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> 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 sai

> 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?
    - NortySpock 6y ago
      Save the people (using unemployment) and ditch the hollow husks of marginal companies that have rotted from within? Dumb idea: maybe if you had a published interest rate schedule that planned out 10 years, 15 years, whatever. So everyone knew what the bond/loan base interest rates would look like for the next 15 years. years 0 - 7: base interest rate ramps up from 3% now to 10% years 8 - 15: base interest rate ramps down from 10% to 3% years 16-21: repeat years 22-28: repeat Downside I'm sure is that people who come of age during high-interest-rate periods can't get car loans or education loans that don't eat them alive...
      - jaycroft 6y ago
        This seems sort of like what the Fed intends to do now, only with maybe lower rates overall - 0 for a few years, ramping to a target of 2 or 3, but I guess no real guidance after that. Unfortunately the Fed has pretty blunt tools, even after their upgrade back in March 2020. Using some of the surplus wealth from the asset holding class (top half of the K) to implement UBI, healthcare education, for the class that has most of it's wealth tied up in future wages (bottom half of the K). This would take congress though, and I'm not confident that we'll see anything recurring after the next round of stimulus. There is risk here though - bottom up stimulus comes with it's own moral hazard issues, but then again I don't know what the net drag / benefit is compared to zombie companies getting infinite credit moral hazard we have now. I suspect UBI for individuals leads to fewer systemic risk sorts of issues, but I really don't know, it's very hard to envision what actually ends up happening due to lack of having ever experienced anything like that in my lifetime. It would be nice if we could try it out - but there's probably a momentum term hidden in there somewhere - give an inch take a mile sort of thinking. Is UBI like corporate debt backstopping? Once you get a taste you can never go back? I really don't see any good answers here other than "try to be on the top half of the K, and also try not to get eaten".
- kazen44 6y ago
  which is highly dangerous to the general stability of society. When economic policy results in massive finanicial instability for the common worker (thanks to hyperinflation and insane asset prices) it creates a power vacuum which can be filled by those promising to fix the problem quickly and swiftly.
  - deleted 6y ago
    [deleted]
  - chiefalchemist 6y ago
    Yes. But hyperinflation and insane asset prices aren't required. You simply need a highly dissatisfied and highly motivated "fringe group" to set off a chain reaction. We're flirting with that now. The next POTUS election is the one to watch. 2020 was overrated in terms of significance. The next vacuum filler(s) will have intent and focus. They've seen what's possible without out really trying. The market hasn't improved; the "competition" remains blind and/or in denial. There's still plenty of opportunity.
- quickthrowman 6y ago
  Yeah, interest rate risk and increased debt service costs bankrupting companies is a bigger issue than slowing or stopping QE. I hope the Fed can figure a way out of this without hyperinflation, but it’s a distinct possibility. I agree that they’ll wait to raise rates until inflation really starts cooking above 3%.
- clairity 6y ago
  large institutions going bankrupt doesn't mean millions of americans will be thrown out of work. that's a boogeyman used by economists to short-circuit that line of thinking because it threatens moneyed interests. the value of those businesses remains and they'll be quickly bought up and revitalized by excess capital looking for returns (part of the problem is concentrated wealth that doesn’t know what to do with itself). let that excess capital be unleashed rather than sitting sidelined. we need more bankruptcies at the unproductive top-heavy end of the economy.
  - MrMan 6y ago
    This!
  - cudgy 6y ago
    So true. The Fed is essentially a dam built to stop the existing machinations of capitalism from flowing as they were intended. The longer it remains in place, the harder it will be to prevent these forces from occurring until eventually (like now) the economy no longer resembles a capitalist system.

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?
  - NortySpock 6y ago
    Save the people (using unemployment) and ditch the hollow husks of marginal companies that have rotted from within? Dumb idea: maybe if you had a published interest rate schedule that planned out 10 years, 15 years, whatever. So everyone knew what the bond/loan base interest rates would look like for the next 15 years. years 0 - 7: base interest rate ramps up from 3% now to 10% years 8 - 15: base interest rate ramps down from 10% to 3% years 16-21: repeat years 22-28: repeat Downside I'm sure is that people who come of age during high-interest-rate periods can't get car loans or education loans that don't eat them alive...
    - jaycroft 6y ago
      This seems sort of like what the Fed intends to do now, only with maybe lower rates overall - 0 for a few years, ramping to a target of 2 or 3, but I guess no real guidance after that. Unfortunately the Fed has pretty blunt tools, even after their upgrade back in March 2020. Using some of the surplus wealth from the asset holding class (top half of the K) to implement UBI, healthcare education, for the class that has most of it's wealth tied up in future wages (bottom half of the K). This would take congress though, and I'm not confident that we'll see anything recurring after the next round of stimulus. There is risk here though - bottom up stimulus comes with it's own moral hazard issues, but then again I don't know what the net drag / benefit is compared to zombie companies getting infinite credit moral hazard we have now. I suspect UBI for individuals leads to fewer systemic risk sorts of issues, but I really don't know, it's very hard to envision what actually ends up happening due to lack of having ever experienced anything like that in my lifetime. It would be nice if we could try it out - but there's probably a momentum term hidden in there somewhere - give an inch take a mile sort of thinking. Is UBI like corporate debt backstopping? Once you get a taste you can never go back? I really don't see any good answers here other than "try to be on the top half of the K, and also try not to get eaten".
kazen44 6y ago
which is highly dangerous to the general stability of society. When economic policy results in massive finanicial instability for the common worker (thanks to hyperinflation and insane asset prices) it creates a power vacuum which can be filled by those promising to fix the problem quickly and swiftly.
- deleted 6y ago
  [deleted]
- chiefalchemist 6y ago
  Yes. But hyperinflation and insane asset prices aren't required. You simply need a highly dissatisfied and highly motivated "fringe group" to set off a chain reaction. We're flirting with that now. The next POTUS election is the one to watch. 2020 was overrated in terms of significance. The next vacuum filler(s) will have intent and focus. They've seen what's possible without out really trying. The market hasn't improved; the "competition" remains blind and/or in denial. There's still plenty of opportunity.
quickthrowman 6y ago
Yeah, interest rate risk and increased debt service costs bankrupting companies is a bigger issue than slowing or stopping QE. I hope the Fed can figure a way out of this without hyperinflation, but it’s a distinct possibility. I agree that they’ll wait to raise rates until inflation really starts cooking above 3%.
clairity 6y ago
large institutions going bankrupt doesn't mean millions of americans will be thrown out of work. that's a boogeyman used by economists to short-circuit that line of thinking because it threatens moneyed interests. the value of those businesses remains and they'll be quickly bought up and revitalized by excess capital looking for returns (part of the problem is concentrated wealth that doesn’t know what to do with itself). let that excess capital be unleashed rather than sitting sidelined. we need more bankruptcies at the unproductive top-heavy end of the economy.
- MrMan 6y ago
  This!
- cudgy 6y ago
  So true. The Fed is essentially a dam built to stop the existing machinations of capitalism from flowing as they were intended. The longer it remains in place, the harder it will be to prevent these forces from occurring until eventually (like now) the economy no longer resembles a capitalist system.