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The article makes it sound like stocks are high because of low interest rates. But the main reason that stocks are high is probably that there is so much money

The article makes it sound like stocks are high because of low interest rates. But the main reason that stocks are high is probably that there is so much money out there: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... I think the fed would need to take back money to reverse the inflation. I don't know via which mechanisms they would do this. Does anybody here know? It is important to remember that this would bankrupt the government unless the government finds ways to raise capital elsewhere. So we will probably not see any de-inflationary actions unless we also see higher taxes. My feeling: We will see a fast rise in taxes and a slow rise in interest rates. In other words: Governments will try to take away peoples money and only afterwards slowly make money more valuable again. Maybe. Maybe they will just keep the value of money at the current level.

cookguyruffles 5y ago
They have tens of knobs, some strange and esoteric, targeting specific corners of the banking system, but I believe if they want to control inflation they simply need to cut back on bond purchases. As they buy less bonds, their price drops, as the price drops risk-free yields drift higher. As risk-free yields drift higher, consumer credit becomes simultaneously more expensive and less available, as lenders allocate less of their capital to risky lending and more to risk-free (government) lending. This credit shrinkage causes the deflationary effect. The trouble is that every time the fed has even hinted at this on past occasions (stretching back a decade), an immediate violent market event has usually followed. https://www.investopedia.com/terms/t/taper-tantrum.asp https://www.investopedia.com/terms/t/taper-tantrum.asp
CyberRabbi 5y ago
To take back the money they would need to sell the assets they bought to inject money into the economy in the first place, then they would need to pretend the money gained in that sale never existed. Usually those assets are bonds so it’s unlikely they can call in those bonds before they are due and hopefully when they are due the bond debtors are able to pay.
- ArtTimeInvestor 5y ago
  The debtor is the government, right? So unless the government collects more taxes, it is probably not able to pay.
  - CyberRabbi 5y ago
    The debtor is not always the government. The fed buys bonds in smaller banks, among other assets.
    - ArtTimeInvestor 5y ago
      I thought banks don't want anymore money and even charge negative interest when you give them some against their will. Why would a bank take FED money in?
      - CyberRabbi 5y ago
        The same reason any business takes on investment/debt.
- QuesnayJr 5y ago
  They don't call in the bonds. They either hold them to maturity, or sell them in the open market.
Barrin92 5y ago
> I don't know via which mechanisms they would do this. Does anybody here know? selling bonds or increasing reserve requirements are two of the fairly straight-forward tools central banks have to reduce money supply.
- ArtTimeInvestor 5y ago
  With "money" I meant FED money. I did not count IOUs from banks as money. So that leaves us with selling bonds. As for the IOUs from banks: It is an interesting question how much stocks are bought with that kind of pseudo money. Since banks probably do not give those IOUs to people who want to buy stocks with them, I would think not so much. The IOUs would have to go through zombie companies which give the IOUs to their employees who then buy stocks with them.
  - Adrox 5y ago
    Do you know how much BILLIONS of bonds the FED is DIRECTLY buying? "The Federal Reserve is expected to announce it will begin trimming its $120 billion in monthly asset purchases before the end of the year as the U.S. economy recovers strongly from Covid-19, according to economists surveyed by Bloomberg." https://www.bloomberg.com/news/articles/2021-04-26/fed-to-taper-bond-buying-in-fourth-quarter-economists-say https://www.bloomberg.com/news/articles/2021-04-26/fed-to-ta... It just has to stop buying them, and maybe actually start selling from their giant portfolio...
  - Barrin92 5y ago
    >With "money" I meant FED money. I did not count IOUs from banks as money. That's not a reasonable take (in the context of the question). Controlling reserve rates controls the money supply, and the money supply is relevant when it comes to the level of inflation in the economy. What you're referencing is the 'monetary base'. (which is actually only a relatively small fraction of money in circulation).
    - ArtTimeInvestor 5y ago
      I have the feeling you did not read my comment in full. I explained why I think for that for this context the monetary base is the right type of money to look at. For crypto and stock we do the same. People say Bitcoin is capped at 21 million and stocks in circulation is the amount the companies issued. If someone owes someone else a coin or a share, we do not count that towards the supply.
QuesnayJr 5y ago
They do it basically by raising interest rates -- when the Fed issues new currency they do it by buying bonds (usually Treasuries). When they want to take currency out of circulation, they just sell the bonds. This lowers the price of bonds, which raises interest rates.
HNfriend234 5y ago
I'm surprised no one else has mentioned it but I would say a bigger problem is that the stimulus is encouraging people to not work which discourages production of goods/services. A lot of the inflation I've experienced it directly from less people providing goods/services so those who are producing have more pricing power and simply raise their prices. I recently got quotes for some construction work and all of these contractors say they're booked out for MONTHS! We need to start rolling back on all of the stimulus and COVID rules we've implemented to encourage people to return back to work. Once this happens, I believe production will increase and inflation will dissipate quicker.
- rbg246 5y ago
  How do you know it's not that more people have access to cheap loans, more people are wanting construction done?
  - ktkoffroth 5y ago
    Because it isn't just happening in the construction industry. There are restaurants in my town offering a $3000 bonus if servers and cooks commit to 4 months of work. They literally cannot open entire sections of their restaurant because they cannot find enough people willing to work. Same thing with the trucking industry, there was a driver shortage before the pandemic, and it has only gotten worse. People are simply not willing to work so long as they are being paid to sit at home.
    - rbg246 5y ago
      Interesting that it is so widespread- from my perspective it's great that there people now have leverage in negotiating their wage
- CameronNemo 5y ago
  You know what would also increase production and increase labor force participation? Paying workers more.

cookguyruffles 5y ago

They have tens of knobs, some strange and esoteric, targeting specific corners of the banking system, but I believe if they want to control inflation they simply need to cut back on bond purchases. As they buy less bonds, their price drops, as the price drops risk-free yields drift higher. As risk-free yields drift higher, consumer credit becomes simultaneously more expensive and less available, as lenders allocate less of their capital to risky lending and more to risk-free (government) lending. This credit shrinkage causes the deflationary effect. The trouble is that every time the fed has even hinted at this on past occasions (stretching back a decade), an immediate violent market event has usually followed. https://www.investopedia.com/terms/t/taper-tantrum.asp https://www.investopedia.com/terms/t/taper-tantrum.asp

CyberRabbi 5y ago

To take back the money they would need to sell the assets they bought to inject money into the economy in the first place, then they would need to pretend the money gained in that sale never existed. Usually those assets are bonds so it’s unlikely they can call in those bonds before they are due and hopefully when they are due the bond debtors are able to pay.

ArtTimeInvestor 5y ago
The debtor is the government, right? So unless the government collects more taxes, it is probably not able to pay.
- CyberRabbi 5y ago
  The debtor is not always the government. The fed buys bonds in smaller banks, among other assets.
  - ArtTimeInvestor 5y ago
    I thought banks don't want anymore money and even charge negative interest when you give them some against their will. Why would a bank take FED money in?
    - CyberRabbi 5y ago
      The same reason any business takes on investment/debt.
QuesnayJr 5y ago
They don't call in the bonds. They either hold them to maturity, or sell them in the open market.

Barrin92 5y ago

> I don't know via which mechanisms they would do this. Does anybody here know? selling bonds or increasing reserve requirements are two of the fairly straight-forward tools central banks have to reduce money supply.

ArtTimeInvestor 5y ago
With "money" I meant FED money. I did not count IOUs from banks as money. So that leaves us with selling bonds. As for the IOUs from banks: It is an interesting question how much stocks are bought with that kind of pseudo money. Since banks probably do not give those IOUs to people who want to buy stocks with them, I would think not so much. The IOUs would have to go through zombie companies which give the IOUs to their employees who then buy stocks with them.
- Adrox 5y ago
  Do you know how much BILLIONS of bonds the FED is DIRECTLY buying? "The Federal Reserve is expected to announce it will begin trimming its $120 billion in monthly asset purchases before the end of the year as the U.S. economy recovers strongly from Covid-19, according to economists surveyed by Bloomberg." https://www.bloomberg.com/news/articles/2021-04-26/fed-to-taper-bond-buying-in-fourth-quarter-economists-say https://www.bloomberg.com/news/articles/2021-04-26/fed-to-ta... It just has to stop buying them, and maybe actually start selling from their giant portfolio...
- Barrin92 5y ago
  >With "money" I meant FED money. I did not count IOUs from banks as money. That's not a reasonable take (in the context of the question). Controlling reserve rates controls the money supply, and the money supply is relevant when it comes to the level of inflation in the economy. What you're referencing is the 'monetary base'. (which is actually only a relatively small fraction of money in circulation).
  - ArtTimeInvestor 5y ago
    I have the feeling you did not read my comment in full. I explained why I think for that for this context the monetary base is the right type of money to look at. For crypto and stock we do the same. People say Bitcoin is capped at 21 million and stocks in circulation is the amount the companies issued. If someone owes someone else a coin or a share, we do not count that towards the supply.

QuesnayJr 5y ago

They do it basically by raising interest rates -- when the Fed issues new currency they do it by buying bonds (usually Treasuries). When they want to take currency out of circulation, they just sell the bonds. This lowers the price of bonds, which raises interest rates.

HNfriend234 5y ago

I'm surprised no one else has mentioned it but I would say a bigger problem is that the stimulus is encouraging people to not work which discourages production of goods/services. A lot of the inflation I've experienced it directly from less people providing goods/services so those who are producing have more pricing power and simply raise their prices. I recently got quotes for some construction work and all of these contractors say they're booked out for MONTHS! We need to start rolling back on all of the stimulus and COVID rules we've implemented to encourage people to return back to work. Once this happens, I believe production will increase and inflation will dissipate quicker.

rbg246 5y ago
How do you know it's not that more people have access to cheap loans, more people are wanting construction done?
- ktkoffroth 5y ago
  Because it isn't just happening in the construction industry. There are restaurants in my town offering a $3000 bonus if servers and cooks commit to 4 months of work. They literally cannot open entire sections of their restaurant because they cannot find enough people willing to work. Same thing with the trucking industry, there was a driver shortage before the pandemic, and it has only gotten worse. People are simply not willing to work so long as they are being paid to sit at home.
  - rbg246 5y ago
    Interesting that it is so widespread- from my perspective it's great that there people now have leverage in negotiating their wage
CameronNemo 5y ago
You know what would also increase production and increase labor force participation? Paying workers more.