4 ms·

Central banks are not out of ammunition. I think you underestimate the impact of "open-ended QE", as well as the dozens of incredible and never-seen-before prog

by dannyw 6y ago

Central banks are not out of ammunition. I think you underestimate the impact of "open-ended QE", as well as the dozens of incredible and never-seen-before programs set up during COVID; sometimes stretching the mandate through "special purpose vehicles". Everyone expects the Fed to inject as many trillions of dollars as needed to the _stock market_ to keep stock prices up. The effects on the economy are more uncertain; but we know the Fed can, has, and said they will do "whatever it takes" to ensure an "orderly market"; which is just an euphemism for "stop stocks from crashing". TINA. There is no alternative, and if you look at long term treasury rates (YCC has not happened _yet_), people are believing interest rates will be around the 1% mark for the _next 30 years_. When the long term risk free rate goes from 2% to 1%; stocks become worth twice as much.

lumost 6y ago
Such a strategy in the face of high unemployment will end poorly. It's effectively currency debasement to prop up your top corporations stock prices at the expense of the real economy. You'll be left with 5-100 megacaps, carrying less real revenue than when the debasement started. Consumers, SMBs, and employees will have had their dollars eroded.
- MiroF 6y ago
  If our currency is debased, where's the inflation?
  - grey-area 6y ago
    Seems to have turned up in insane asset prices, making the rich richer. Unfortunate that it's the wrong kind of inflation.
    - MiroF 6y ago
      Or maybe conditions in the world have changed that make assets more valuable... If the currency was "debased" it would show up everywhere.
      - Rury 6y ago
        >If the currency was "debased" it would show up everywhere Not necessarily. Prices are dictated by supply/demand - and different goods have different amounts of supply/demand. As so, it's theoretically possible to continually print money into existence, and use it all to buy Tesla stock, until there are no more shares of Tesla stock left for sale. Under such a hypothetical scenario, INFLATION would only happen in Tesla's Stock price - as all this extra money spurred DEMAND for Tesla stock and wasn't accompanied by an increase in SUPPLY of Tesla stock. However, the price of shirts would remain the same - as none of this money changed the SUPPLY/DEMAND of shirts. As so - inflation doesn't necessarily have to happen everywhere. Note, this is mainly why CPI is a bad indicator of inflation - as it doesn't track the inflation that is happening around us - inflation in assets like stocks / real estate. This also explains why prices of real estate in certain cities are way pricier than others, and also why the stock market can be way overvalued when the economy is doing bad.
  - lumost 6y ago
    Asset prices have grown faster than incomes in the U.S for the last several decades; this trend appears to be accelerating. In my neighborhood of Boston, YoY condo prices are growing at 8%. On paper I've been paid to live in my condo for the last few years. <Speculation> IMHO the method that the Fed uses to inject currency biases towards asset classes by controlling borrowing costs. In an industrial economy, this would typically result in direct investment into new equipment, and an agricultural economy the tilling of new land. However, growth in services or tech is rarely debt-financed as there are relatively low CapEx costs and high opex loads. Given the relative maturity of the industrial and agricultural sectors, there aren't many places in the economy that can productively absorb debt-backed financing. What we end up with is relatively static asset classes absorbing massive debt-based financing and inflating overall asset prices. Unfortunately, several of these asset prices bleed over as costs to workers who need a home, a rent for their place of business, or an education to acquire skills. While in a healthy economy, everyone's cost is someone else's income. As long as the Central bank is applying a QE strategy, your cost is a mortgage or a rent backed by a mortgage; the "income" side of the equation is just the central bank. Asset holders benefit from holding assets that magically increase in price. </Speculation>
    - dannyw 6y ago
      Inflating asset prices is just UBI for the wealthy.
grey-area 6y ago
Is it the job of the fed and QE to boost stock prices? That's not what it was supposed to do. It also wasn't supposed to be policy forever but a carefully calculated (quantitative) intervention. I'm not even sure it's working any more to boost stock prices.
- MiroF 6y ago
  The job of the Fed is to maintain inflation and employment targets. Since both inflation and employment are below target, they are engaging in an expansionary monetary policy. I'm honestly baffled by so many people thinking that a contractionary stance would be better?
  - grey-area 6y ago
    Doesn't seem like the levers they have are working. Economic growth rather than inflation is the goal. The measures are not the goal. Maybe that needs massive investment rather than monetary policy. Certainly QE has had many other impacts, but it hasn't led to a positive change in the measure that matters - consumer price inflation.
    - MiroF 6y ago
      > Doesn't seem like the levers they have are working. Economic growth rather than inflation is the goal. Nope, economic growth is not the goal. Inflation targeting and unemployment targeting is the goal. I don't see how you can claim that the levers "aren't" working if you don't know what would have occurred without the Fed action.
      - Talanes 6y ago
        The other poster said "doesn't seem," which is already an admittance that it is just anecdotal observation. I'm also not sure what you're hoping to accomplish here. Yes, quantifiable claims are better than subjective ones, but "no one knows what would have happened otherwise" is just an argument that justifies literally any action.
MiroF 6y ago
A key lesson I've learned arguing about macro online: Anyone who claims that the Fed is "out of ammo" is not worth arguing with.
mr_toad 6y ago
> I think you underestimate the impact of "open-ended QE" Until it comes time to settle. Then they’ll have to either borrow more, by raising interest rates, or literally print money.
richajak 6y ago
I think they eventually have to release all ammunitions that they have. It is not a good sign, it means that they are desperate, it is their last chance, live or die. We should not be complacent that everything will be ok. They need to maintain status quo. If they fail, all of us will be in precarious situation.

by dannyw 6y ago

lumost 6y ago

Such a strategy in the face of high unemployment will end poorly. It's effectively currency debasement to prop up your top corporations stock prices at the expense of the real economy. You'll be left with 5-100 megacaps, carrying less real revenue than when the debasement started. Consumers, SMBs, and employees will have had their dollars eroded.

MiroF 6y ago
If our currency is debased, where's the inflation?
- grey-area 6y ago
  Seems to have turned up in insane asset prices, making the rich richer. Unfortunate that it's the wrong kind of inflation.
  - MiroF 6y ago
    Or maybe conditions in the world have changed that make assets more valuable... If the currency was "debased" it would show up everywhere.
    - Rury 6y ago
      >If the currency was "debased" it would show up everywhere Not necessarily. Prices are dictated by supply/demand - and different goods have different amounts of supply/demand. As so, it's theoretically possible to continually print money into existence, and use it all to buy Tesla stock, until there are no more shares of Tesla stock left for sale. Under such a hypothetical scenario, INFLATION would only happen in Tesla's Stock price - as all this extra money spurred DEMAND for Tesla stock and wasn't accompanied by an increase in SUPPLY of Tesla stock. However, the price of shirts would remain the same - as none of this money changed the SUPPLY/DEMAND of shirts. As so - inflation doesn't necessarily have to happen everywhere. Note, this is mainly why CPI is a bad indicator of inflation - as it doesn't track the inflation that is happening around us - inflation in assets like stocks / real estate. This also explains why prices of real estate in certain cities are way pricier than others, and also why the stock market can be way overvalued when the economy is doing bad.
- lumost 6y ago
  Asset prices have grown faster than incomes in the U.S for the last several decades; this trend appears to be accelerating. In my neighborhood of Boston, YoY condo prices are growing at 8%. On paper I've been paid to live in my condo for the last few years. <Speculation> IMHO the method that the Fed uses to inject currency biases towards asset classes by controlling borrowing costs. In an industrial economy, this would typically result in direct investment into new equipment, and an agricultural economy the tilling of new land. However, growth in services or tech is rarely debt-financed as there are relatively low CapEx costs and high opex loads. Given the relative maturity of the industrial and agricultural sectors, there aren't many places in the economy that can productively absorb debt-backed financing. What we end up with is relatively static asset classes absorbing massive debt-based financing and inflating overall asset prices. Unfortunately, several of these asset prices bleed over as costs to workers who need a home, a rent for their place of business, or an education to acquire skills. While in a healthy economy, everyone's cost is someone else's income. As long as the Central bank is applying a QE strategy, your cost is a mortgage or a rent backed by a mortgage; the "income" side of the equation is just the central bank. Asset holders benefit from holding assets that magically increase in price. </Speculation>
  - dannyw 6y ago
    Inflating asset prices is just UBI for the wealthy.

grey-area 6y ago

Is it the job of the fed and QE to boost stock prices? That's not what it was supposed to do. It also wasn't supposed to be policy forever but a carefully calculated (quantitative) intervention. I'm not even sure it's working any more to boost stock prices.

MiroF 6y ago
The job of the Fed is to maintain inflation and employment targets. Since both inflation and employment are below target, they are engaging in an expansionary monetary policy. I'm honestly baffled by so many people thinking that a contractionary stance would be better?
- grey-area 6y ago
  Doesn't seem like the levers they have are working. Economic growth rather than inflation is the goal. The measures are not the goal. Maybe that needs massive investment rather than monetary policy. Certainly QE has had many other impacts, but it hasn't led to a positive change in the measure that matters - consumer price inflation.
  - MiroF 6y ago
    > Doesn't seem like the levers they have are working. Economic growth rather than inflation is the goal. Nope, economic growth is not the goal. Inflation targeting and unemployment targeting is the goal. I don't see how you can claim that the levers "aren't" working if you don't know what would have occurred without the Fed action.
    - Talanes 6y ago
      The other poster said "doesn't seem," which is already an admittance that it is just anecdotal observation. I'm also not sure what you're hoping to accomplish here. Yes, quantifiable claims are better than subjective ones, but "no one knows what would have happened otherwise" is just an argument that justifies literally any action.

MiroF 6y ago

A key lesson I've learned arguing about macro online: Anyone who claims that the Fed is "out of ammo" is not worth arguing with.

mr_toad 6y ago

> I think you underestimate the impact of "open-ended QE" Until it comes time to settle. Then they’ll have to either borrow more, by raising interest rates, or literally print money.

richajak 6y ago

I think they eventually have to release all ammunitions that they have. It is not a good sign, it means that they are desperate, it is their last chance, live or die. We should not be complacent that everything will be ok. They need to maintain status quo. If they fail, all of us will be in precarious situation.