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And a huge amount of public debt matures in the next 1-2 years, e.g. it's $7.6T (31%) just in the next year [1]. Imagine how the interest will balloon after thi

• JumpCrisscross 3y ago
  > I expect the Fed will drop the interest rate and/or will re-start QE somewhere in the next year, so expect new waves of inflation similar to 70s Side note, this has been Silicon Valley's take for a decade. It's wrong. It results from a series of fundamental misunderstanding that caught start-ups, VCs and even Silicon Valley Bank flat footed by the Fed's rate rises occurring and persisting.
  • fuoqi 3y ago
    Yes, many analysts have expected this to happen this year, but they underestimated stimulating effect of the COVID stimulus checks and the huge deficit spending by the government (e.g. Inflation Reduction Act, lol). To be fair, the banking system has started breaking, but, instead of lowering the rate, the Fed has temporarily masked it by the BTFP. When the program will end, banks will end up with huge holes in their balance sheets (discounted paper + accumulated interest on BTFP funds). So we either end up with a huge banking crisis, or the Fed will prolong the program, thus effectively making it a form of QE.
    • JumpCrisscross 3y ago
      > many analysts have expected this to happen this year They expected the economy to cool thereby causing rates to fall. Because what we're going through--rising rates, falling inflation and persistent growth--is literally the first time an economy of note has managed the opposite of stagflation. The Fed being constrained by the federal deficit (or even interest expenditure) is a different beast. Nobody serious thinks the Fed would lower rates to finance the government thereby causing inflation. If the Fed is lowering rates, the economy is cooling. That's deflationary. If the economy is doing well enough that lowering rates would cause inflation, there is no need to lower rates. Stagflation is real. But it's never happened in the way this theory describes (deficits --> lower rates --> inflation amidst recession). And there are simple, well-tested reasons to find that causation ridiculous. > banks will end up with huge holes in their balance sheets It's a trivial hole to fill: let banks borrow at the discount window against the face instead of market value of their Treasuries. (At a penalty rate, I would add.) The persistent problems in banking come from credit risk. That's happening in commercial real estate. But not rates.
      • fuoqi 3y ago
        Yes, the Fed is independent and it should not care about fiscal deficits. On the paper. But the recent history shows that in practice it plays a bit differently... Also, there is a very enticing (for the government) example of Japan where BoJ effectively owns almost all of the Japanese government debt. Do not forget, that if things will get bad enough the Congress can always re-write the Federal Reverse Act. >If the economy is doing well enough that lowering rates would cause inflation, there is no need to lower rates. I am not naive enough to believe into the soft and no-landing scenarios. The gradual yield curve uninversion points to incoming recession. Huge fiscal deficits contribute to it, since without QE they cause crowding out of private debt markets. >Just let banks borrow at the discount window against the face instead of market value of their Treasuries. And, as I've said, it becomes another form of QE. If you set the penalty rate on the level of the current Fed rate, eventually banks will fail, since they can give enough loans at such rates and deposits actively flee into treasures and MMFs. And using lower rates will be rightfully seen as yet another bailout of banks.
        • JumpCrisscross 3y ago
          > On the paper. But the recent history shows that in practice it plays a bit differently What history? When did the Fed ever lower rates because of the deficit? > Japan where BoJ effectively owns almost all of the Japanese government debt. Help me understand why a large holder of debt would want it to pay less? (Also, Japan is a bad model for America.) > not naive enough to believe into the soft and no-landing scenarios That's fine. That's reasonable. What's not is thinking we'll have deficits cause lower rates and then inflation. If we have a hard landing, which is the historically-suggested outcome, we get lower rates and a recession. Not inflation. > it becomes another form of QE. No, because new money isn't being created. Existing money is not being removed. That's different. > If you set the penalty rate on the level of the current Fed rate, eventually banks will fail How? > If you set the penalty rate on the level of the current Fed rate It already is. This is how it works. > since they can give enough loans at such rates and deposits actively flee into treasures and MMFs How does the discount rate cause deposits to flee? Also, what?! The discount rate is 5.5% [1]. Banks can borrow against the market value of their Treasuries at that. So for a dollar of face value, they can borrow ~60¢ at 5.5%. If we penalty that for face-value borrowing, they can borrow 100¢ at e.g. 8.5%. Help me understand how this additional liquidity causes whatever you're predicting? [1] https://www.frbdiscountwindow.org https://www.frbdiscountwindow.org
• MuffinFlavored 3y ago
  I can’t think of any counter argument that says if you truly believe the American economy will be exposed to quantitive easing in any form (even if it’s interest rates below 4%) in the near future, then US equities are a great thing to have financial exposure to. I’m going to guess you would agree with that?
  • fuoqi 3y ago
    It's... difficult and depends on many factors. In an inflation environment equities usually do not feel great, since inflation causes shrinking margins and it takes time to pass rising costs on the consumer. Analysis from the Hussman Funds based on statistical data predicts that nominal return from equities in the next decade will be zero to negative. I think it's unlikely (but not impossible) that we will see a direct repeat of the recent QEs. We probably will see something similar to the Japanese yield curve control and you can easily see how the Japanese equities performed in the last two decades.
    • JumpCrisscross 3y ago
      > inflation environment equities usually do not feel great, since inflation causes shrinking margins and it takes time to pass rising costs on the consumer This is factually untrue [1]. Equities aren't a surefire inflation hedge, as they're sometimes positioned. But it's also wrong that they "usually do not feel [sic] great" in inflation. (It's also wrong that margins compress in inflation.) [1] https://www.nber.org/system/files/working_papers/w17798/w17798.pdf https://www.nber.org/system/files/working_papers/w17798/w177...
      • fuoqi 3y ago
        I was talking about high inflation environment. If you bought equities in the begging of 70s, it would take more than a decade to get nominal return. Even the paper you linked explicitly states: >A large literature has documented the poor inflation hedging properties of the overall stock market. However, certain individual stocks have the ability to be good inflation hedges, even if the overall aggregate market has poor inflation hedging properties You can position yourself defensively, but investing into a broad market using something like S&P500 or God forbid NASDAQ as an inflation hedge is arguably not a great idea.