5 ms·

Maybe a stupid question, but if the velocity goes up, couldn't/wouldn't the Fed contract the supply? It seems like having large supply is desirable/correct whe

by tbabb 5y ago

Maybe a stupid question, but if the velocity goes up, couldn't/wouldn't the Fed contract the supply? It seems like having large supply is desirable/correct when velocity is low.

ignasheahy 5y ago
Of course they would try to do it - first of all raising interest rates. However they are basically trapped now and it's questionable if they can still control situation. With current debt levels it might be extremely hard to raise rates or sell instruments they hold that were bought with printed money (to take off liquidity of the market). On top of that I would say all the rich and influential are well positioned for high inflation so it's speculation but I wouldn't bet that Fed will choose hard recession scenario...
ItsMonkk 5y ago
No. We live in a fiat currency world where every dollar is allowed to leverage 10x. This means that every dollar defaulted on results in the destruction of 10 dollars. Even during the housing crash of 2008, the money supply didn't contract because the government was forced to keep the money supply constant, and if they did not it would lead to cascading failures that would destroy the currency entirely. Allowing the money supply, given all of the moral hazard we've shown so far, would be suicide to the economy. The Fed's next step is to slow down this inflation, and they will do so by raising rates. The Fed's dot plots shows that they will reach the rate of the 30Y Treasury bill sometime around 2024, but with this data they might bring that up to 2023. This will, like every single other time they set the Fed Funds Rate above the 30YT, cause a recession 6 months afterwards, which will bring down the inflation pressures. Problem resolved? That's totally standard, and not yet the true problem. The problem is after that. Once we reach that recession the Fed quickly drops the interest rate and that brings us out of the recession. But interest rates are already so low, we've already pumped so many dollars into the system, that it might not cut it. We might get cascading failures, we might get stuck in a depression. This might be the end of the long-term debt cycle.
- tbabb 5y ago
  Again, maybe dumb question, but what sense is "every dollar leveraged 10x"? Also in 2008, it looks like money velocity decreased during the recession (as it's been doing almost monotonically since the mid 90s). It looks like after the crash, velocity increased slightly, and indeed the supply contracted just slightly at basically the exact same time.
  - nightski 5y ago
    Fractional reserve banking.
    - tbabb 5y ago
      If a dollar is defaulted, I'm not sure it's accurate to say that one dollar is destroyed (as opposed to moved), let alone ten? If the borrower defaults, it is the same as the borrower owing the depositor $1 (the bank is in a sense acting like a risk-absorbing and expertise-adding middleman between the depositor and the borrower). And doesn't whether that dollar is "destroyed" depend on why the borrower can't pay it? If it's because someone else got ≥ $1 richer off the borrower, then it seems to me like the supply of money in the economy as a whole hasn't actually gone down.
- givemeethekeys 5y ago
  Ray Dalio's "beautiful deleveraging" ?
- landemva 5y ago
  I am waiting with my popcorn ready for the exciting show to unfold when the Fed seriously raises rates. Those in Western Europe (low or negative bank account rates) will park funds in US banks. This will increase demand for dollars and put the final nail in the euro. This will be exciting to watch.

by tbabb 5y ago

Maybe a stupid question, but if the velocity goes up, couldn't/wouldn't the Fed contract the supply? It seems like having large supply is desirable/correct when velocity is low.

ignasheahy 5y ago

Of course they would try to do it - first of all raising interest rates. However they are basically trapped now and it's questionable if they can still control situation. With current debt levels it might be extremely hard to raise rates or sell instruments they hold that were bought with printed money (to take off liquidity of the market). On top of that I would say all the rich and influential are well positioned for high inflation so it's speculation but I wouldn't bet that Fed will choose hard recession scenario...

ItsMonkk 5y ago

No. We live in a fiat currency world where every dollar is allowed to leverage 10x. This means that every dollar defaulted on results in the destruction of 10 dollars. Even during the housing crash of 2008, the money supply didn't contract because the government was forced to keep the money supply constant, and if they did not it would lead to cascading failures that would destroy the currency entirely. Allowing the money supply, given all of the moral hazard we've shown so far, would be suicide to the economy. The Fed's next step is to slow down this inflation, and they will do so by raising rates. The Fed's dot plots shows that they will reach the rate of the 30Y Treasury bill sometime around 2024, but with this data they might bring that up to 2023. This will, like every single other time they set the Fed Funds Rate above the 30YT, cause a recession 6 months afterwards, which will bring down the inflation pressures. Problem resolved? That's totally standard, and not yet the true problem. The problem is after that. Once we reach that recession the Fed quickly drops the interest rate and that brings us out of the recession. But interest rates are already so low, we've already pumped so many dollars into the system, that it might not cut it. We might get cascading failures, we might get stuck in a depression. This might be the end of the long-term debt cycle.

tbabb 5y ago
Again, maybe dumb question, but what sense is "every dollar leveraged 10x"? Also in 2008, it looks like money velocity decreased during the recession (as it's been doing almost monotonically since the mid 90s). It looks like after the crash, velocity increased slightly, and indeed the supply contracted just slightly at basically the exact same time.
- nightski 5y ago
  Fractional reserve banking.
  - tbabb 5y ago
    If a dollar is defaulted, I'm not sure it's accurate to say that one dollar is destroyed (as opposed to moved), let alone ten? If the borrower defaults, it is the same as the borrower owing the depositor $1 (the bank is in a sense acting like a risk-absorbing and expertise-adding middleman between the depositor and the borrower). And doesn't whether that dollar is "destroyed" depend on why the borrower can't pay it? If it's because someone else got ≥ $1 richer off the borrower, then it seems to me like the supply of money in the economy as a whole hasn't actually gone down.
givemeethekeys 5y ago
Ray Dalio's "beautiful deleveraging" ?
landemva 5y ago
I am waiting with my popcorn ready for the exciting show to unfold when the Fed seriously raises rates. Those in Western Europe (low or negative bank account rates) will park funds in US banks. This will increase demand for dollars and put the final nail in the euro. This will be exciting to watch.