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There are two components to the crazy asset inflation we saw after COVID: 1) The Fed increasing the money supply. This lead to a situation where there was a lo
by DANK_YACHT 4y ago
There are two components to the crazy asset inflation we saw after COVID:
1) The Fed increasing the money supply. This lead to a situation where there was a lot of money that needed to be put somewhere.
2) The Fed keeping the interest rate near zero. This meant there was no safe place to put all the money the Fed was dumping into the system.
Warren Buffet, someone generally regarded as being very good at estimating value, has said that near-zero interest rates can support near-infinite valuations. That's exactly what we saw play out.
- PKop 4y agoYes, and with the amount of debt the US has (over 120% dept to GDP), the economy cannot function without low rates, without negative real rates (for long enough until debt to GDP declines). Without new money pumped into the system it collapses, without steadily increasing asset prices (at least assets not declining for long) the system collapses. The interest on debt will crowd out everything else and put economy in depression if rates rise meaningfully. With energy becoming more expensive than in decades past ("peak cheap oil"), there is not enough real growth to keep the system going without injections of money/liquidity. Inflation, however painful, is baked into the cake and is the only real path to devalue the debt. Cutting spending, cutting entitlements, cutting defense, raising taxes...all are politically near impossible and would put US economy into massive depression.
- DANK_YACHT 4y agoThe government debt doesn't really matter because the Fed can always increase the money supply by buying treasuries. For instance, the total U.S. debt is almost 30T, but 9T of that is owed to the Fed. The Fed can do this regardless of interest rate.