) of sipping purchasing power of participants.

kart23 7y ago
Yeah the party keeps going, but the crash will be worse. Worse crashes means more time to recover, more americans lose their jobs, and so on.
- unhashable 7y ago
  100%

OscarCunningham 7y ago

What does the deficit have to do with the Fed? QE doesn't grow the deficit.

liuliu 7y ago
Deficit is funded through debt (treasury notes). Fed buys treasury notes (through QE) and sets the interest rate on these debt. Lower interest rate in short-term reduces deficit (smaller coupon payment), but in longer-term encourages borrowing.