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The Fed is stabilizing the price of the USD because of the coronavirus pandemic. If it were not printing money, then there would likely be a deflationary spiral

The Fed is stabilizing the price of the USD because of the coronavirus pandemic. If it were not printing money, then there would likely be a deflationary spiral that would cause a depression. That's one of the reasons why the Great Depression was so bad: the US was on the gold standard at the beginning. The US can't create gold out of thin air, so the USD started deflating, people stopped spending, and capital stopped flowing. Companies went bankrupt, people lost jobs — all because much needed dollars were stuffed in people's mattresses instead of being spent. The Fed is increasing the money supply by purchasing bonds because corporations need cheaper capital to pay their workers and their bills. When the pandemic is over, it will sell back these bonds the banks it bought them from. Without the Fed's intervention, this recession and pandemic would have been far, far worse. Of course, helping corporations also helps the people who own the corporations: the rich. That's a distributional issue, and the main solution is tax policy. We need to raise income and estate taxes on the rich, increase the tax on capital gains, and institute a wealth tax. The Fed is like an engine. But engines are a tool. Tools can cause good things and bad things. Right now, the Fed is causing good things by providing liquidity, which has the side effect of causing bad things because it lets the rich accumulate wealth. If the Fed is like an engine, then it serves to move a train — the economy. If the train is runaway — if the economy benefits the rich far more than normal people — that doesn't mean engines are bad. It means we need to stop the train, fix it, and start the engine again. If we restructure our economy, the Fed will still continue to do good things, with fewer negative side effects. That would be, on net, good. So the problem isn't with the Fed, it's with the economy. And claiming that the Fed is the root of all our problems misses the bigger picture.

quickthrowman 6y ago
> When the pandemic is over, it will sell back these bonds the banks it bought them from. This remains to be seen, the market had an absolute fit when they said QE was tapering in 2013, and also had an absolute fit when Powell was raising rates in 2018, particularly in December. The Fed may have painted themselves into a corner here, nothing is certain with regards to unwinding QE or raising rates.
- nostrademons 6y ago
  I've heard (from finance professionals) that big elephant in the room is corporate debt. Corporations need to roll over their debt when it comes due, and a fair amount of it is short-term paper. If interest rates rise, that debt will become a lot more expensive, which will make many of the more marginal companies insolvent. Not software companies, which are sitting on hoards of cash, but all of the ordinary manufacturing/retail/service/financial companies that employ millions of Americans. If they go bankrupt we'll see unemployment worse than the COVID lockdown, but moving up the income ladder into what's left of the middle class. This was why the Fed flinched in 2018. To me (and this is a minority viewpoint - my finance industry friends disagreed), the way this plays out is both obvious and terrible. The Fed knows that if they raise interest rates, very large American institutions are going to go bankrupt and millions of Americans will be thrown out of work. The Fed's primary mandate is full employment (adjusted last year from a dual mandate of "full employment and low inflation"). Therefore, the Fed is not going to raise interest rates. We'll see this first as a massive asset bubble during the early 2020s, and then as rising inflation in the later 2020s, and then finally as hyperinflation. When it gets to the hyperinflation stage the Fed will take notice and raise rates, but it's too late by then. Hyperinflation is characterized as a sharp increase in the velocity of money, which makes traditional monetary policy tools ineffective for curbing it. You have to ditch the currency and start over with a new one.
  - NortySpock 6y ago
    So, we need to see loan-forgiveness for businesses then? Trying to figure out how you unwind it slowly when apparently "slowing raising rates" still destroys many businesses with a lot of debt...
    - jaycroft 6y ago
      I'm starting to think that it's time to let the unproductive businesses that have blossomed over the last 12 years go bankrupt and be removed from the system. Unfortunately a lot of productive businesses that are temporarily unproductive had been using their cash for stock buybacks and using easy corp debt to run operations, and so with the pandemic, those wold get washed out too. Maybe the laws banning stock buybacks prior to Reagan weren't such a bad idea? On the other hand how can the fed buy bonds from the "good" companies worth saving, and not from the "bad" companies that can freeride until "eventual" profitability? I suppose you let the market decide - let the bonds float, and anything worth saving should be bought back up by the people enriched by the buybacks, right? Isn't that what efficient markets and capitalism are all about?
artificialLimbs 6y ago
> ...increase the tax on capital gains... How about proportionally? Stock trading apps now make it easy enough for Joe 6 pack to invest in the market at any income level. I could see a x% higher tax if you're buying 10,000 shares of Amazon, but it seems to me like putting < $1,000 in the market a month should be somewhat painless.
- icedchai 6y ago
  It became easy over 25 years ago when the first brokerages went online. Is it easier now? Yes. But it's been simple and painless for years.
- freeone3000 6y ago
  Capital gains is still a percentage of earnings and currently caps out at 26%. Hold your stock for a year, and it drops to 13%. Increasing cap gains could be as simple as taxing it the same as regular income.
- pnutjam 6y ago
  You know most American's can't cover a $400 unexpected bill. Try <$100, which is still a stretch for many.
glsdfgkjsklfj 6y ago
> by providing liquidity, which has the side effect of causing bad things because it lets the rich accumulate wealth. curious, what if the people driving that engine opted for wealth tax instead? Wouldn't that be a win-win and your phrase could have been instead: > by providing liquidity, with no side effect such as causing bad things because it lets the rich accumulate wealth. ¯\_(ツ)_/¯
- tylerhou 6y ago
  The Fed doesn't the power to enact a wealth tax. It's powers were delegated to it by Congress. Congress does have the power to enact a wealth tax. But it chooses not to. The way to change that is by voting.
tobmlt 6y ago
I appreciate your counter argument and am familiar with it. I disagree about the Great Depression and pretty much everything else you’ve said, but I mean no disrespect, only contend that there is a whole body of economic thought that agrees with me, and that mainstream Econ (recognizing the plurality of schools of thought here) has swept under the rug, because it’s inconvenient. I know “my side” is unpopular and “discredited”. I think it happens to mainly be right, simpler, and generally disabling to the status quo, which I’d characterize as built to enable active interventions. I’ve said nothing about what to Actually do to fix this all, because that is more complex, and not addressed properly, in the main, by anybody. I think one has to recognize the pain that unwinding all of this must cause, and not just “switch it all out”. Heck of a mess! I’ll be happy to get my (Of course discredited) books out and recite the counter case about the Great Depression if anybody really wants me to later. Basically the fed and various policies caused what should have been a short sharp correction/stock-crash (at the end of a runaway fed built stock market streak) to extend into a long drawn out mess. Forgetting innumerable details I am sure. But yeah, I know you don’t agree. I do not find your case compelling. While I have a chance, here is a good book on the Austrian case against the status quo narrative on the great depression: https://cdn.mises.org/Americas%20Great%20Depression_3.pdf https://cdn.mises.org/Americas%20Great%20Depression_3.pdf This is, in the main, what I allude to on that one point (caveat, I am not a gold bug and of course Rothbard is. I think focusing on specific instances of "the way to implement an idea" allows people to laugh at the specific to forget/discredit the greater idea itself. Similar issues arise with Austrian rejection of stats and involved mathematical analysis.). I do not subscribe to those ideas, but find the bulk of the economic analysis itself compelling.
- learc83 6y ago
  If you're talking Austrian economists, who are the primary proponent of the "fed is the bad buy, bring back the gold standard" argument, they explicitly reject any attempt at modeling or mathematical analysis. They are only interested in arguments based on "self evident" axioms. I've read many of the books you're talking about, and there's a reason they are "unpopular" and “discredited".
  - 6y ago
afarrell 6y ago
Agreed. The problem is that the Fed only has the power to inject dollars at the top of the economy, yet sales taxes and the IRS drain dollars from a broad base of the economy. I think an MMO designer would suggest two options: A. Nerf the Fed, which would have the problems you note. B. A balancing mechanic -- Some more universally-accessable way to inject income at the base of the economy.
- InitialLastName 6y ago
  > B. A balancing mechanic -- Some more universally-accessable way to inject income at the base of the economy. Something like, for example, giving $1000 to every adult?
  - anchpop 6y ago
    This is risky, because if the fed accidentally injects too much money by buying back too many bonds, they can always un-inject it by selling the bonds back (and banks are compelled to buy). This lets the fed be more aggressive because it knows that if it goes too far and starts seeing more inflation than it intended, it can always walk back its decision. But there's no realistic way to do that after having given $1000 to every adult.
    - tylerhou 6y ago
      Taxes?
      - notriddle 6y ago
        The Fed can't make taxes. Congress makes taxes, but Congress is subject to popular approval, and the population don't like tax hikes.
        tylerhou 6y ago
        The Fed also can't give $1000 to everyone.
matwood 6y ago
> The Fed is stabilizing the price of the USD because of the coronavirus pandemic. The pandemic is a case of exactly when the gov. should step in. Unfortunately the gov. is slow and takes so much time to do anything. > That's a distributional issue, and the main solution is tax policy. Exactly. I think a better argument could have been made by looking at the tax cuts a couple of years ago. Companies didn't go on hiring sprees or even keep any money in the bank. They did stock buy backs, paid bonuses, etc...so that when the pandemic did hit they had nothing to fall back on (see the airlines).
- tylerhou 6y ago
  CEO bonuses, not always a good thing. Buybacks are not always good (because stock-compensated corporate managers sometimes abuse them to increase the stock price), but for airlines, buying stock was the right choice. You can read Matt Levine's argument, but basically: If airlines didn't spend money on buying back stock, they could have: 1. Invested it in growth. But if they had invested it in all the normal things an airline might invest in, they would still suffering because of the pandemic. 2. Saved it for a rainy day. You're arguing (2) should have happened. But an important thing to remember is that companies' savings are not like your savings — companies have far more reliable future cash flow, which means that they can borrow at much lower rates than you can through the equity markets. If airlines had saved their earnings, maybe they would have grown at bond rates (investing the company's savings in the stock market is too risky and unorthodox for corporate finance officers). That's not good for investors who are looking for 1) return on capital and 2) higher exposure to travel. By returning the capital to investors, airlines increased their exposure to airline-adjacent things and their return on capital. That's a good thing for investors because it gives them more choice! If an investor wants a safer investment, they can create their own basket of bonds and airline stonks. Similarly, now that the coronavirus has hit, investors know that airlines' fundamentals haven't changed — they're just hitting temporary turbulence. So, to raise capital, airlines can issue stocks and bonds to temporarily get them through 12-24 months. And that's exactly what they did last May: https://www.wsj.com/articles/aviation-industry-races-for-cash-with-record-bond-sales-11588607851 https://www.wsj.com/articles/aviation-industry-races-for-cas... Basically: corporate finance is not like personal finance, and it's a mistake to think that companies need "rainy day funds." They don't: that's what the equity markets are for.
ItsMonkk 6y ago
This is an inaccurate narrative. The more wealth inequality there is in a nation, the less that increases in the money supply effect the economy. This is why we have no inflation with trillions injected. The rich simply store the money in assets like stocks and houses and it never touches consumption. The only thing that needed to happen to keep the economy afloat was the Congress passing their bills.
- tylerhou 6y ago
  > The rich simply store the money in assets like stocks and houses and it never touches consumption. But these do affect consumption. 1) Stonks going up means that companies have more capital (through stock issuances and equity raises). Companies use this capital to buy things and pay workers, so the dollars end up recirculating through the economy just like if a regular person spent it. 2) Buying houses is consumption. And increases in housing prices causes more building of houses. Which leads to people getting paid for building houses and creating materials which leads to money circulating. Wealth inequality is bad, and Congress should have done more to help the American people. But the populist "rich people hoard money in stonks and houses so it doesn't recirculate" is also a complete misunderstanding.
  - ItsMonkk 6y ago
    1. When the money supply is increasing at a rate faster than stuff, the best use of capital is to hoard it. Can you show me examples of major companies issuing stock right now? Looks to me like they are all buying back their stock, which has the opposite effect. 2. Buying houses is an investment and is specifically carved out in the CPI. Consumption is Owner's Equivalent Rent, buying is not.
    - tylerhou 6y ago
      https://www.cnbc.com/2020/12/08/tesla-to-raise-up-to-5-billion-in-share-offering.html https://www.cnbc.com/2020/12/08/tesla-to-raise-up-to-5-billi... https://www.ft.com/content/a59c2a9d-5e0b-4cbc-b69e-a138de76a776 https://www.ft.com/content/a59c2a9d-5e0b-4cbc-b69e-a138de76a... https://www.bloomberg.com/news/articles/2020-12-21/u-s-stock-sales-raise-435-billion-amid-2020-s-ipo-euphoria https://www.bloomberg.com/news/articles/2020-12-21/u-s-stock... Stock and bond issuances are at all time highs. Housing is an investment in the CPI because most people don’t buy houses as consumption. The CPI aims to create a basket of consumption for normal people. Rich people do consume houses, and their consumption leads to money circulating. Should rich people be rich enough to buy houses willy-nilly? That’s a different question. Maybe they shouldn’t, to the current degree.
brobdingnagians 6y ago
There are differences of opinion on what is the cause and the effect [1]. There were deeper reasons for the deflation and by cutting production and preventing deflation, it made it much more difficult for small businesses and individuals to buy food or continue business. That benefited large corporations at the expense of the smaller ones. The government taxed the poor, then subsidized farmers to stop producing, which made the food more expensive which further hobbled the poor. The Fed benefits banks and the wealthy. Inflation and increasing money supply makes labor cheaper for businesses and hurts those on fixed salary or wage by decreasing the real value of wages over time. [1] https://mises.org/library/how-fdr-made-depression-worse https://mises.org/library/how-fdr-made-depression-worse
natenthe 6y ago
This is one of the worst takes I've read in awhile. First off, there is no general consensus about the exact cause of the Great Depression and the cause of the recovery. If you're going to make an attempt at a history lesson, at least get it right. We know that the stock market crash and banking panics played a large role in the contraction of economic activity, but there is absolutely no general consensus for the exact causes. Your theory, that was portrayed as a fact, is solely an opinion that is disputed by many economists and historians. Academics are split as to the exact cause of the great depression and stopping deflation made possible by the gold standard is not an accepted fact in any economics or history debate. [1] Secondly, the Fed providing liquidity is not "stabilizing the price of the USD", as you say. Printing money out of thin air at extreme rates (22% of all dollars were printed in 2020) is massively devaluing the USD and is borrowing against the future of the country, thus ultimately destabilizing the USD. Just like how many things that feel good in the short term are unhealthy for us, providing artificial short term liquidity that ends up destabilizing society long-term is not healthy or intelligent. As we add trillions of dollars of debt to the US balance sheet, we will soon get to a point where the vast majority of federal expenditure will be on interest payments (it is currently less than 10% but increasing exponentially). At that point, the US will either be forced to hike taxes to ridiculous levels to pay down the debt, or will essentially be bankrupted, and the country's assets will be taken over and dissolved to pay back its lenders by some supranational organization. The only thing you said with a hint of truth was that the Fed is like an engine that serves to move a train. However, the train is off the tracks, not moving the economy forward. The fed is actively destroying the economy by devaluing the USD and destroying the future of this country. Look around you - companies have already started hedging against the dollar and moving into anything that won't surely be devalued at dangerous levels like the USD in the next decade (i.e. Bitcoin). The Fed is being disrupted, similarly to how Amazon disrupted Barnes and Noble, Netflix disrupted BlockBuster, Uber disrupted Taxis, AirBnB disrupted hotels, and so on. The Fed is NOT a not a net positive on society and people are waking up to it. Hence crypto (deflationary in nature) being the highest returning asset in the last decade, appreciating at 200% each year against the dollar, which people are flocking to. The economy will surely be destructured, but it will be away from centralization and the Fed, because it only serves to enrich the monied interests, while putting on a facade that it exists to 'lower unemployment' and 'stabilize the USD'. [1] https://www.britannica.com/story/causes-of-the-great-depression https://www.britannica.com/story/causes-of-the-great-depress...
satellite2 6y ago
Every indicators point to precisely that. Tax rates are too low. It's extremely unpopular but we have to say it and repeat it. They are far too low for the highest earning quantiles but they are also too low for the rest of the population. They are at their lowest for the last 70 years in most western countries. We need to increase tax.
tchalla 6y ago
> The Fed is stabilizing the price of the USD because of the coronavirus pandemic. If it were not printing money, then there would likely be a deflationary spiral that would cause a depression. And by doing that, we have the Cantillon Effect [0]. > The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. *The first recipient of the new supply of money is in the convenient position of being able to spend extra dollars before prices have increased. But whoever is last in line receives his share of new dollars after prices have increased*. This is why when the Treasury’s deficit is monetized, inflation is referred to as a non-legislated tax. In these cases, the government has seized purchasing power (rather than physical bills) from its citizens without congressional approval. [0] https://www.aier.org/article/cantillon-effects-and-money-neutrality/ https://www.aier.org/article/cantillon-effects-and-money-neu...
- jb775 6y ago
  What's a good hedge against the Cantillon Effect?
  - bseidensticker 6y ago
    Inject the money somewhere else? UBI perhaps?
    - jb775 6y ago
      I mean as a personal investment hedge to protect against the artificial inflation
      - throwaway09223 6y ago
        Borrow money.
        MrMan 6y ago
sumedh 6y ago
> And claiming that the Fed is the root of all our problems misses the bigger picture. I think you are missing the bigger picture here, When Fed steps in to bail out failed companies, it increases the moral hazard, there is no reason to be responsible when you know the Fed will bail you out.
chiefalchemist 6y ago
Perhaps, but printing money is effectively a tax. And it's not going to be the ones who are benefitting the most who are going to be paying that tax proportionally. There's no honest and justifiable reason The Feds efforts should be so top heavy.
decasteve 6y ago
The Fed printing money isn't the engine, it's the throttle. The engine is powered by a treadmill that requires everyone to run, i.e. being consummate consumers. Throttling up requires running faster, thereby increasingly consuming more. I hope we don't exhaust ourselves to keep up.

quickthrowman 6y ago

> When the pandemic is over, it will sell back these bonds the banks it bought them from. This remains to be seen, the market had an absolute fit when they said QE was tapering in 2013, and also had an absolute fit when Powell was raising rates in 2018, particularly in December. The Fed may have painted themselves into a corner here, nothing is certain with regards to unwinding QE or raising rates.

nostrademons 6y ago
I've heard (from finance professionals) that big elephant in the room is corporate debt. Corporations need to roll over their debt when it comes due, and a fair amount of it is short-term paper. If interest rates rise, that debt will become a lot more expensive, which will make many of the more marginal companies insolvent. Not software companies, which are sitting on hoards of cash, but all of the ordinary manufacturing/retail/service/financial companies that employ millions of Americans. If they go bankrupt we'll see unemployment worse than the COVID lockdown, but moving up the income ladder into what's left of the middle class. This was why the Fed flinched in 2018. To me (and this is a minority viewpoint - my finance industry friends disagreed), the way this plays out is both obvious and terrible. The Fed knows that if they raise interest rates, very large American institutions are going to go bankrupt and millions of Americans will be thrown out of work. The Fed's primary mandate is full employment (adjusted last year from a dual mandate of "full employment and low inflation"). Therefore, the Fed is not going to raise interest rates. We'll see this first as a massive asset bubble during the early 2020s, and then as rising inflation in the later 2020s, and then finally as hyperinflation. When it gets to the hyperinflation stage the Fed will take notice and raise rates, but it's too late by then. Hyperinflation is characterized as a sharp increase in the velocity of money, which makes traditional monetary policy tools ineffective for curbing it. You have to ditch the currency and start over with a new one.
- NortySpock 6y ago
  So, we need to see loan-forgiveness for businesses then? Trying to figure out how you unwind it slowly when apparently "slowing raising rates" still destroys many businesses with a lot of debt...
  - jaycroft 6y ago
    I'm starting to think that it's time to let the unproductive businesses that have blossomed over the last 12 years go bankrupt and be removed from the system. Unfortunately a lot of productive businesses that are temporarily unproductive had been using their cash for stock buybacks and using easy corp debt to run operations, and so with the pandemic, those wold get washed out too. Maybe the laws banning stock buybacks prior to Reagan weren't such a bad idea? On the other hand how can the fed buy bonds from the "good" companies worth saving, and not from the "bad" companies that can freeride until "eventual" profitability? I suppose you let the market decide - let the bonds float, and anything worth saving should be bought back up by the people enriched by the buybacks, right? Isn't that what efficient markets and capitalism are all about?

artificialLimbs 6y ago

> ...increase the tax on capital gains... How about proportionally? Stock trading apps now make it easy enough for Joe 6 pack to invest in the market at any income level. I could see a x% higher tax if you're buying 10,000 shares of Amazon, but it seems to me like putting < $1,000 in the market a month should be somewhat painless.

icedchai 6y ago
It became easy over 25 years ago when the first brokerages went online. Is it easier now? Yes. But it's been simple and painless for years.
freeone3000 6y ago
Capital gains is still a percentage of earnings and currently caps out at 26%. Hold your stock for a year, and it drops to 13%. Increasing cap gains could be as simple as taxing it the same as regular income.
pnutjam 6y ago
You know most American's can't cover a $400 unexpected bill. Try <$100, which is still a stretch for many.

glsdfgkjsklfj 6y ago

> by providing liquidity, which has the side effect of causing bad things because it lets the rich accumulate wealth. curious, what if the people driving that engine opted for wealth tax instead? Wouldn't that be a win-win and your phrase could have been instead: > by providing liquidity, with no side effect such as causing bad things because it lets the rich accumulate wealth. ¯\_(ツ)_/¯

tylerhou 6y ago
The Fed doesn't the power to enact a wealth tax. It's powers were delegated to it by Congress. Congress does have the power to enact a wealth tax. But it chooses not to. The way to change that is by voting.

tobmlt 6y ago

I appreciate your counter argument and am familiar with it. I disagree about the Great Depression and pretty much everything else you’ve said, but I mean no disrespect, only contend that there is a whole body of economic thought that agrees with me, and that mainstream Econ (recognizing the plurality of schools of thought here) has swept under the rug, because it’s inconvenient. I know “my side” is unpopular and “discredited”. I think it happens to mainly be right, simpler, and generally disabling to the status quo, which I’d characterize as built to enable active interventions. I’ve said nothing about what to Actually do to fix this all, because that is more complex, and not addressed properly, in the main, by anybody. I think one has to recognize the pain that unwinding all of this must cause, and not just “switch it all out”. Heck of a mess! I’ll be happy to get my (Of course discredited) books out and recite the counter case about the Great Depression if anybody really wants me to later. Basically the fed and various policies caused what should have been a short sharp correction/stock-crash (at the end of a runaway fed built stock market streak) to extend into a long drawn out mess. Forgetting innumerable details I am sure. But yeah, I know you don’t agree. I do not find your case compelling. While I have a chance, here is a good book on the Austrian case against the status quo narrative on the great depression: https://cdn.mises.org/Americas%20Great%20Depression_3.pdf https://cdn.mises.org/Americas%20Great%20Depression_3.pdf This is, in the main, what I allude to on that one point (caveat, I am not a gold bug and of course Rothbard is. I think focusing on specific instances of "the way to implement an idea" allows people to laugh at the specific to forget/discredit the greater idea itself. Similar issues arise with Austrian rejection of stats and involved mathematical analysis.). I do not subscribe to those ideas, but find the bulk of the economic analysis itself compelling.

learc83 6y ago
If you're talking Austrian economists, who are the primary proponent of the "fed is the bad buy, bring back the gold standard" argument, they explicitly reject any attempt at modeling or mathematical analysis. They are only interested in arguments based on "self evident" axioms. I've read many of the books you're talking about, and there's a reason they are "unpopular" and “discredited".
- 6y ago

afarrell 6y ago

Agreed. The problem is that the Fed only has the power to inject dollars at the top of the economy, yet sales taxes and the IRS drain dollars from a broad base of the economy. I think an MMO designer would suggest two options: A. Nerf the Fed, which would have the problems you note. B. A balancing mechanic -- Some more universally-accessable way to inject income at the base of the economy.

InitialLastName 6y ago
> B. A balancing mechanic -- Some more universally-accessable way to inject income at the base of the economy. Something like, for example, giving $1000 to every adult?
- anchpop 6y ago
  This is risky, because if the fed accidentally injects too much money by buying back too many bonds, they can always un-inject it by selling the bonds back (and banks are compelled to buy). This lets the fed be more aggressive because it knows that if it goes too far and starts seeing more inflation than it intended, it can always walk back its decision. But there's no realistic way to do that after having given $1000 to every adult.
  - tylerhou 6y ago
    Taxes?
    - notriddle 6y ago
      The Fed can't make taxes. Congress makes taxes, but Congress is subject to popular approval, and the population don't like tax hikes.
      - tylerhou 6y ago
        The Fed also can't give $1000 to everyone.

matwood 6y ago

> The Fed is stabilizing the price of the USD because of the coronavirus pandemic. The pandemic is a case of exactly when the gov. should step in. Unfortunately the gov. is slow and takes so much time to do anything. > That's a distributional issue, and the main solution is tax policy. Exactly. I think a better argument could have been made by looking at the tax cuts a couple of years ago. Companies didn't go on hiring sprees or even keep any money in the bank. They did stock buy backs, paid bonuses, etc...so that when the pandemic did hit they had nothing to fall back on (see the airlines).

tylerhou 6y ago
CEO bonuses, not always a good thing. Buybacks are not always good (because stock-compensated corporate managers sometimes abuse them to increase the stock price), but for airlines, buying stock was the right choice. You can read Matt Levine's argument, but basically: If airlines didn't spend money on buying back stock, they could have: 1. Invested it in growth. But if they had invested it in all the normal things an airline might invest in, they would still suffering because of the pandemic. 2. Saved it for a rainy day. You're arguing (2) should have happened. But an important thing to remember is that companies' savings are not like your savings — companies have far more reliable future cash flow, which means that they can borrow at much lower rates than you can through the equity markets. If airlines had saved their earnings, maybe they would have grown at bond rates (investing the company's savings in the stock market is too risky and unorthodox for corporate finance officers). That's not good for investors who are looking for 1) return on capital and 2) higher exposure to travel. By returning the capital to investors, airlines increased their exposure to airline-adjacent things and their return on capital. That's a good thing for investors because it gives them more choice! If an investor wants a safer investment, they can create their own basket of bonds and airline stonks. Similarly, now that the coronavirus has hit, investors know that airlines' fundamentals haven't changed — they're just hitting temporary turbulence. So, to raise capital, airlines can issue stocks and bonds to temporarily get them through 12-24 months. And that's exactly what they did last May: https://www.wsj.com/articles/aviation-industry-races-for-cash-with-record-bond-sales-11588607851 https://www.wsj.com/articles/aviation-industry-races-for-cas... Basically: corporate finance is not like personal finance, and it's a mistake to think that companies need "rainy day funds." They don't: that's what the equity markets are for.

ItsMonkk 6y ago

This is an inaccurate narrative. The more wealth inequality there is in a nation, the less that increases in the money supply effect the economy. This is why we have no inflation with trillions injected. The rich simply store the money in assets like stocks and houses and it never touches consumption. The only thing that needed to happen to keep the economy afloat was the Congress passing their bills.

tylerhou 6y ago
> The rich simply store the money in assets like stocks and houses and it never touches consumption. But these do affect consumption. 1) Stonks going up means that companies have more capital (through stock issuances and equity raises). Companies use this capital to buy things and pay workers, so the dollars end up recirculating through the economy just like if a regular person spent it. 2) Buying houses is consumption. And increases in housing prices causes more building of houses. Which leads to people getting paid for building houses and creating materials which leads to money circulating. Wealth inequality is bad, and Congress should have done more to help the American people. But the populist "rich people hoard money in stonks and houses so it doesn't recirculate" is also a complete misunderstanding.
- ItsMonkk 6y ago
  1. When the money supply is increasing at a rate faster than stuff, the best use of capital is to hoard it. Can you show me examples of major companies issuing stock right now? Looks to me like they are all buying back their stock, which has the opposite effect. 2. Buying houses is an investment and is specifically carved out in the CPI. Consumption is Owner's Equivalent Rent, buying is not.
  - tylerhou 6y ago
    https://www.cnbc.com/2020/12/08/tesla-to-raise-up-to-5-billion-in-share-offering.html https://www.cnbc.com/2020/12/08/tesla-to-raise-up-to-5-billi... https://www.ft.com/content/a59c2a9d-5e0b-4cbc-b69e-a138de76a776 https://www.ft.com/content/a59c2a9d-5e0b-4cbc-b69e-a138de76a... https://www.bloomberg.com/news/articles/2020-12-21/u-s-stock-sales-raise-435-billion-amid-2020-s-ipo-euphoria https://www.bloomberg.com/news/articles/2020-12-21/u-s-stock... Stock and bond issuances are at all time highs. Housing is an investment in the CPI because most people don’t buy houses as consumption. The CPI aims to create a basket of consumption for normal people. Rich people do consume houses, and their consumption leads to money circulating. Should rich people be rich enough to buy houses willy-nilly? That’s a different question. Maybe they shouldn’t, to the current degree.

brobdingnagians 6y ago

There are differences of opinion on what is the cause and the effect [1]. There were deeper reasons for the deflation and by cutting production and preventing deflation, it made it much more difficult for small businesses and individuals to buy food or continue business. That benefited large corporations at the expense of the smaller ones. The government taxed the poor, then subsidized farmers to stop producing, which made the food more expensive which further hobbled the poor. The Fed benefits banks and the wealthy. Inflation and increasing money supply makes labor cheaper for businesses and hurts those on fixed salary or wage by decreasing the real value of wages over time. [1] https://mises.org/library/how-fdr-made-depression-worse https://mises.org/library/how-fdr-made-depression-worse

natenthe 6y ago

This is one of the worst takes I've read in awhile. First off, there is no general consensus about the exact cause of the Great Depression and the cause of the recovery. If you're going to make an attempt at a history lesson, at least get it right. We know that the stock market crash and banking panics played a large role in the contraction of economic activity, but there is absolutely no general consensus for the exact causes. Your theory, that was portrayed as a fact, is solely an opinion that is disputed by many economists and historians. Academics are split as to the exact cause of the great depression and stopping deflation made possible by the gold standard is not an accepted fact in any economics or history debate. [1] Secondly, the Fed providing liquidity is not "stabilizing the price of the USD", as you say. Printing money out of thin air at extreme rates (22% of all dollars were printed in 2020) is massively devaluing the USD and is borrowing against the future of the country, thus ultimately destabilizing the USD. Just like how many things that feel good in the short term are unhealthy for us, providing artificial short term liquidity that ends up destabilizing society long-term is not healthy or intelligent. As we add trillions of dollars of debt to the US balance sheet, we will soon get to a point where the vast majority of federal expenditure will be on interest payments (it is currently less than 10% but increasing exponentially). At that point, the US will either be forced to hike taxes to ridiculous levels to pay down the debt, or will essentially be bankrupted, and the country's assets will be taken over and dissolved to pay back its lenders by some supranational organization. The only thing you said with a hint of truth was that the Fed is like an engine that serves to move a train. However, the train is off the tracks, not moving the economy forward. The fed is actively destroying the economy by devaluing the USD and destroying the future of this country. Look around you - companies have already started hedging against the dollar and moving into anything that won't surely be devalued at dangerous levels like the USD in the next decade (i.e. Bitcoin). The Fed is being disrupted, similarly to how Amazon disrupted Barnes and Noble, Netflix disrupted BlockBuster, Uber disrupted Taxis, AirBnB disrupted hotels, and so on. The Fed is NOT a not a net positive on society and people are waking up to it. Hence crypto (deflationary in nature) being the highest returning asset in the last decade, appreciating at 200% each year against the dollar, which people are flocking to. The economy will surely be destructured, but it will be away from centralization and the Fed, because it only serves to enrich the monied interests, while putting on a facade that it exists to 'lower unemployment' and 'stabilize the USD'. [1] https://www.britannica.com/story/causes-of-the-great-depression https://www.britannica.com/story/causes-of-the-great-depress...

satellite2 6y ago

Every indicators point to precisely that. Tax rates are too low. It's extremely unpopular but we have to say it and repeat it. They are far too low for the highest earning quantiles but they are also too low for the rest of the population. They are at their lowest for the last 70 years in most western countries. We need to increase tax.

tchalla 6y ago

> The Fed is stabilizing the price of the USD because of the coronavirus pandemic. If it were not printing money, then there would likely be a deflationary spiral that would cause a depression. And by doing that, we have the Cantillon Effect [0]. > The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. *The first recipient of the new supply of money is in the convenient position of being able to spend extra dollars before prices have increased. But whoever is last in line receives his share of new dollars after prices have increased*. This is why when the Treasury’s deficit is monetized, inflation is referred to as a non-legislated tax. In these cases, the government has seized purchasing power (rather than physical bills) from its citizens without congressional approval. [0] https://www.aier.org/article/cantillon-effects-and-money-neutrality/ https://www.aier.org/article/cantillon-effects-and-money-neu...

jb775 6y ago
What's a good hedge against the Cantillon Effect?
- bseidensticker 6y ago
  Inject the money somewhere else? UBI perhaps?
  - jb775 6y ago
    I mean as a personal investment hedge to protect against the artificial inflation
    - throwaway09223 6y ago
      Borrow money.
      - MrMan 6y ago

sumedh 6y ago

> And claiming that the Fed is the root of all our problems misses the bigger picture. I think you are missing the bigger picture here, When Fed steps in to bail out failed companies, it increases the moral hazard, there is no reason to be responsible when you know the Fed will bail you out.

chiefalchemist 6y ago

Perhaps, but printing money is effectively a tax. And it's not going to be the ones who are benefitting the most who are going to be paying that tax proportionally. There's no honest and justifiable reason The Feds efforts should be so top heavy.

decasteve 6y ago

The Fed printing money isn't the engine, it's the throttle. The engine is powered by a treadmill that requires everyone to run, i.e. being consummate consumers. Throttling up requires running faster, thereby increasingly consuming more. I hope we don't exhaust ourselves to keep up.