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>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 th

• DiogenesKynikos 6y ago
  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-9b5f468b20d5 https://www.ft.com/content/19e47570-ba23-4929-988e-9b5f468b2...
  • RobertoG 6y ago
    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 6y ago
  >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).
  • claudeganon 6y ago
    How’d that theory work out with asset price inflation in the housing market, post-2008?
  • alexmingoia 6y ago
    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 6y ago
      That's the argument for crypto and the gold standard.
  • thomashobohm 6y ago
    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 6y ago
      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.
• mariojv 6y ago
  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 https://fred.stlouisfed.org/graph/?g=qH1p [1] https://en.wikipedia.org/wiki/Inflation#Keynesian_view https://en.wikipedia.org/wiki/Inflation#Keynesian_view [2] https://en.wikipedia.org/wiki/Inflation#Monetarist_view https://en.wikipedia.org/wiki/Inflation#Monetarist_view
  • neffy 6y ago
    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.
    • thomashobohm 6y ago
      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.
• anoraca 6y ago
  So, in your opinion, the only two possible outcomes are extreme cases that are bad? That seems like hyperbole to me.
• czinck 6y ago
  > 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%.
  • DiogenesKynikos 6y ago
    > That's not necessarily true The Fed is driving up the price of junk bonds, so it clearly is true.
  • andreilys 6y ago
    The fed is buying junk corporate bonds that would otherwise plummet in value.
    • thomashobohm 6y ago
      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 6y ago
        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.
• Jeema101 6y ago
  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 6y ago
    > 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 https://fred.stlouisfed.org/series/WALCL
    • cm2187 6y ago
      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 6y ago
      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 6y ago
    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 6y ago
  > 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 6y ago
    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 6y ago
      > 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.
• eli_gottlieb 6y ago
  >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?
• esoterica 6y ago
  > 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?
• kyuudou 6y ago
  >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.