Why are we even doing the dance that banks need to keep short term assets on hand to satisfy deposit outflow? Can't they just buy whatever government bonds they want (if the federal government defaults and does not honor its debt there are bigger issues than some regional bank) and give them to the Fed in exchange for freshly minted money?
It's the end result in either case, but a lot of uncertainty and friction is added for some reason. Why?
wait until you realize that the deposits that first republic received last week came from the big 4 banks... which were flush from cash they received from transfers from smaller banks like first republic.
By having banks buy government bonds and/or lend money to the government, they are essentially investing in the stability of the government itself. This can help build confidence in the government and the banking sector, which can contribute to overall stability. Of course, there are still real risks and challenges that exist, such as potential default by the government or problems within the banking system.
That's because it is a charade. The fed's entire job is basically a dependency injection in an otherwise free market. Money creation in a modern economy is literal magic and while they may claim it's tied to "metrics" these metrics are tenuous at best. Unfortunately, the clown show has been run for the last 20 years by people who do not have the country's best interests at heart. We are now reaping what was sown with the 20 years of free money to banks.
> We are now reaping what was sown with the 20 years of free money to banks.
This argument ignores the "black swan" events of covid, ukrainian invasion by russia, supply bottlenecks of various kinds, and trade tensions with china, all happening at the "same" time within the last 3 years.
Under previous policy, the Fed would lend only against the market value of an asset. The FMV of a long-term bond declines when interest rates increase, so that didn't help. This is roughly how the SVB failed.
Under new policy, for the next year, the Fed will lend against the par value of certain assets purchased before the crisis. That's an undercollateralized loan, so it's a subsidy to banks that took excessive interest rate risks. Those banks are still worse off than if they hadn't taken that risk though, since the interest cost of the loan is greater than the interest paid by the asset.
This policy change has no direct cost to the public if the loans are repaid. If a bank gets such a loan and then fails anyways, some losses will be socialized.
This is another QE/Quantitative Easing, even if they don't call it that way. I hope inflation doesn't come back/get higher again because then we'd likely see the kind of second wave inflation people saw in the 70s.
its a 0% loan (edit: 4.68%) at a 100% loan to value ratio, actually at par value not even the current market value, and if the banks don't pay then the fed seizes the collateral
> Rate: The rate for term advances will be the one-year overnight index swap rate plus 10 basis points; the rate will be fixed for the term of the advance on the day the advance is made.
I know "QE with extra steps" is a R&M reference, but keep in mind that R&M was wrong, what they described wasn't actually slavery (you can make anything anything else if you squint hard enough and/or remove the critical "extra steps"), and this isn't actually QE (as I, random Internet dweller, understand it anyway).
I don't know who R&M is. I don't know anything about the slavery reference. Feel free to explain what you're talking about.
I read press releases from the federal financial agencies and look at their balance sheet. The similarity here is that money is being created and injected into the balance sheets of private participants in the economy, money that wouldn't have seeped out to purchase things now will, overlapping in the venn diagram with QE. Another similarity is that additional US treasury bonds are now on the Federal Reserve's balance sheet, in direct exchange, overlapping in the venn diagram with QE. The difference is that the Fed is not acting as direct buying pressure in the US Treasury bond market, as the extra step is that people deposit the bonds as collateral to the fed and the feds will own them if the banks stop repaying. We're focusing on the similarities, you're focusing on the difference. I feel the similarities are a policy pivot in the worst way. I don't find the differences to be relevant.
"<X> with extra steps" is from a show called "Rick & Morty" [0]. Surprising how you picked up on the phrase without even knowing what the show is.
As for your comment itself, it seems like you gloss over the similarities and ignore the differences. For example, you say "money is being created" but this is objectively false. As is your claim that this money is "seeping" anywhere; it isn't doing anything other than ensuring bank solvency.
Your comment is what I'd expect from someone who wants to call this action by the Fed "Quantitive Easing" but doesn't want to bother actually considering if it is or not. It is not, as you said, because of the critical and relevant differences. This money isn't going back out into the economy as you claim, which is the meaningful mechanism through which QE has its effects.
Without that mechanism, calling this QE is misleading at best.
My thoughts are that some money was going to be parked at the banks. Some of that money wasn't going to be redeemed, some of it would have been impossible to redeem because the banks were sitting on losses.
Now that everyone is woken up to that reality, they want to move it around now into other banks and other assets, and actually can. It is impossible to stop at just ensuring bank solvency.
But that doesn't track; they may want to move it around, but there's no place to move it to. Nothing not-absolutely-insane would return positive yields in the time it would need to before the loan matured. That's the whole point of the borrowing rate it's set to.
It's a loan that will be paid back within 90 days. Most for the money won't enter circulation and is only a liquidity backstop for banks. The rest of the money will be gone in a few months. This is extremely different from traditional QE which involves buying long dated bonds.
True, I'm just not sure what's the plan after these 90 days have passed other than more loans, any idea? If the Fed suddenly cut rate aggressively that would
be one way for banks to restore liquidity but I cannot see that happening while inflation still running hot.
I think the plan is the banks use these 90 days to sell their less liquid assets that aren't as effected by the interest rate increase. In the end, even being insolvent isn't actually a death knell for banks as long as depositors believe the money will be paid back, which is why the government is putting so much effort into reassuring that 0 deposits will be lost.
Also half the money was literally just to pay back SVB and signature deposits while they unwind their book. Once everything is sold the other FDIC member banks will have to pony up any extra cash to pay the loans back.
As long as the regular Joe doesn’t get extra money to spend, inflation will be check. Banks won’t go buy eggs anytime soon.
We had close to 0% interest rates for almost a decade, and inflation was in check. It’s not the Fed that caused inflation, it is:
* Suspending school debt (extra income)
* Injecting real cash into the economy (stimulus checks and PPP loans to small businesses)
* Supply chain bottlenecks after Covid
All things that make real people wake up tomorrow and decide to spend some extra cash they have around in their bank account. It’s very tangible, it’s very measurable.
Of course 0% interest rates didn’t help, but it wasn’t the originating source of our inflation problems, as the previous 13 years of QE didn’t cause a spike in inflation.
I don’t really understand the inflation situation. When house prices shot up, heath care costs shot up, education costs shot up there was no inflation. But when the little guys got some money, suddenly we call it inflation. I don’t really get it.
When you give to 300+ million people extra cash to spend, you have inflation, yes.
I am not arguing that “before” it was better for the “little guys”, I am just making an observation.
You can affect the economy with fiscal policy (what our politicians/government does) and monetary policy (the central bank). Turns out monetary policy didn’t cause inflation to rise as much, as the previous 13 years demonstrate, but it was caused by liberal fiscal policy after Covid (all those points that I mentioned + supply chain bottlenecks).
The fact that our government blames the Fed is just scapegoating. They messed up big time, and acted quickly in such a way that they were not able to coordinate properly (rates should have gone up in light of liberal fiscal policies being implemented). These two entities don’t work and collaborate well together, and hindsight is 20/20.
This is severely dismissing the economic distortion of monetary stimulus. We’ve effectively been printing money into wealthy individuals assets. Increasing wealth inequality has tangible negative effects on the economy and effectively functions as a reverse tax.
> Increasing wealth inequality has tangible negative effects on the economy and effectively functions as a reverse tax.
I am not sure I understand what you are trying to say. Inflation either spikes up because of increased of demand, or lack of supply. In our case, both have happened:
* Increased demand because free money is hitting the bank accounts of almost everyone.
* Decreased supply because of supply chain bottlenecks, when every vendor canceled their orders in anticipation of a lack of demand (which never happened, with Covid), and then all of a sudden had to place again the same orders. Since every vendor practiced Just-In-Time order of all parts, the sudden demand (or - to put it in other words - the "lack of demand" which never happened) put them in a though spot where everyone was re-ordering the same parts again, but factories had to start with a fresh order queue.
This is not a "wealthy people problem", this is a "everyone is creating demand" problem. Wealthy people cannot create inflation in common goods because they are both outnumbered by regular folks, and because there is not too many of them anyways. How many eggs can a wealthy family purchase anyways? The demand of wealthy people is otherwise focused on goods that are not affecting the rest of the pyramid (does anybody care if yachts are price inflated because too many wealthy people buy them?).
Easy access to money caused inflation along with a supply chain bottleneck, the easy money that caused inflation was not ~2-3% loans that were accessible for 13 years prior to Covid, it was PPP loans, stimulus checks, and student loan pause, which all combined was given to pretty much the entire population of the US. Next thing you know, inflation is up.
I am not saying that people didn't deserve handouts for a very unique and though time in the history of their lives (Covid), I am just making an observation with the benefit of hindsight.
My argument is that the last 13 years of low interest rates produced a distorted economy where wealthy individuals gained more wealth without making profits, and those without assets saw their incomes and living standards stagnate. Low-interest rates produced companies like Uber, and socialized losses for bank failures. Low-interest rates meant TSLA became the most valuable company in the world while turning a loss.
When you print money, Its unsurprising that those closest to the money printer will accumulate the most money.
I don't disagree with anything that you are saying. The parent topic is about inflation, and throughout the least 13 years, inflation has not been a problem until - in my opinion - faulty fiscal policy during Covid.
In other words, had both monetary and fiscal policy stayed the same, inflation would not have happened to the extent we are dealing with right now. But fiscal policy (government handouts) was extremely liberal after Covid, and that put us out of balance.
"and throughout the least 13 years, inflation has not been a problem until - in my opinion - faulty fiscal policy during Covid."
It was a problem for a lot of people who either got priced out of the housing market or have huge student loans or have huge healthcare bills. The price of eggs or gas is really not much of a problem when the price of these big ticket items shoots up.
> It was a problem for a lot of people who either got priced out of the housing market or have huge student loans..
It may have been, but that was not reflected in the CPI, and we are talking about inflation as it is officially recorded in the CPI reports. The CPI inflation didn't spike up until early 2021.
The point is that many asset poor Americans saw the inflation as moderately beneficial due to higher wages. These higher wages made homes appear more affordable. The CPI measure underestimates inflation for individuals who need to acquire assets like homes.
If you consider that assets and results rents on those assets skyrocketed while "inflation" wasn't happening, then sure, but realistically, the dollar lost value and people got poorer in that time while having the same or increasing income
It’s okay. I doubt anyone in this thread does either. Thank god the good guys have the presidency or else all this not inflations and not bank bailouts might have been a bigger deal, am I right?
I’m not sure what point you are trying to make. Are you upset that only democratic presidents (like George W Bush) bail out banks in financial crises, or that only democrats (like Donald Trump) engage in inflationary policies like keep interest rates artificially low and encouraging deficit spending during strong economic times?
The bank bailouts, in particular, were done with broad bipartisan support.
Energy isn't included either. Kind of amazing they can get away with publishing an inflation stat that excludes every core household expenditure category.
there's no getting away with anything. The inflation stat "everyone" uses is preferred by economists because it is not as noisy, i.e. it has better temporal auto-correlation. However, there are all-inclusive metrics as well, and in fact those are used to compute the I-bond yield. https://www.bls.gov/news.release/cpi.t01.htm
A more cynical take on this is that the remaining goods in the basket often have "adjustments" that can be made - for example, most technology gets discounted because the new version is faster (in top-line performance) than the old version. That adjustment process allows them to create a lower-noise metric, with the side effect of also creating an inflation narrative that is convenient (unless things are well and truly out of control, like they are now).
You could say that, but then you have to explain why all my commodity investments seem so terrible.
This is mostly a joke, as I don't trade commodities; however, if BLS is juking the stats year over year with some agenda or other, basic inputs should have a steeper nominal trend line than they do, noisy as it is.
It still has political side benefits, which is likely why economists who prefer it get funding to continue their research etc.
The "getting away with it" is that in some forms, the wealthy can say it's bad that poor people get money because "it makes inflation" but when rich people get money, it's ok, because the resulting cost increases don't show up on the CPI
Inflation was there all along in asset prices - why else have home values gone up disproportionately relative to average Joe's income?
What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.
The downstream consequence that we didn't see with SVB was the bank starting to call unsecured loans, and pull back on lines of credit etc. Which should in turn have triggered the turning in of the leased Lambos and Audis....
Housing prices were going up because of supply/demand and not necessarily because of systemic high inflation.
By the way just with regular <2% YoY inflation, a $1m home in 2005 was worth $1.3m+ in 2019 (before covid and the current inflation spike), and that is with regular inflation.
Because homes cost a lot of money to begin with, the compounding effects of “healthy” inflation is going to be noticeable, and that doesn’t even factor in the low supply in the market.
Despite a massive decrease in population, Japan has been mostly flat, when they should be in a strong deflationary environment due to demand destruction - because, you know, people being dead.
So hey, if the US population would decrease .5% a year (doesn’t sound like a lot, but it adds up fast - 1.75 mln/yr if in the US), we could also tame some inflation!
That's a funny way of saying that 'supply and demand meet in Japan' which you can do but decreasing demand or increasing supply. It really is that simple. When supply and demand are allowed to meet, prices stabilize. Otherwise please explain to me why you think that this is the one asset on earth not affected by supply and demand. And you could really use a solid citation.
Thought exercise.
There are 140,000,000 houses in the US. What do you think would happen to the price of each house if there were 280,000,000? If you answered anything other than 'they would still go up for some reason despite many of them being empty and derelict' then we are in agreement that it is a supply and demand issue. Ergo a zoning issue.
You’re fighting a straw man, nobody is arguing you need to do what Japan did verbatim. The only argument I’m making is when you allow supply and demand to meet prices stop going up. All the rest is narrative.
The answer to where is “up.”
Also the prices in Tokyo aren’t insane at all they’re super affordable by any standard.
Tokyo prices are running 908k yen/square meter, or $685 square foot. While manhattan real estate is $1.5k/sq Ft and San Francisco $1k/sq ft - median incomes are dramatically lower in Japan, as is purchasing power, with the median Tokyo income being only $66k/yr.
There is a reason the stereotypical apartment in Tokyo is tiny - on average 65 square meters (700 square feet), of which only 41 square meters (441 square feet) is livable space.
That’s often for more than one person.
Outside of Tokyo, property is nearly free. Inside Tokyo it’s expensive, crowded, and tiny.
Looking at the national stats, it roughly averages out.
But that isn’t this utopia you seem to think is occurring.
So at $685 (1/3 of Manhattan and 1/2-1/3 of SF) there are also units that are somewhat smaller. Just like in Europe. Sounds pretty darn affordable. Meanwhile in SF if you can’t afford the units that are larger by regulation you can live 2h outside of town. The whole point is folks can live in the metro, and live well. And despite that prices haven’t changed in nominal terms in 30 years -
meaning slightly cheaper each year. Not everyone can afford the home of their dreams right now but it shouldn’t be between that and homelessness or a 2h commute.
But if you put a billion houses on Manhattan their value will be zero. There's almost an unlimited amount you can build up. The problem is we're currently putting houses on Jupiter instead of Manhattan through arbitrary restrictions on density. There's single-family zoning in San Francisco! 94% of San Jose. 15% of NYC (25% if you include single and two-family zoning). It's wild. [1] And that's if you can even get the city to approve your development regardless of zoning, parking minimums, etc.
If you put a billion houses on Manhattan, MOST of those billion houses would be worth nothing, and the ones where people wanted to be (which is probably not Manhattan if a billion houses were blocking out the light - but I digress) would still be expensive.
The price of a house in the middle of nowhere is labor + materials. The closer you get to a population center (where people want to be) it becomes labor + materials + property value, where property value increases non-linearly. At the center it becomes labor + materials + property value + zoning overhead. Zoning overhead grows as more people are involved in the process.
I don't think you'll ever get much cheap housing, unless you build a ton along the periphery of a population center (which people don't want). You'd have to build at least 20% more housing for the price to drop 10%, and most of that housing will be where people don't want to live.
Zoning ‘overhead’ is people trying to control perceived negative effects and assert boundaries on what they will and will not accept.
Building more freeways doesn’t result in lower traffic for any length of time, because traffic increases based on available capacity in high demand areas.
If we put a billion houses on Manhattan (somehow), there would still be ‘in’ and ‘out’ areas with high prices and restrictions, with those high prices driven by managed scarcity.
Because being selective is a large part of HOW an area becomes and stays desirable. It’s not possible for one to stay that way for long without some attempt to defend itself, in my experience.
Saying ‘prices wouldn’t be high and we could all have what we want if we just got rid of zoning’ doesn’t reflect what is really going on.
Now, busting the worst offenders with artificial scarcity, like monopoly/trust busting, could easily have a lot of value as it has gotten over the top in a lot of areas.
But frankly, remote work and increasing costs of funding should do a lot of that anyway here soon.
> Housing prices were going up because of supply/demand
I don't think that's the case. Development was occurring so quickly, supply exceeded demand, and new houses sat or became entangled in bad mortgages. Property values increase as a function of population, which sounds the same as supply and demand but isn't quite. Housing prices increased because labor, builder and materials rates increased.
All the people that only saw the city for work/employment now don't have to live there. That was huge. Now we wait what's going to happen to all these office real estate. The office doesn't need to go away but not everyone has to have one these days.
An increase in asset prices is not inflation, it's a good investment. AAPL isn't in the CPI basket, Apples are.
Homes are up in price because zoning rules preclude development of new houses sufficient to meet demand, creating an imbalance in supply vs. demand. Interest rates only shift that equilibrium. Concretely, Japan's monetary and interest rate policy has been almost the same as the US for decades however they haven't seen an increase in housing prices in nominal terms since 1990. They federalize zoning so councils can't preclude you from building safe and reasonable housing, and this allows supply to meet demand.
Housing is driving inflation in the US, not responding to it - remember, inflation is the measured drop in purchasing power calculated from prices. Zoning causes house prices to go up, which in turn means the purchasing power of the dollar is calculated to be lower.
Lol so according to you the money supply can increase 10x but as long as the cost of apples (or things in the CPI basket) is same, there is no inflation. Am i right?
I think you are trying to say that CPI and Inflation are the same thing.
Money in a fractional reserve system operates not on a push model but on a pull model. You do not 'push' money into the system. Money is created when loans (and corresponding obligations to repay said loan) are created. The increase in supply was driven by an increase in demand. Your model is incomplete. You'll have to work a specific example - how would the supply suddenly triple? Who would get that money? What would they do with it?
> I think you are trying to say that CPI and Inflation are the same thing.
I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.
We're not in a fractional reserve system. Banks can borrow arbitrarily from the fed, and routinely do so, and don't have reserve ratios. Many countries have moved to this model over the past few decades, including the US. The Fed has papers on this explaining the how and why of the newer system.
The increase in money supply was absolutely not driven by an increase in demand. Supply increases were used to grow demand. Why else would it be called “stimulus”?
The supply did grow and the money went to banks, to the US government, etc. You can look at the Federal Reserve’s balance sheet and see entries for US treasury bonds, mortgage backed securities, etc. The US government then went and spent that on things, and the value of mortgage-backed securities increased which decreases the return on the investment and thus encourages banks to take on higher-risk investments. These activities drive inflation. So, no, an increase in the amount of money isn’t inflation, but a higher quantity of money supply times velocity does, by definition.
Zoning may have localised effects, but in general house prices are determined by incomes (módulo) interest rates. People pay as much as they can afford to get the best house they can afford. This amount is then translated into house prices by interest rates. 1K/month at 3% gives a wildly different price than at 6%. Compounding this has been the 'funny money' sloshing around the system looking for safe assets to park in - said funny money induced by the liquidity pumped in by low interest rates.
SF is pricey because of high engineers' earnings, foreign cash inflows, on a background of low rates.
A change in the CPI is a symptom of underlying inflation (devaluation of the currency) but it is not the only symptom which can occur. Capital asset prices rising due to changes in the supply and demand of capital assets can also be a symptom of inflation. Different prices may be earlier or later indicators of inflation. Because financial markets are highly liquid, and their participants are close to the underlying source of the devaluation of the currency (the central bank), they tend to be earlier indicators. So to say that an increase in asset prices is not inflation may technically be correct, but it is misleading. An increase in asset prices can be an indicator that inflation is already occurring (e.g. in 2020), and that inflation may take much longer to show up in the CPI.
The zoning effects are US specific, why then have house prices increased in pretty most all western countries, also they can't explain the huge jump in housing prices during covid.
The whole zoning discussion ignores the fact that investing in housing became hugely popular in the last decade, largely due to monetary policy as well as faverable tax policies.
While zoning is indeed a major problem in the US, ultimately the problem worldwide is that supply isn't meeting demand. If supply was able to meet demand, then prices would be stable and housing wouldn't become an investment vehicle.
“Inflation”, unqualified, means consumer price inflation. Asset price inflation is a completely different thing, with slightly overlapping potential causes, and completely different effects.
> What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.
Systemic firesales that drop asset prices aren’t “a deflation”, because, like inflation, unqualified “deflation” refers to consumer price deflation.
The distinction is dumb. People's main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index.
A 10000x increase in rent makes carrots unaffordable even if the price of carrots hasn't changed
You would be better positioned to make that argument if you could demonstrate a basic understanding of what the distinction is.
> People’s main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index.
The cost of housing as a consumer good (rent, actual or, for homeowners, imputed) is included in inflation measures (consumer price index, PCE, etc.)
The asset price of residential real estate is not, but that’s a different thing.
We've got the same bullshit in Sweden with the housing market boom, free-ish loans have driven prices through the roof. This means we're stuck on low interest rates or everyone and their uncle will default, a better solution must exist!
This makes it very difficult to get into the market since our rules require 15% of your loan in up-front capital. For a 1 room apartment that means about one year of salary saved up. Yay boomer economy...!
Suspending educational loan payments is tapping the brakes on what is largely a trillion dollars of absolutely unsustainable debt Joe biden himself lobbied for and now lives in constant low key fear of.
Stimulus checks were a feature of George w bush's presidency too during the great collapse of 2008.
The past 13 years of qe put so much cash into the supply side that inflation was inevitable as all the governors for responsible corporate income basically evaporated with free money. The governments hamfisted bailout loan of about a dozen major conglomerates while ignoring small business during covid was probably the real torch that lit the powderkeg.
I still don’t understand why student loans are not forgivable during bankruptcy proceedings. It is a recent change, and pretty clearly in violation of the thirteenth amendment:
“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”
since there are legal implications if you default (including legal liability, wage garnishment, loss of social security benefits, and revocation of professional licenses). This is similar to indentured servitude, which is a form of involuntary servitude.
Surely the government would keep giving them, with some proff that somebody actually wants to complete a useful degree.
I think in the future, those student debt punishments will be looked on in a similar way to indentured servitude. At best, forced to work (though for an indefinite, likely forever time period) for whoever gave the loan, and at worst, much worse.
Debts are risky, and should occasionally be discharged with bankruptcy. Zero risk loans make zero interest
Almost by definition, inflation is caused only by expanding the money supply. Zero rates and QE expanded the money supply to be keep economies on life support after the GFC and Covid. However this led to asset bubbles more than high street inflation as the extra money flowed first to the already wealthy. Resource miss-allocation due to the miss pricing of time/risk has now likely manifested itself in lower productivity and so higher prices for goods and services too.
Of course, helicopter money (debt cancellation, Covid relief), will also increase the money supply, but at least it will flow first to the most needy. If the price of eggs goes up because more people can actually afford to eat them, I'm not sure that is a bad thing.
As long as there aren't any eggs going unsold, this is irrelevant to the price of eggs. If anything, the opposite is happening: sporadically there are limits on how many eggs one customer can buy in my grocery store.
Companies are deliberately limiting supply now as part of revenue management. Growing revenue can be simplistically thought of as maximizing a function of units sold * price per unit. You can decrease numbers sold and increase the price or the converse; 2 units * $10 or 10 units * $2. There is mounting evidence across countries and continents that this is what’s been going on.
Banks don't buy eggs, but they do buy mortgage-backed securities. The focus on eggs is a red herring. Eggs are what, 0.15% of a middle class household's monthly budget, and housing is at least >30%? I would have much less objection to this policy if it didn't have real negative impacts on median working Americans. Having a long term residence is a bedrock to stability.
You don’t think all the refinance cash out money contributed to inflation? You couldn’t find a trade with free time in the second half of 2020, 2021, and 2022.
Defense spending doesn't contribute not even a little bit to how inflation (CPI) is being calculated, because the DoD is spending money on stuff that doesn't affect the general population. Unless everyone is trying to buy an F22, of course, and that finds its way into the CPI.
Not every expense is the same when it comes to the cost of general goods and services.
> Defense spending doesn't contribute not even a little bit to how inflation (CPI) is being calculated, because the DoD is spending money on stuff that doesn't affect the general population. Unless everyone is trying to buy an F22, of course, and that finds its way into the CPI.
That's completely wrong.
When the government spends on defense that money is not put into a large pit somewhere at Lockheed HQ and then lit on fire. It is spent on wages, on buying things from other contractors, etc. It ends up in people's pockets just like stimulus checks do. There's no difference. This is Econ 101 stuff.
You're seriously misleading people in this thread about how CPI, inflation, and the economy as a whole works.
Defense spending more than doubled from 2000 to 2019, from ~320B to ~730B, while inflation grew on average 2.10% per year during the same time period.
It is true that defense money gets redistributed across the population and into the economy, but that has always been the case and inflation was in check.
The fact that you are insinuating that this has anything to do with the current inflation problem is misleading. In 2023 we are dealing with the fallback of Covid fiscal policies, not defense spending.
> The fact that you are insinuating that this has anything to do with the current inflation problem is misleading. In 2023 we are dealing with the fallback of Covid fiscal policies, not defense spending.
No. I'm stating that medicare+defense spending is far larger than either covid relief or student loan forgiveness. By an order of magnitude per year.
The fact that you don't think the thing that's 10x bigger can cause inflation, but you think the minor foonote that is covid spending can, shows that this is 100% ideology-driven and not fact-driven.
Even basic back of the envelope economics shows you're completely off.
> The fact that you don't think the thing that's 10x bigger can cause inflation, but you think the minor foonote that is covid spending can, shows that this is 100% ideology-driven and not fact-driven.
What a weird comparison.
If it's true that something doesn't cause inflation, then if you make it 10x as big it still probably won't cause inflation. That's not an illogical position at all.
10 times zero being zero is not holding ideology over facts.
And even if we say defense spending was a significant part of the 2% inflation, that doesn't mean it also caused the huge spike we just had.
The US is the largest market for almost any vendor, so more demand in the US will drive lack of supply elsewhere.
That plus...the supply chain bottlenecks were real, and affect the whole world. Supply chain was the focus of the Fed until late 2021 when they realized they couldn't wait for the supply chain to fix itself anymore, and they started to lower demand by increasing the interest rates. The ECB followed the course.
The fact that we focused so much on lowering US demand in 2022-2023 by increasing interest rates, should not distract us from the fact that supply chain bottlenecks are the real issue we are trying to fix (by lowering demand, most of which spiked up because of fiscal policy after Covid), which is a global problem. Jerome Powell was not wrong in saying that inflation was transitory, he was just too optimistic on the time it would take to heal the supply chain.
Actually it would likely collapse the entire economy as thats whats historically happened. Then you have tons of people out of work and starving so you could feel some sense of justice for a few
Maybe if people suffer enough they'll learn not to build a debt-based house-of-cards economy that requires hundreds of billions in taxpayer bailouts at the slightest threat of insolvency and defaults.
Oh who am I kidding? They'll just go back to banks again, every single time.
QE creates money from thin air when distressed assets fail. This doesn’t because the asset is still on the banks balance sheet and can thus cause the bank to fail. Which is a critical distinction.
Except that Alice here is the government, and in both scenarios Adam The Average Guy loses purchasing power, which is the whole point. The distinction here is purely nitpicking.
It's all a loan, whatever name you attach to it they have to borrow to print money.
Reality check: US debt to GDP ratio is over 120% and the US doesn't have the credit to borrow anymore. We're looking at hyperinflation and a long depression unless they stop printing money and we experience massive austerity/spending cuts. We are literally in an economic death spiral (that's what a debt to GDP ratio of > 120% means) and that death spiral will be irreversible by 2028 (with US insolvent by 2042) as that WAS the timeline for when all of our loan payments for all of that printed money/bailouts goes only to the interest on the loans and not the principal. Unless of course, they change all the rules and it's laws for thee but not for me and debt starts getting erased. And/or war, which is historically how they do it.
Insolvent in the sense that they won't be able to pay the debt? That's not very likely given that the US controls the emission of its own currency, which is the currency the government bonds are denominated in.
These loans will have special clauses for banks not to pay back, or pay back very much later wothout any consequences for not doing so. Somwtimes Fed as write down these debts. It is QE just the free money parts need some dressing so peasants won't know about it.
QE has no impact on inflation because loan origination is not reserve constrained, because banks can always use their government securities as collateral
What does this graph prove exactly? It goes up steadily for decades where there weren't any inflation, and then had a sudden bump 2 years before the inflation started.
Inflation was caused by the massive fiscal spending (stimmies) not the FED
The fed printing was done to pay for the stimmies. Government spends more than it takes in in taxes so it borrows. But it borrows so much that the market won't lend it the amount it needs to borrow at the rates it wants to borrow at. So the fed prints money and lends it to the government. They call this "quantitative easing" so they don't have to say money printing. Look at this chart of treasuries held by the fed. Notice how it mirrors the money supply. https://fred.stlouisfed.org/series/TREAST
That's a graph that shows M2, not inflation. QE does have an impact on M2, but bank lending behaviour is not directly reserve constrained, so it has little impact on inflation.
No, by the non-orthodox definition of inflation espoused by Austrian economists, QE is inflation. Most people are referring to price level increases when they refer to inflation, and a more correct definition of inflation is sustained real price level increases over time rather than one off price adjustments.
Nobody is suggesting they're conspiring, they're just pointing out that certain people have a pattern of actively denying what their own reasoning would lead them to conclude and instead of at the very least remaining neutral, they choose to favor of a narrative that conveniently aligns with those of government officials
QE had a big impact on inflation because creating loans typically requires a willing buyer/underwriter at a given rate, which is a natural limiter.
When the gov’t is willing to buy/underwrite loans with minimal standards or sight unseen at lower rates, it artificially accelerates loans and lowers the cost of money - and increases the money supply and velocity of money in the economy.
"The most extreme growth occurred in September 2001, January 2009, and January 2012, when the rate of M2 expansion topped 10%. These accelerated periods coincided with recessions and economic weakness, during which expansionary monetary policy was deployed by the central bank."[0]
This expasionary monetary policy failed to stimulate the economy, which is predictable to anyone who understands that banks having bonds vs reserves has virtually no impact on their lending behaviour. Bonds are, for all intents and purposes, as good as cash.
Inflation doesn't come from QE it comes from very tight labor markets and monetary policy putting money in the hands of the poorest members of society.
In response to that, I'd point out that inflation doesn't come from QE or tight labor markets, its comes from supply chain shortages, and fractional reserve banks lending money to people.
----
In reality, it comes from all of those things, to different extents, in different spaces. The price of cars and eggs went up because of supply shortages. The price of houses went up because people can borrow money for 30 year mortgages. The price of employing someone went up because of a tight labor market. The price of stocks went up because the Fed printed money with QE, and kept interest rates at zero.
Juicero’s 127M funding round certainly came from QE. As did WeWork’s 40B valuation, Uber’s 32B in burnt cash, and all the inflated salaries that money funded, which, in turn, created $3M 2-bedroom houses in SF.
Turning "QE" into a catchall for anything even sort of related to central banks holding more bonds isn't helpful. When words have too many meanings they have none, communication breaks down and people talk past each other, exactly as is happening here.
This is like the whole debate over whether or not there was a bailout. In the colloquial sense there absolutely was. In the traditional policy definition it really wasn't. It may seem academic but if you're interested in how this will affect the taxpayer then it makes a big difference. Both the Fed and FDIC are exercising the tools within their ordinary powers.
The fed is in between a rock and a hard place. Once upon a time, asset prices were low relative to incomes - and assets people cared about day to day like housing generally weren’t terribly competitive.
The fed started rate targeting, and asset prices started rising as the economy adapted to Fed policies. 50 years later assets like homes regularly exceed individuals lifetime earning potential.
If interest rates rise, these asset prices must fall. If they fall, then someone is on the hook as a counter party. The fed bailing out the banks with more free money kicks the can down the road.
Best case scenario is a steady inflation that raises incomes closer to assets. However this inflation effects boomers, millennials, and gen z differently- there is no easy solution.
But swinging between 0 interest rates and bailouts won’t help things.
Arguably, yes; however, I'd rather (for my descendants' sake) we play the infinite game and be disappointed if it ends early than play the finite game and be left holding a hot potato.
According to the internet it's a loan to prevent these affected banks from failing. Some things are going to fail and go under in the effort to lower inflation. Better them than everyone else. Call it trimming the fat or taking out the trash. If it weren't for the low interest rates/near zero rates, some entities wouldn't even exists now. I spoke to a trader and he said even retail traders could've telegraphed the changing rate conditions and made adjustments. Why wouldn't banks?
Id be curious to know how much physical currency has been withdrawn and if there are pressures on that. Inter-bank deposits are covered for people fleeing bad banks, but anecdotally I know a few people who are withdrawing all their hard cash. I wonder if central banks will have issues with that soon.
ETH has extreme problems to the point where it's worse than fiat, there's no good reason to be grouping it in with BTC. Even something like Dogecoin, which need I remind you was invented as a joke, has a stronger case for replacing fiat than ETH.
i'd imagine physical currency is not a problem - it's easy to roll the printers.
And there's often a hard limit on how much physical currency can be withdrawn on short notice, and to do more you'd have to make a call to prep the bank first. This means they will have a chance to ship newly minted paper in to cover it, as long as the bank's liquidity allows for it.
> anecdotally I know a few people who are withdrawing all their hard cash
Why (anecdotally)? Even if the bank holding your checking/savings account fails, the US federal government insures you up to $250k. And that promise is an important one for the government to make precisely because it tips fear/security scales so that people don't do exactly what your friends are doing, which is contributing to the risk of a bank run. Do your friends actually believe the Federal Reserve itself is at risk of failure? What's the scenario they're betting against?
Loose summary: Final payout 2005, collapse 1990. Depositors returned 51% of the dollar. As it was happening: govt says nothing to worry about. Months later: no govt guarantee lol. To someone who didn’t get involved in the run: what are going to do for food, all our savings are locked away and it’s a fortnight until next payday. Those effected unlikely to forget easily.
It’s not apples to apples, aus vs USA, conditions have changed since etc. but I think the rough jist of if you can manage to, don’t rely on the govt in a crisis still applies. Anecdotally.
From reading that account, it sounds like the deposits were not actually insured at the time.
> The Victorian government of the time had chosen not to participate in that scheme [an Australia-wide National Deposit Insurance Corporation], believing the government could regulate and supervise societies.
The cultural memory in America is that in the 1929 crash there were little to no government protections and economic disaster ensued. Reforms, including the FDIC, were created precisely so that people could lean on the government in time of crisis. The beauty of the FDIC safety net is that it's mere existence reduces the risk of its needing to be used.
And the more recent living memory is our 2008 financial crisis in which the government issued enormous loans (since repaid with interest) to a few large banks to protect the whole banking system, and the belief that, in retrospect, it worked and was a good move.
So I guess my question still is: why distrust the safety nets that are in place, when they are shown to be working? What's the story about a time when the US government enacted an economic security promise and then broke it?
I assume banks went ahead and bought subprime mortgage bonds with that $300B. And at this point why not? Everyone knows that the government will print an unlimited amount of money to keep the system going no matter what risks you take and how careless you are.
Why doesn't it? This bank may have failed. Their next one may not. They are playing with house money, and have limited time in the casino. Betting big is the optimal strategy.
There is a long lag between taking on excessive risk and failure.
In that period, your excessive risk taking will likely show excessive growth, which will likely lead to stronger stock prices. If you’re a banking exec, your salary is linked to stock performance. You can easily run up 5-8 years before the whole edifice crumbles, pocketing fat bonuses in the interim.
Who cares if Joe Shareholder gets left with nothing at the end? You and all your exec buddies can make off like bandits in the interim.
Not true. The shareholders and executives walked away with millions in stock grants and bonuses for about a decade, benefitting from their strategies that led to the bank's downfall. If they are fined their entire earnings in the last 10 years then I would consider them walking off "with nothing".
So will they do this again in a similar situation? Of course! There are millions to be made!
If they haven’t yet, they will eventually. Once banks realize that utilizing BTFP is kosher, they’ll run it all the way to its cap (which encompasses a little over $4T of distressed assets [0]) and reinvest the cash wherever they can. The mortgage rate will become pegged to the one-year rate and the housing market will resume its climb. Banks will still take a massive hit but they’ll bleed out slowly instead of crashing violently causing widespread panic in the process.
So here's what I'm confused by. The writing was on the wall a year ago for rapid interest rate hikes. This has well-known and predictable effects on long-term bond holdings.
Why didn't banks liquidate their long-term bond holdings a year ago? I can guess the answer: they wanted to protect executive bonuses and share prices. They hoped they could just stick their heads in the sands and hold those bonds to maturity.
Another question: why even hold their liquidity in long-term bonds that are more sensitive to interest rate changes? Banks could've rolled 90 day Fed debt instead of 10+ year bonds. Again, I can guess the answer: long-term bonds have better yields so the bank can artificially improve its position (ie executive bonuses and share prices again) by adding risk to their depositor funds.
I'm happy to see the solution for poor financial management (eg SVB) is for the bank to be dissolved. Let shareholders bear the cost for poor management.
There was an article in the WSJ today how the San Francisco Fed cited SVB multiple times in 2022 for their risk to rising interest rates, and how SVB's models were wrong. SVB believed the rising interest rates would improve their outlook, not be a risk.
I think the main thing is that holding long bonds was a way to get profits and pay interest. Despite being doomed long term, there were a couple reasons banks did it - they couldn't make money by making conventional business loans, profitable loan opportunities weren't available and most banks expected to be bailed out when things went bad (Silicon Valley Bank and Signature had each been previously bailed out).
The related question is why did regulators turn a blind eye? Interest rate risk is something regulators look at. I know SVB had some loopholes that prevented a lot of oversight but one other factor that comes to mind is that the Fed needed to get rid of high prices/low-interest Fannie Mae bonds somehow and letting bonds feed on them was one way.
lending by a bank could've also achieved the same. Depositor's funds are always "risked" in a non 100% fractional reserve system.
The problem isn't with banks buying long-dated bonds, but that they may have bought too much. The central bank, the thinking goes, could lend as a last resort, so the risk of liquidity (or lack thereof) is lowered; this means any bank that _didn't_ buy a higher yield is losing money compared to their competitors who did (until the shit hits the fan).
> Why didn't banks liquidate their long-term bond holdings a year ago?
Too many bonds / too little time.
Bank assets are several times larger than the real economy. It's impossible to transact them in one year.
> long-term bonds have better yields so the bank can artificially improve its position (ie executive bonuses and share prices again) by adding risk to their depositor funds.
About this, that one seems right on the mark to me. Banks seem to love all kinds of "tails we win, heads you lose" games.
But then, I wonder if the US didn't increase their rates much faster than they should.
> Why didn't banks liquidate their long-term bond holdings a year ago?
Who do "the banks" sell them to?
A bank can sell them to another bank. Someone is still sitting on it.
We can't sell mortgage bonds to space aliens yet AFAIK, and other banks in other countries can also see that they don't want to touch them in a rising rate environment, and they'll have their own problems back home.
Economics 101 is learning that "why doesn't everyone just X" usually doesn't work when it comes to macroeconomics.
Specifically the issue was certain banks having much too high a ratio of long-term bonds, and they could have sold those to less concentrated investors without upending the market.
The market thought they were fine at the time. If only the banks with the most rate risk were selling, the price would have been stable.
It's too late now, but there was a big period of time where the rate risk was obvious but the price was still good because institutions were comfortable with that bet. And it was okay for 95% of them to make that bet, just not the ones going too hard on it.
>Why didn't banks liquidate their long-term bond holdings a year ago?
Because if they had all done it then, the crisis would have happened at that time instead of this one. For any mass-liquidation, you can always ask, "well why didn't you beat the rest of the market to dumping this trash?" It's a problem in any bubble.
The banks didn't need to buy those bonds back in 2021. The fed could have just done it and prevented all the ensuing drama once rates rose ahead of time.
Is there anything preventing banks from buying treasures on open market by using funds they got from Fed by exchanging their treasuries on mark-to-maturity basis? Looks like a bailout with extra steps.
A bank has 10 year bond which trades 90 cents on the dollar on the open market. It gives the bond to Fed as collateral and receives 1 dollar. It uses this dollar to buy bonds on open market with rate higher than cost of the loan, after 90 days it sells the bond, gives the Fed 1 dollar and interest, and pockets the rate spread on 10 cents.
A bond bought by a bank in the past at a lower interest rate than those offered today is worth less than those offered today.
If the fed values those bonds at face value (rather than what the market would pay today) and allows the bank to borrow money using those as collateral, then a bank could simply borrow from the fed using the older less valuable bonds as collateral and then buy new more valuable bonds.
The bank could then default on the loan and forfeit the original less valuable bond.
This would effectively be the fed giving free money to the bank.
The interest rate on the loans is .1% higher than the 3 month T bills which is all they can get before the loan comes due. They would lose money with this strategy.
They can buy longer duration bonds and sell them before the loan is due or even corporate bonds. Yes, it introduces certain risks, but with the endemic banks irresponsibility constantly bailed out by the government, I will not be surprised. But I guess, possible spreads are a bit too small for this scheme to matter.
I think you misunderstand what is happening here. It's not free money, it has a 4.7% interest rate. Taking this loan and using it to buy bonds would just be transferring .1% of the loan value to the fed as the bonds would pay out less than the banks owe.
They may be collateralized by bonds worth even less than that.
If the bonds were worth 80 cents on the dollar than they just traded 80 cents on the dollar for 99.9 cents on the dollar. A good deal if your balance sheet is in such poor shape.
Unless the bank fails that doesn't matter. And the banks won't fail because the incentive to run them is gone now. Everyone will see their deposits are safe and the banks can give the money back with interest.
Of course there is. Assuming you're referring to the new Bank Term Funding Program (which this article is not referring to), collateral is only eligible if it was owned before the program began.
The fed has backstopped the FDIC. Instead of letting taxpayers foot the bill, of which are majority of payers are the very wealthy, they will foot the bill via inflation by rolling back some of the QE. Sure it's just a loan but what if the loan has no one to repay. Who will repay this loan in SVB's situation (the shortfall of asset sales to account balances) maybe I am misunderstanding. The money to cover the shortfall of the FDIC was conjured. It will find a way to your grocery bill. If all the banks are paying a fee to foot the bill, the payers of that fee will be you the customer.
The FDIC has announced that any shortfalls wlil be paid by the collective member banks. As long as the banks can't pass these costs onto customers it will have no effect on taxpayers. There's good reason to believe that one time supply shocks don't effect prices, so I'd say taxpayers did not foot the bill here. Bank equity holders did.
I honestly do not think that all this flux in the banking system is 'The economic burst' (TM) but it will definitely be in the opening chapters of the book on it in a few decades time.
Banks and governments have become very good at figuring out how to put band-aids over band-aids. SVB and the little heart skip the UK had last year are good examples. But the long term conditions they are creating is lining us up for a big drop in the next 5-10 years. When the symbolic claims we have de-laminate from the biophysical world, the drop is going to make a lot of people nauseous. The problems will be inflated to such a size that they cannot be saved in any meaningful manner.
What to do with this information? Beats me!
Personally I am getting the physical assets I actually use, reducing my physical needs were possible and then sitting back like legend of Nero and watching Rome burn while being more like the reality of Nero and helping who ever I can.
NY Times alleges that the Fed had been telling SVB about the reserve issues since 2021.
It sounds like SVB was a poorly run bank. When it came down, I'm sure a bunch of people said "told you so," but there was ample time to correct before then.
You're not being downvoted because people trust banks; you're being downvoted because commenting "you can't trust the banks" doesn't add anything interesting to the discussion, it's just a bare statement of a common opinion.
And that's not ok why? It's not against the HN policies...
And you are incorrect, my point is we can't trust the people currently in charge of much of our financial system. Not a mistrust of the institutions themselves.
261 comments
[ 3.7 ms ] story [ 172 ms ] threadIt's the end result in either case, but a lot of uncertainty and friction is added for some reason. Why?
The whole thing sounds like a charade
we are living in financial clownworld now.
This argument ignores the "black swan" events of covid, ukrainian invasion by russia, supply bottlenecks of various kinds, and trade tensions with china, all happening at the "same" time within the last 3 years.
Under new policy, for the next year, the Fed will lend against the par value of certain assets purchased before the crisis. That's an undercollateralized loan, so it's a subsidy to banks that took excessive interest rate risks. Those banks are still worse off than if they hadn't taken that risk though, since the interest cost of the loan is greater than the interest paid by the asset.
This policy change has no direct cost to the public if the loans are repaid. If a bank gets such a loan and then fails anyways, some losses will be socialized.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
Is this not essentially QE?
QT is still ongoing as of last week, however, I don’t see it lasting.
I do think a .25 rate hike will still happen.
this is QE with extra steps
The actual rate is 4.68%.
more like 5%
I read press releases from the federal financial agencies and look at their balance sheet. The similarity here is that money is being created and injected into the balance sheets of private participants in the economy, money that wouldn't have seeped out to purchase things now will, overlapping in the venn diagram with QE. Another similarity is that additional US treasury bonds are now on the Federal Reserve's balance sheet, in direct exchange, overlapping in the venn diagram with QE. The difference is that the Fed is not acting as direct buying pressure in the US Treasury bond market, as the extra step is that people deposit the bonds as collateral to the fed and the feds will own them if the banks stop repaying. We're focusing on the similarities, you're focusing on the difference. I feel the similarities are a policy pivot in the worst way. I don't find the differences to be relevant.
As for your comment itself, it seems like you gloss over the similarities and ignore the differences. For example, you say "money is being created" but this is objectively false. As is your claim that this money is "seeping" anywhere; it isn't doing anything other than ensuring bank solvency.
Your comment is what I'd expect from someone who wants to call this action by the Fed "Quantitive Easing" but doesn't want to bother actually considering if it is or not. It is not, as you said, because of the critical and relevant differences. This money isn't going back out into the economy as you claim, which is the meaningful mechanism through which QE has its effects.
Without that mechanism, calling this QE is misleading at best.
[0] https://knowyourmeme.com/memes/well-that-sounds-like-slavery...
Now that everyone is woken up to that reality, they want to move it around now into other banks and other assets, and actually can. It is impossible to stop at just ensuring bank solvency.
As of Wednesday last week, 4 months of QT have been reverted in a single week: https://fred.stlouisfed.org/series/WALCL
Also half the money was literally just to pay back SVB and signature deposits while they unwind their book. Once everything is sold the other FDIC member banks will have to pony up any extra cash to pay the loans back.
What bond-selection strategies do banks usually take in situations like this? Riskiest bonds off of their sheets first?
We had close to 0% interest rates for almost a decade, and inflation was in check. It’s not the Fed that caused inflation, it is:
* Suspending school debt (extra income)
* Injecting real cash into the economy (stimulus checks and PPP loans to small businesses)
* Supply chain bottlenecks after Covid
All things that make real people wake up tomorrow and decide to spend some extra cash they have around in their bank account. It’s very tangible, it’s very measurable.
Of course 0% interest rates didn’t help, but it wasn’t the originating source of our inflation problems, as the previous 13 years of QE didn’t cause a spike in inflation.
I am not arguing that “before” it was better for the “little guys”, I am just making an observation.
You can affect the economy with fiscal policy (what our politicians/government does) and monetary policy (the central bank). Turns out monetary policy didn’t cause inflation to rise as much, as the previous 13 years demonstrate, but it was caused by liberal fiscal policy after Covid (all those points that I mentioned + supply chain bottlenecks).
The fact that our government blames the Fed is just scapegoating. They messed up big time, and acted quickly in such a way that they were not able to coordinate properly (rates should have gone up in light of liberal fiscal policies being implemented). These two entities don’t work and collaborate well together, and hindsight is 20/20.
I am not sure I understand what you are trying to say. Inflation either spikes up because of increased of demand, or lack of supply. In our case, both have happened:
* Increased demand because free money is hitting the bank accounts of almost everyone.
* Decreased supply because of supply chain bottlenecks, when every vendor canceled their orders in anticipation of a lack of demand (which never happened, with Covid), and then all of a sudden had to place again the same orders. Since every vendor practiced Just-In-Time order of all parts, the sudden demand (or - to put it in other words - the "lack of demand" which never happened) put them in a though spot where everyone was re-ordering the same parts again, but factories had to start with a fresh order queue.
This is not a "wealthy people problem", this is a "everyone is creating demand" problem. Wealthy people cannot create inflation in common goods because they are both outnumbered by regular folks, and because there is not too many of them anyways. How many eggs can a wealthy family purchase anyways? The demand of wealthy people is otherwise focused on goods that are not affecting the rest of the pyramid (does anybody care if yachts are price inflated because too many wealthy people buy them?).
Easy access to money caused inflation along with a supply chain bottleneck, the easy money that caused inflation was not ~2-3% loans that were accessible for 13 years prior to Covid, it was PPP loans, stimulus checks, and student loan pause, which all combined was given to pretty much the entire population of the US. Next thing you know, inflation is up.
I am not saying that people didn't deserve handouts for a very unique and though time in the history of their lives (Covid), I am just making an observation with the benefit of hindsight.
When you print money, Its unsurprising that those closest to the money printer will accumulate the most money.
In other words, had both monetary and fiscal policy stayed the same, inflation would not have happened to the extent we are dealing with right now. But fiscal policy (government handouts) was extremely liberal after Covid, and that put us out of balance.
It was a problem for a lot of people who either got priced out of the housing market or have huge student loans or have huge healthcare bills. The price of eggs or gas is really not much of a problem when the price of these big ticket items shoots up.
It may have been, but that was not reflected in the CPI, and we are talking about inflation as it is officially recorded in the CPI reports. The CPI inflation didn't spike up until early 2021.
If you consider that assets and results rents on those assets skyrocketed while "inflation" wasn't happening, then sure, but realistically, the dollar lost value and people got poorer in that time while having the same or increasing income
The bank bailouts, in particular, were done with broad bipartisan support.
This is mostly a joke, as I don't trade commodities; however, if BLS is juking the stats year over year with some agenda or other, basic inputs should have a steeper nominal trend line than they do, noisy as it is.
https://www.reuters.com/article/us-usa-fed-dudley-ipad-idUST...
The "getting away with it" is that in some forms, the wealthy can say it's bad that poor people get money because "it makes inflation" but when rich people get money, it's ok, because the resulting cost increases don't show up on the CPI
What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.
The downstream consequence that we didn't see with SVB was the bank starting to call unsecured loans, and pull back on lines of credit etc. Which should in turn have triggered the turning in of the leased Lambos and Audis....
By the way just with regular <2% YoY inflation, a $1m home in 2005 was worth $1.3m+ in 2019 (before covid and the current inflation spike), and that is with regular inflation.
Because homes cost a lot of money to begin with, the compounding effects of “healthy” inflation is going to be noticeable, and that doesn’t even factor in the low supply in the market.
[1] https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI
[2] https://fred.stlouisfed.org/series/INTDSRJPM193N
https://www.macrotrends.net/countries/JPN/japan/population-g...
Despite a massive decrease in population, Japan has been mostly flat, when they should be in a strong deflationary environment due to demand destruction - because, you know, people being dead.
So hey, if the US population would decrease .5% a year (doesn’t sound like a lot, but it adds up fast - 1.75 mln/yr if in the US), we could also tame some inflation!
Thought exercise.
There are 140,000,000 houses in the US. What do you think would happen to the price of each house if there were 280,000,000? If you answered anything other than 'they would still go up for some reason despite many of them being empty and derelict' then we are in agreement that it is a supply and demand issue. Ergo a zoning issue.
There is massive excess supply of housing in Japan.
They literally demolish entire villages because no one lives there anymore.
Everyone who can moves to Tokyo, and prices there are insane.
In the US, if we had 288 million homes, the big question would be ‘where?’.
We already have millions of acres of land with literally no zoning rules at all. Even Greenlee County Arizona (1500 sq miles) is more than enough.
No one would want to though, because it’s not the place people want to live.
The answer to where is “up.”
Also the prices in Tokyo aren’t insane at all they’re super affordable by any standard.
https://japanpropertycentral.com/tag/tokyo-apartment-prices/
Tokyo prices are running 908k yen/square meter, or $685 square foot. While manhattan real estate is $1.5k/sq Ft and San Francisco $1k/sq ft - median incomes are dramatically lower in Japan, as is purchasing power, with the median Tokyo income being only $66k/yr.
There is a reason the stereotypical apartment in Tokyo is tiny - on average 65 square meters (700 square feet), of which only 41 square meters (441 square feet) is livable space.
That’s often for more than one person.
Outside of Tokyo, property is nearly free. Inside Tokyo it’s expensive, crowded, and tiny.
Looking at the national stats, it roughly averages out.
But that isn’t this utopia you seem to think is occurring.
Put a billion houses on Jupiter, and their value will be zero, while new york remains expensive
[1] https://www.nytimes.com/interactive/2019/06/18/upshot/cities...
I don't think you'll ever get much cheap housing, unless you build a ton along the periphery of a population center (which people don't want). You'd have to build at least 20% more housing for the price to drop 10%, and most of that housing will be where people don't want to live.
Zoning ‘overhead’ is people trying to control perceived negative effects and assert boundaries on what they will and will not accept.
Building more freeways doesn’t result in lower traffic for any length of time, because traffic increases based on available capacity in high demand areas.
If we put a billion houses on Manhattan (somehow), there would still be ‘in’ and ‘out’ areas with high prices and restrictions, with those high prices driven by managed scarcity.
Because being selective is a large part of HOW an area becomes and stays desirable. It’s not possible for one to stay that way for long without some attempt to defend itself, in my experience.
Saying ‘prices wouldn’t be high and we could all have what we want if we just got rid of zoning’ doesn’t reflect what is really going on.
Now, busting the worst offenders with artificial scarcity, like monopoly/trust busting, could easily have a lot of value as it has gotten over the top in a lot of areas.
But frankly, remote work and increasing costs of funding should do a lot of that anyway here soon.
They only depreciate
I don't think that's the case. Development was occurring so quickly, supply exceeded demand, and new houses sat or became entangled in bad mortgages. Property values increase as a function of population, which sounds the same as supply and demand but isn't quite. Housing prices increased because labor, builder and materials rates increased.
Homes are up in price because zoning rules preclude development of new houses sufficient to meet demand, creating an imbalance in supply vs. demand. Interest rates only shift that equilibrium. Concretely, Japan's monetary and interest rate policy has been almost the same as the US for decades however they haven't seen an increase in housing prices in nominal terms since 1990. They federalize zoning so councils can't preclude you from building safe and reasonable housing, and this allows supply to meet demand.
Housing is driving inflation in the US, not responding to it - remember, inflation is the measured drop in purchasing power calculated from prices. Zoning causes house prices to go up, which in turn means the purchasing power of the dollar is calculated to be lower.
Punitive zoning rules are inflationary.
[1] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage
I think you are trying to say that CPI and Inflation are the same thing.
> I think you are trying to say that CPI and Inflation are the same thing.
I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.
The supply did grow and the money went to banks, to the US government, etc. You can look at the Federal Reserve’s balance sheet and see entries for US treasury bonds, mortgage backed securities, etc. The US government then went and spent that on things, and the value of mortgage-backed securities increased which decreases the return on the investment and thus encourages banks to take on higher-risk investments. These activities drive inflation. So, no, an increase in the amount of money isn’t inflation, but a higher quantity of money supply times velocity does, by definition.
SF is pricey because of high engineers' earnings, foreign cash inflows, on a background of low rates.
The whole zoning discussion ignores the fact that investing in housing became hugely popular in the last decade, largely due to monetary policy as well as faverable tax policies.
“Inflation”, unqualified, means consumer price inflation. Asset price inflation is a completely different thing, with slightly overlapping potential causes, and completely different effects.
> What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.
Systemic firesales that drop asset prices aren’t “a deflation”, because, like inflation, unqualified “deflation” refers to consumer price deflation.
A 10000x increase in rent makes carrots unaffordable even if the price of carrots hasn't changed
You would be better positioned to make that argument if you could demonstrate a basic understanding of what the distinction is.
> People’s main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index.
The cost of housing as a consumer good (rent, actual or, for homeowners, imputed) is included in inflation measures (consumer price index, PCE, etc.)
The asset price of residential real estate is not, but that’s a different thing.
This makes it very difficult to get into the market since our rules require 15% of your loan in up-front capital. For a 1 room apartment that means about one year of salary saved up. Yay boomer economy...!
https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
Stimulus checks were a feature of George w bush's presidency too during the great collapse of 2008.
The past 13 years of qe put so much cash into the supply side that inflation was inevitable as all the governors for responsible corporate income basically evaporated with free money. The governments hamfisted bailout loan of about a dozen major conglomerates while ignoring small business during covid was probably the real torch that lit the powderkeg.
“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”
since there are legal implications if you default (including legal liability, wage garnishment, loss of social security benefits, and revocation of professional licenses). This is similar to indentured servitude, which is a form of involuntary servitude.
Also it’s pretty offensive to equate paying back debt to indentured servitude.
I think in the future, those student debt punishments will be looked on in a similar way to indentured servitude. At best, forced to work (though for an indefinite, likely forever time period) for whoever gave the loan, and at worst, much worse.
Debts are risky, and should occasionally be discharged with bankruptcy. Zero risk loans make zero interest
Of course, helicopter money (debt cancellation, Covid relief), will also increase the money supply, but at least it will flow first to the most needy. If the price of eggs goes up because more people can actually afford to eat them, I'm not sure that is a bad thing.
https://modernfarmer.com/2023/01/record-breaking-egg-profits...
How about this one ?
https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1...
As unbiased as it can be. Hopefully you can stomach the direct quotes from the companies themselves.
https://archive.is/1EbGX
> It’s not the Fed that caused inflation, it is: > > * Suspending school debt (extra income)
School debt repayments are about $100B per year ($0.1T).
> * Injecting real cash into the economy (stimulus checks and PPP loans to small businesses)
$800B in stimulus checks. PPP was about $800B as well. So we're talking $1.6T over 3 years, $0.5T/year.
The US economy is $23T. Let's put $0.5T/year in perspective: social security payments are now $1.3T/year and defense spending is $0.8T/year.
You're trying to argue that a 2% GDP increase in spending is the main cause of significant inflation? That's nonsense.
Not every expense is the same when it comes to the cost of general goods and services.
That's completely wrong.
When the government spends on defense that money is not put into a large pit somewhere at Lockheed HQ and then lit on fire. It is spent on wages, on buying things from other contractors, etc. It ends up in people's pockets just like stimulus checks do. There's no difference. This is Econ 101 stuff.
You're seriously misleading people in this thread about how CPI, inflation, and the economy as a whole works.
It is true that defense money gets redistributed across the population and into the economy, but that has always been the case and inflation was in check.
The fact that you are insinuating that this has anything to do with the current inflation problem is misleading. In 2023 we are dealing with the fallback of Covid fiscal policies, not defense spending.
No. I'm stating that medicare+defense spending is far larger than either covid relief or student loan forgiveness. By an order of magnitude per year.
The fact that you don't think the thing that's 10x bigger can cause inflation, but you think the minor foonote that is covid spending can, shows that this is 100% ideology-driven and not fact-driven.
Even basic back of the envelope economics shows you're completely off.
What a weird comparison.
If it's true that something doesn't cause inflation, then if you make it 10x as big it still probably won't cause inflation. That's not an illogical position at all.
10 times zero being zero is not holding ideology over facts.
And even if we say defense spending was a significant part of the 2% inflation, that doesn't mean it also caused the huge spike we just had.
That's kind of hard to believe when inflation went up worldwide.
That plus...the supply chain bottlenecks were real, and affect the whole world. Supply chain was the focus of the Fed until late 2021 when they realized they couldn't wait for the supply chain to fix itself anymore, and they started to lower demand by increasing the interest rates. The ECB followed the course.
The fact that we focused so much on lowering US demand in 2022-2023 by increasing interest rates, should not distract us from the fact that supply chain bottlenecks are the real issue we are trying to fix (by lowering demand, most of which spiked up because of fiscal policy after Covid), which is a global problem. Jerome Powell was not wrong in saying that inflation was transitory, he was just too optimistic on the time it would take to heal the supply chain.
You don’t get to value WeWork at 40B unless interest rates are 0%
The new facility is the Bank Term Funding Program. It won't be revealed how much this facility is used for a year.
Sure, technically, but substantially different from how loans usually work...
Exactly.
> screw over millions of people
People who loaned their money to the banks. Why shouldn't there be consequences for lenders?
Oh who am I kidding? They'll just go back to banks again, every single time.
Um what? How does the Fed inject no strings attached money into “the” market?
QE its strings attached, and this is also QE. They are buying debt from the banks (by giving out a loan)
QE is actually buying assets. https://en.wikipedia.org/wiki/Quantitative_easing
QE is literally just funky loans.
QE creates money from thin air when distressed assets fail. This doesn’t because the asset is still on the banks balance sheet and can thus cause the bank to fail. Which is a critical distinction.
> No QE is purchasing something [generally a debt], not making a new loan.
Bob the bank buys a bond from Alice. Criss at the central bank in charge of QE buys if from Bob. Alice goes bankrupt and Bob doesn’t care.
Bob the bank buys a bond from Alice. Criss at the central bank loans Bob money. Alice goes bankrupt and Bob’s bank fails.
As a rule these banks just don’t own that many government bonds the returns suck.
Reality check: US debt to GDP ratio is over 120% and the US doesn't have the credit to borrow anymore. We're looking at hyperinflation and a long depression unless they stop printing money and we experience massive austerity/spending cuts. We are literally in an economic death spiral (that's what a debt to GDP ratio of > 120% means) and that death spiral will be irreversible by 2028 (with US insolvent by 2042) as that WAS the timeline for when all of our loan payments for all of that printed money/bailouts goes only to the interest on the loans and not the principal. Unless of course, they change all the rules and it's laws for thee but not for me and debt starts getting erased. And/or war, which is historically how they do it.
This is a ridiculous statement. The market for US treasuries is perfectly healthy.
This is the most false statement ever.
Anything that increases the money supply will increase inflation.
Except we have actual numbers and history to prove that false....
Inflation was caused by the massive fiscal spending (stimmies) not the FED
When the gov’t is willing to buy/underwrite loans with minimal standards or sight unseen at lower rates, it artificially accelerates loans and lowers the cost of money - and increases the money supply and velocity of money in the economy.
This expasionary monetary policy failed to stimulate the economy, which is predictable to anyone who understands that banks having bonds vs reserves has virtually no impact on their lending behaviour. Bonds are, for all intents and purposes, as good as cash.
[0] https://www.investopedia.com/terms/m/m2.asp#toc-the-bottom-l...
----
In reality, it comes from all of those things, to different extents, in different spaces. The price of cars and eggs went up because of supply shortages. The price of houses went up because people can borrow money for 30 year mortgages. The price of employing someone went up because of a tight labor market. The price of stocks went up because the Fed printed money with QE, and kept interest rates at zero.
That said, it is a harbinger of substantial problems to the system.
The fed started rate targeting, and asset prices started rising as the economy adapted to Fed policies. 50 years later assets like homes regularly exceed individuals lifetime earning potential.
If interest rates rise, these asset prices must fall. If they fall, then someone is on the hook as a counter party. The fed bailing out the banks with more free money kicks the can down the road.
Best case scenario is a steady inflation that raises incomes closer to assets. However this inflation effects boomers, millennials, and gen z differently- there is no easy solution.
But swinging between 0 interest rates and bailouts won’t help things.
Isn’t that a successful strategy then?
> Fiat is trash
Okie dokie.
I'll gladly take that trash off your hands if you hate it so much
You just happen to be born in a country that doesn’t have trash fiat - yet.
But if you were born in Pakistan, Lebanon, Argentina, or even Turkey, you’d probably say that your fiat was trash.
No currencies are worth holding (lending at interest isn’t holding.) Holding isn’t what currency is for.
Currently, that also applies to apparently non-trash currencies like Euro and to some degree, USD.
And there's often a hard limit on how much physical currency can be withdrawn on short notice, and to do more you'd have to make a call to prep the bank first. This means they will have a chance to ship newly minted paper in to cover it, as long as the bank's liquidity allows for it.
Why (anecdotally)? Even if the bank holding your checking/savings account fails, the US federal government insures you up to $250k. And that promise is an important one for the government to make precisely because it tips fear/security scales so that people don't do exactly what your friends are doing, which is contributing to the risk of a bank run. Do your friends actually believe the Federal Reserve itself is at risk of failure? What's the scenario they're betting against?
Loose summary: Final payout 2005, collapse 1990. Depositors returned 51% of the dollar. As it was happening: govt says nothing to worry about. Months later: no govt guarantee lol. To someone who didn’t get involved in the run: what are going to do for food, all our savings are locked away and it’s a fortnight until next payday. Those effected unlikely to forget easily.
It’s not apples to apples, aus vs USA, conditions have changed since etc. but I think the rough jist of if you can manage to, don’t rely on the govt in a crisis still applies. Anecdotally.
> The Victorian government of the time had chosen not to participate in that scheme [an Australia-wide National Deposit Insurance Corporation], believing the government could regulate and supervise societies.
Although, it sounds like the protections in place for Australians today are stronger now and aligned with protections for Americans. https://www.rba.gov.au/publications/bulletin/2011/dec/5.html
The cultural memory in America is that in the 1929 crash there were little to no government protections and economic disaster ensued. Reforms, including the FDIC, were created precisely so that people could lean on the government in time of crisis. The beauty of the FDIC safety net is that it's mere existence reduces the risk of its needing to be used.
And the more recent living memory is our 2008 financial crisis in which the government issued enormous loans (since repaid with interest) to a few large banks to protect the whole banking system, and the belief that, in retrospect, it worked and was a good move.
So I guess my question still is: why distrust the safety nets that are in place, when they are shown to be working? What's the story about a time when the US government enacted an economic security promise and then broke it?
In that period, your excessive risk taking will likely show excessive growth, which will likely lead to stronger stock prices. If you’re a banking exec, your salary is linked to stock performance. You can easily run up 5-8 years before the whole edifice crumbles, pocketing fat bonuses in the interim.
Who cares if Joe Shareholder gets left with nothing at the end? You and all your exec buddies can make off like bandits in the interim.
Not true. The shareholders and executives walked away with millions in stock grants and bonuses for about a decade, benefitting from their strategies that led to the bank's downfall. If they are fined their entire earnings in the last 10 years then I would consider them walking off "with nothing".
So will they do this again in a similar situation? Of course! There are millions to be made!
[0] https://cryptohayes.medium.com/kaiseki-b15230bdd09e
Why didn't banks liquidate their long-term bond holdings a year ago? I can guess the answer: they wanted to protect executive bonuses and share prices. They hoped they could just stick their heads in the sands and hold those bonds to maturity.
Another question: why even hold their liquidity in long-term bonds that are more sensitive to interest rate changes? Banks could've rolled 90 day Fed debt instead of 10+ year bonds. Again, I can guess the answer: long-term bonds have better yields so the bank can artificially improve its position (ie executive bonuses and share prices again) by adding risk to their depositor funds.
I'm happy to see the solution for poor financial management (eg SVB) is for the bank to be dissolved. Let shareholders bear the cost for poor management.
The related question is why did regulators turn a blind eye? Interest rate risk is something regulators look at. I know SVB had some loopholes that prevented a lot of oversight but one other factor that comes to mind is that the Fed needed to get rid of high prices/low-interest Fannie Mae bonds somehow and letting bonds feed on them was one way.
lending by a bank could've also achieved the same. Depositor's funds are always "risked" in a non 100% fractional reserve system.
The problem isn't with banks buying long-dated bonds, but that they may have bought too much. The central bank, the thinking goes, could lend as a last resort, so the risk of liquidity (or lack thereof) is lowered; this means any bank that _didn't_ buy a higher yield is losing money compared to their competitors who did (until the shit hits the fan).
Because these bonds are in the Hold-to-maturity portfolio and you can't sell them. If you sell one you have to mark down everything.
Too many bonds / too little time.
Bank assets are several times larger than the real economy. It's impossible to transact them in one year.
> long-term bonds have better yields so the bank can artificially improve its position (ie executive bonuses and share prices again) by adding risk to their depositor funds.
About this, that one seems right on the mark to me. Banks seem to love all kinds of "tails we win, heads you lose" games.
But then, I wonder if the US didn't increase their rates much faster than they should.
Who do "the banks" sell them to?
A bank can sell them to another bank. Someone is still sitting on it.
We can't sell mortgage bonds to space aliens yet AFAIK, and other banks in other countries can also see that they don't want to touch them in a rising rate environment, and they'll have their own problems back home.
Economics 101 is learning that "why doesn't everyone just X" usually doesn't work when it comes to macroeconomics.
https://fortune.com/2023/03/10/svb-collapse-fdic-takeover-ma...
I doubt anyone wants more than they already have.
It's too late now, but there was a big period of time where the rate risk was obvious but the price was still good because institutions were comfortable with that bet. And it was okay for 95% of them to make that bet, just not the ones going too hard on it.
Because if they had all done it then, the crisis would have happened at that time instead of this one. For any mass-liquidation, you can always ask, "well why didn't you beat the rest of the market to dumping this trash?" It's a problem in any bubble.
If the fed values those bonds at face value (rather than what the market would pay today) and allows the bank to borrow money using those as collateral, then a bank could simply borrow from the fed using the older less valuable bonds as collateral and then buy new more valuable bonds.
The bank could then default on the loan and forfeit the original less valuable bond.
This would effectively be the fed giving free money to the bank.
They are only losing .1% of bond value instead of the difference between face and market value.
If the bonds were worth 80 cents on the dollar than they just traded 80 cents on the dollar for 99.9 cents on the dollar. A good deal if your balance sheet is in such poor shape.
https://www.federalreserve.gov/newsevents/pressreleases/file...
The FDIC has announced that any shortfalls wlil be paid by the collective member banks. As long as the banks can't pass these costs onto customers it will have no effect on taxpayers. There's good reason to believe that one time supply shocks don't effect prices, so I'd say taxpayers did not foot the bill here. Bank equity holders did.
fat chance?
Better prepare for the worse.
I honestly do not think that all this flux in the banking system is 'The economic burst' (TM) but it will definitely be in the opening chapters of the book on it in a few decades time.
Banks and governments have become very good at figuring out how to put band-aids over band-aids. SVB and the little heart skip the UK had last year are good examples. But the long term conditions they are creating is lining us up for a big drop in the next 5-10 years. When the symbolic claims we have de-laminate from the biophysical world, the drop is going to make a lot of people nauseous. The problems will be inflated to such a size that they cannot be saved in any meaningful manner.
What to do with this information? Beats me!
Personally I am getting the physical assets I actually use, reducing my physical needs were possible and then sitting back like legend of Nero and watching Rome burn while being more like the reality of Nero and helping who ever I can.
Seems like SVB was scarified
It sounds like SVB was a poorly run bank. When it came down, I'm sure a bunch of people said "told you so," but there was ample time to correct before then.
https://www.smh.com.au/business/banking-and-finance/before-c...
And you are incorrect, my point is we can't trust the people currently in charge of much of our financial system. Not a mistrust of the institutions themselves.