Federal Reserve pledges asset purchases with no limit to support markets
cnbc.comLots of voices missing the mark: the fed is acting to keep the corporate bond market from seizing up.
Corporations finance part of their borrowings through bonds. These bonds need to be paid in full + the interest when the bond matures. Corporations and banks typically repay some of these from cash, and some by issuing new bonds.
Right now no one is getting to issue new bonds at all. Banks cannot lend because the risk rating on these bonds has gone up, meaning they in-fact need to sell said bonds to reduce their risk exposure.
Thus the FED is acting as a lender of last resort directly to major corporations. Without this last resort said corporations would need to either fire-sale off assets to pay the principle on these bonds or face a technical default.
Covenants on their other bonds mean that if the corporation defaults on any of their bonds, all of the bonds become callable. It is 110% not good to have any major corporation go into a technical default. We are talking about companies which have plenty of assets and strong businesses.
Thus the Fed and US Government are/should be acting to avoid any such rapid deleverage. It took Japan 2 decades to reduce leverage in the corporations. Without intervention the US could undergo this same deleveraging in a matter of months. It would throw the American people into such a deep poverty the likes of which we've not seen since the great depression.
Which is to say: these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
> We are talking about companies which have plenty of assets and strong businesses.
We are also talking about companies that are leveraged to the tits to juice their return on equity. What is glossed over in all of these discussions about bailouts is that the managers of these corporations respond directly to financial incentives, and the existence of a "lender of last resort" such as the Fed ensures that corporations will tend to leverage their balance sheets far beyond a level commensurate with the actual risk of the underlying business.
> We are talking about companies which have plenty of assets and strong businesses.
Except that those assets are owned with borrowed money. Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders. Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue.
"the existence of a "lender of last resort" such as the Fed "
This. The moral hazard here is enormous. And why should the Fed serve the interests of equity owners over the national interest in a strong, reserve dollar?
My feeling is that the answer to this is because these companies (arguably) produce something of value to the world. Letting them become bankrupt would mean they do not produce that something of value so that would be bad economics. And a case of not seeing the forest for the trees. The role of economy is to sustain a certain confort to the population, an people should forget that at their own peril.
Bankruptcy doesn't mean the company's assets are thrown in the trash. It just means the current equity & bond holders get rinsed. Other presumably smarter people can then come in and run the company.
They mustn’t even be smarter, simply more ethical and responsible.
They needn’t even be more ethical and responsible, either. Calvinist mythology aside, financial success isn't a symptom of moral virtue.
Isn't the nature of a bankruptcy largely at the discretion of a judge?
> Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders.
The equity holders are eating the losses; have you seen the stock market?
> Now, the Fed provides a third option: the holders of U.S. dollars, whose currency is devalued as money is printed to paper over the void which was opened up by the pandemic. And so the charade will continue.
Money is being temporarily created and lent, in exchange for collateral (bonds) to avoid a lack of liquidity caused by decreasing asset values and more hesitant lenders. Once things go back to normal, the money will be destroyed since corporations will return the money in exchange for the asset again. The net currency devaluation is 0.
> The equity holders are eating the losses; have you seen the stock market?
This is a misconception. Loss or profit only happens when you sell your assets. Until then it is just economic potential. The trend of not paying dividends is at fault here. When you do not care about dividends but perceived future growth to earn money there is an incentive to over-commit and increase risk above any reasonable level.
Adding to that, if someone's "investments" last just a few days or weeks. Then that person is not investing, that person is just speculating. And, speculators should not be shielded of market readjustments. If anything they should fully pay to use the market as a casino.
But, back to the point, your assessment do not contradicts that companies are excessively leveraged and are not ready to survive though times. As the parent comment says, there is an incentive to leverage as much as possible and let the tax payers pay for the meltdown.
"American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away or lent money at close to zero interest when the companies had the money and dedicated it to artificially increase share prices?
> Loss or profit only happens when you sell your assets.
This is a meme phrase; losses absolutely do happen before you sell your assets. (If I bought Enron at $90 and never sold, I didn't lose any money, right?)
> "American Airlines spent $13 billion on share buybacks for 10 years through 2019". They should have used that money more wisely. Why should the taxpayers give money away
You have two misunderstandings here. The Fed is not bailing out American Airlines by giving money away. That has to go through Congress. (I have no claims about whether bailing out AA is a good decision or not). Bailouts also generally are not free giveaways; the government often takes equity stakes.
> or lent money at close to zero interest
The Fed is lending everyone money at 0% to avoid a recession. Regardless of whether AA previously bought back their stock, they could still borrow at 0%. The Fed is doing this because the alternative (letting everything crash) is much worse.
> when the companies had the money and dedicated it to artificially increase share prices?
Share buybacks do not "manipulate the market" (not your words, but common phrasing among anti-buyback advocates) and artificially increase share prices. They return capital to shareholders. The share price goes up because the stock now represents a better return on investment (when AA buys back stock, it no longer a bunch of market cap tied up in money uselessly sitting around in a money market account).
When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse. That's what could happen here. This ebb and flow (raising capital by issuing shares when you need it, returning capital when you don't) is the whole point of equity markets.
See https://www.bloomberg.com/opinion/articles/2020-03-17/the-go... for a more comprehensive argument about why share buybacks for airlines are more rational than holding money for a rainy day.
> When times get tough, AA can sell equity for more money, which is a stock buyback but in reverse
so why are they not doing this, but instead asking for low interest loans? (https://finance.yahoo.com/news/airline-ceos-promise-to-elimi...)
The reason is that raising equity dilutes all current shareholders. It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk.
I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future.
> The reason is that raising equity dilutes all current shareholders.
But like venture funding, dilution is fine as long as it means that the company survives or grows. I'd rather own 1% of a billion dollar company than 10% of a dead one.
> It's a bigger "loss" to them than a termed interest loan which the tax payer gets minimal reward for taking on the risk.
Yes, I agree, but my key point is that buybacks are a natural part of equity markets and are not done solely to "manipulate the market" as commonly claimed.
> I say, that any bailout loans _should_ come with an equity dilution component. Tax payers should get compensated, or this moral hazard will just continue into the future.
Agreed, any exceptional bailouts through the government should come with an equity stake. I'm fine with lending to airlines at normal corporate lending rates without needing any additional compensation, though.
> I'm fine with lending to airlines at normal corporate lending rates without needing any additional compensation, though.
the problem is that the current bond and credit markets have seized up because nobody wants to lend (at "normal" rates). If the gov't comes into the market and act as a perfect lender of last resort, then true price discovery don't happen, and you cannot really know what the "true" corporate lending rate would be. That's my take on why it doesn't work without an equity stake for the gov't to do the lending.
> This is a meme phrase; losses absolutely do happen before you sell your assets.
It is not a meme, is how accounting works, is how governments tax. If you look at your own example, some people though that they had made a lot of profit with Enron, if they did not sold the shares then they only got losses.
Because the you only win or lose money when you sell your shares (not counting dividends if any).
UK law: "You’ll need to work out your gain to find out whether you need to pay Capital Gains Tax.
Your gain is usually the difference between what you paid for your shares and what you sold them for." - https://www.gov.uk/tax-sell-shares/work-out-your-gain
Until you sell there is NO gains as price varies in function of time. And it can go up or down.
The other claims are more complicated. It's difficult to discuss them if common accounting knowledge is not understood.
" is how accounting works,"
There is no one accounting standard that is the ultimate reality. Accounting is a means of representing reality for a particular purpose like any other model. And it can only change and attempt to improve with the understanding that an outside reality exists.
And "mark to market" is a thing that exists, and is sometimes required, anyway.
So I think you're completely wrong in a deep sense, but also in a shallow technical sense.
> Money is being temporarily created and lent
What is your definition of temporary? QE 1/2/3 were each supposed to be temporary. But each one was never enough, and fed smoothly into the next. Then they finally tried reducing their balance sheet and the repo market blew up. Then "Not QE" repo support was supposed to last two weeks. Then only a few months. Now "only" a year, and at a trillion dollars overnight and half that in 14 day operations. How certain are you that at year's end, overnight repo support will be less than $1T? On which track record of correct predictions from central bankers do you base this belief?
Since 2008, there's not a single Fed dot plot that has been even remotely accurate even six months out. SIX MONTHS. These people have absolutely zero credibility. They lied to you about the duration of QE 1/2/3, they lied to you about the duration of ZIRP, they lied to you about the direction and duration of rate hikes, they lied to you about repo market support amount and duration. During all this, they steadily changed their mandate from "price stability", to "some inflation", to "2% inflation", to "2% symmetric inflation", to "greater than 2% symmetric inflation".
But this time, with QE4, they're super cereal pinky swear scouts honor giving you every reason to believe that it's temporary.
Okay.
This. It is basically a rigged system and a no-win game of feudals and peasantry. What happened to responsibility and equal opportunity? Are the 99% of population who are not involved in this scam even considered human beings?
Should be top comment in this thread.
> Except that those assets are owned with borrowed money. Someone has to eat the losses, and in an actual free market there are two options: the equity holders, or the bondholders.
There are no actual free markets and there never have been; governments exist and always intervene in the market, and even if they didn't have something like the Fed executing monetary policy, there's typically the option of “past, present, or future taxpayers”; in the case of future taxpayers, often in part or in whole out of returns directly made from the gains from keeping the businesses afloat rather than letting them fail.
> And so the charade will continue.
What “charade”? It would only be a charade if the government pretended that monetary and fiscal policy wasn't part of the system of the economy, which it does not.
> the holders of U.S. dollars, whose currency is devalued as money is printed
I know that's what the macroeconomics 101 textbook says, but is there any empirical evidence this actually drives higher inflation?
We've had historically low inflation for over a decade now[0], a decade during which the Fed has undertaken successive rounds of QE to the tune of $40-$85 billion per month.[1]
[0] https://www.usinflationcalculator.com/inflation/historical-i...
[1] https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...
My 2 cents on low inflation:
- Inflation gets 'exported' along with production to countries with lower manufacturing costs (because globalization). So no inflation but no working class either, resulting in income inequality - a problem of its own.
- Depending on jurisdiction, inflation should include or adjust the weight of house prices (Eurozone), education costs, medical costs. These are goods that cannot be outsourced, hence they reflect higher inflation.
- Shrinkflation - https://www.economicshelp.org/blog/24369/inflation/shrinkfla...
Printing money in itself doesn't - it is how the supply meets the demand. Devaluation requires a relative increase vs the economy. Distribution of money also affects how much inflation would take place.
Driving inflation up from low is a nominal goal of QE but the magnitude varies.
> It is 110% not good to have any major corporation go into a technical default.
Q: rather than going into debt, would it be possible for the government to just... suspend the activation of financial covenants generally for a while? Enact a law putting a temporary patch on how contract law works vis-a-vis financial instruments?
Something like... any covenant with triggers written after date X would now be required to be written to include additional language Y; and any covenant triggers written before date X would be implicitly interpreted as if they did contain language Y. Language Y specifies that the activation of the covenant is suspended when the government says a certain named financial-market state "Z" pertains; and, when state "Z" is declared as having ended, only then would the covenant be evaluated for activation, based on the present state of the debtor, rather than its state during the historical period during condition "Z". Effectively, the covenant wouldn't be able to "see into" whatever happened during "Z" to apply its triggering logic to it.
(I'm picturing here how you can, in an RDBMS, create constraints that don't validate until a transaction is complete, such that you can temporarily put a table into a constraint-violating state during the TX, and—as long as you fix things before the end of the TX—everything will be fine, and the trigger won't run.)
> would it be possible for the government to just... suspend the activation of financial covenants generally for a while
Changing the rules of massive bilateral agreements to benefit one party over another tends to blow confidence in the system. Investors would start trying to guess which asset class will next be amended, thereby triggering runs across the market. (We see this when governments start expropriation processes in previously-stable economies.)
It also does nothing for e.g. a company with good receivables that can't make payroll or interest payments because its good commercial paper isn't being purchased. It's in a liquidity problem, not a solvency one. But if the liquidity problem persists, the firm will go insolvent.
> Changing the rules of massive bilateral agreements to benefit one party over another tends to blow confidence in the system.
I suspect "confidence" isn't an accurate word to describe the current aggregate sentiment of people towards the system.
> Investors would start trying to guess which asset class will next be amended, thereby triggering runs across the market. (We see this when governments start expropriation processes in previously-stable economies.)
We are already seeing this today. /r/WallStreetBets has plenty of content along these lines, and for good reason - that the government would be selectively bailing out corporations, once again, was fairly self-evident to anyone with half decent capabilities in logic and memory.
> It also does nothing for e.g. a company with good receivables that can't make payroll or interest payments because its good commercial paper isn't being purchased.
Fair enough, but lets not think in false dichotomies - there is in fact an extremely broad array of ways the fed could go about this. Unfortunately (and coincidentally), they seem to have once again miraculously chosen the way that benefits corporations at the expense of taxpayers.
Most people believe that we live in nations based on ~democracy, in both function and name. I for one would be very interested to know what the public's actual sentiments are on this matter, as opposed to what we are told are their sentiments (comically derived from a single vote, at one point in time). It's self-evidently silly behavior, and yet this seems to be the way the vast majority of people conceptualize the world.
So instead of bailing out the companies, why not focus on ensuring their customers have the money to demand their goods and services through direct stimulus?
> why not focus on ensuring their customers have the money to demand their goods and services through direct stimulus?
That's...happening? It's the core of each of the stimulus bills.
The company bailouts are, theoretically, for otherwise-good businesses unusually impacted by the pandemic. Restaurants and airlines, for example. Of course, there is the winner-picking that happens when any government spends money.
Because it doesn't matter how much money you throw at customers right now, it's not going to produce cashflow in <some hotel chain>.
Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing.
Instead the Fed and US government have a much simpler and near instant tool: act as the lender of last resort.
A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure to be re-paid.
> A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure to be re-paid.
Says who? The whole point of loans is that there is a possibility that they will not be repaid. Banks thinks it is risky to lend money at the current interest rates so American taxpayers instead have to shoulder the whole burden. The assets owned by corporations is mostly in the form of financial instruments whose value is currently plummeting. The US government is taking on huge risks.
If these loans weren't risky banks themselves would issue them. Since they aren't it stands to reason that they in fact are risky!
The government can offer loans where they are superior to other borrowers. This is similar to what private equity does to strip assets out from under other bond/debt holders but less evil
If so, what's the point of having banks in the first place?
The fed have more options/levers to manage the situation as it evolves than banks do. I think it's less risky for the fed to do this than a major bank.
> Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing.
I don't see the parallel.
Covenants, ultimately, have to be enacted through the courts. (I mean, presuming debtors' legal departments get the message from the government that they don't have to worry about covenants during this period, whatever their creditors demand. The creditors would ultimately have to take them to court to attempt to get their covenants enforced.)
And, if the covenant enforcement hits the court system, then the government would already be "in place" to suspend traffic—it's "the wire" that court-system messages are flowing through!
(Or, really, it's more like a judge is a router and the legislature controls a WAF module in said router. The judge, as router for motions, is required to deny any motion the law-as-WAF declares as illegitimate.)
You are completely skipping over the basics. If someone doesn't pay then someone else doesn't get paid. You merely shifted the problem to somewhere else. That somewhere else is usually something extremely critical such as the banking system.
Last time, there was a big search for bag holders. Guess who the bag holders were?
You and me and Fed.gov. It fucking sucks.
This doesn't make sense to me at all. If you pause transactions temporarily and then resume them later once we've regained some stability, I don't understand how you see your points as being true? Who isn't getting paid? Where is the problem being shifted to? (Are you thinking the courts? That isn't being proposed, it is only mentioned as an illustration that that which is "impossible", is actually fairly routine, the difference is that in this case it would be done at massive scale.
Does this increase risk? I would think so, but I think people should have an obligation to provide at least some evidence or logical reasoning as to why we must accept the particular flavor of corporate socialism we practice. If an idea is sound, it should be defensible.
Covenants are the smallest part of this.
Without the flow of money the funds/banks/institutions which own those bonds are in-turn going to default to their creditors.
Hence the internet analogy: you cannot just hack in a pause on your local machine. There is a world of complex interactions which would also need to be paused, so complex just figuring out who owes who would take years/decades.
I see covenants as important here because they're the component of the financial system that's most rigid and non-responsive to changing market conditions. The point of a covenant is to make a contract more inflexible, by declaring a point beyond which a creditor just won't accept "slack" in the debtor's performance.
If you take covenants out, contracts become inherently more negotiable. And that's important, because frequently creditors have less pressure on them to perform, in exactly the same circumstances that cause debtors to face more challenges; and so creditors often find that their best option, EBITDA-wise, is to eat the losses from the challenges that their debtors are facing, rather than destroying their debtors through liquidation in a way that gets them, in the end, less money.
You know how, right now, corporations are more willing to release previously-withheld "bad news", because they can blame their lack-of-performance on a suspension of work due to the virus? Those corporations are creditors, not just debtors (esp. in commercial paper); and the "slack" they earn like this, they can pass on to their debtors (e.g. other corporations)—but only if contracts work the "normal" way, that you see in small-scale non-covenanted contracts.
In such non-covenanted contracts, where when the regular contract isn't working out, frequently the best thing to do isn't to sue for breach, but rather to just sit down and renegotiate the contract. That's what's going on right now all over the place—contracts between e.g. landlords and renters, or between suppliers and retailers, are being renegotiated, just for this temporary period, to the benefit of both parties. (Another good example, more generally, is personal debt forgiveness: debtors are willing to accept a renegotiation of a loan to an individual, over the much-less-likely chance of ever claiming the full original loan amount.)
With a covenant in place, though, one party has no incentive to sit down to renegotiate (and in fact, that's what they wanted to avoid by adding a covenant); and instead can just pressure the other party to do drastic things like liquidation in order to fulfill the secondary contract stipulations under the covenant-breaking clause.
Wouldn't it make sense to—temporarily!—take away the tool by which funds/banks/institutions force their debtors to liquidate, and instead force them to do the thing they'd have done if that tool wasn't there: to renegotiate performance expectations, to get what return they can get; and then, in turn, have those funds/banks/institutions renegotiate their performance expectations with their creditors?
It's also about what signals it would send. That contracts are binding is not only the foundation of Capitalism but of all civilization since antiquity. Invalidating contracts by government decree would roughly be as disruptive as a Communist revolution. A global recession is preferable to changing 2,000+ year old legal principles.
> rather than going into debt, would it be possible for the government to just... suspend the activation of financial covenants generally for a while?
That's completely unfair to one side of the transaction.
Here's an example:
Let's say that in 2010, I bought a million in bonds from various sources.
Let's say that in 2010, you sold me some bonds.
Let's say that your proposal goes through, and the government just declares that contracts will not be enforced.
That would completely punish ME at YOUR benefit.
Just like a bailout punishes the average American citizen for VC benefit.
No. That'd be considered an unconstitutional "taking" of the economic rights from people relying on those contractual terms. See Eastern Enterprises v. Apfel, 524 U.S. 498 (1998).
Re: that judgement, why is the stock market allowed to halt trading? For that matter, why are savings banks allowed to restrict access to their customers' savings during bank runs? Wouldn't people have the "economic right" to de-leverage [and thereby kill] these institutions in these situations?
You don’t own the money you deposit in the banks, the banks do. Through the act of depositing you are lending the banks your money, therefore it’s not your money anymore. They can default on the loan.
See https://thehutchreport.com/your-bank-account-who-really-owns...
Or read https://www.amazon.com/Where-Does-Money-Come-Ryan-Collins/dp...
Highly recommended.
Just like Facebook doesn't have to respect your First Amendment rights, neither do other private enterprises like banks and stock markets need to respect your "economic rights"
Neither of those is the government. That ruling only applies to government action.
It is unconstitutional in spirit and practice in the United States for lawmakers to meddle in existing contracts. https://en.wikipedia.org/wiki/Contract_Clause
This happens all the time when things like tenancy law get adjusted.
Banks would almost immediately be insolvent, which is exactly what the Fed is trying to prevent.
The big problem is how this exports pain outside the US.
Even if the US could allow US companies to default for a year without penalty, the Chinese companies expecting coupon payments wouldn't receive the funds they use to operate. They would then have to default on their Chinese obligations.
If Chinese companies can't pay their debts in China, China faces huge pressure to devalue or inflate. They're unlikely to adopt the forgiveness rule. Emerging markets are at the end of this game of crack the whip.
Benefits of being the only superpower and world treasure.
Another problem is the bonds are traded on the open market and many asset managers are forced to sell as soon as they drop below investment grade as a function of their investor agreements. So we’d really have to just pause the entire market.
But Japan did not let the banks and corporations fail, then they got zombie economy. Instead let entrepreneurs buy defaulting corporations with all their assets for $1 and see what can happen with fresh blood and creativity. No value is destroyed, assets and personnel stays, and hopefully consumer demand will go back after the pandemic.
Edit: ah yes shareholders lose money but that's the game. Retirement pensions? If you are not for socializing it then it's the game too.
It's not just one or two companies. At minimum: all retail, all airlines, all hotels, all cruise ship companies are at risk.
Apart from paying people to stay at home during the pandemic what's the issue? Why would tourism disappear? Buy the failed airline/hotel, change the name, personnel returns to work, business as usual.
Who with cash is going to buy all of these businesses and take on their debt? Apple? Microsoft? Some PE firms?
Or is your proposal to default on all the debt for those industries and buy the companies in a firesale? Tourism would actually disappear in that scenario...
It won't disappear. Just change owners as it was already explained and proven.
They United Stats Government should do it. They have literally unlimited funds, and this approach would actually be the most consistent with our "capitalistic" economic model.
Not that we live in anything approaching a capitalist economy of course, but it would be funny if they were logically consistent for once.
> They United Stats Government should do it
That's what they're doing and what the article is about. [Edit: not buying the companies outright, but buying their debt]
The person I was responding to was proposing something else about clever entrepreneurs buying up all of these industries in bankruptcy, or something.
They should get equity along with the debt, for those companies for whom this is not merely a liquidity issue.
Boeing is an example of such a company.
> They United Stats Government should do it. They have literally unlimited funds, and this approach would actually be the most consistent with our "capitalistic" economic model.
That's actually called Socialism, when the government buys up companies and starts to own the means of production.
Under capitalism, if you go broke, you're broke. Boeing is broke, because the executives took all the cash for themselves via buybacks.
If the taxpayers are getting their wallet out, it should be to purchase something. So, they will be purchasing equity in the bankrupt company.
If Boeing doesn't like it, they can go pound sand, or maybe the executives could use the money (that formerly belonged to the shareholders) to purchase the shares themselves. Of course they don't want that, they want to have their cake and eat it too, again.
Because we're all about to be broke and there won't be any free cash to "go on vacation."
Good, then we should let the industries fail instead of keeping them around as zombies. Mail the employees checks for a year until they can find a new form of employment.
Entrepreneurs aren't going to buy up these companies. Other companies will. Amazon will buy out the entire market and now we're even more dependent on them
There is a lot of popular sentiment that misses the mark of the Fed, largely due to most Americans not taking time to study and understand it, but just seeing this large entity that has first-order effects that seem to only benefit banks and investors.
The parent here ^ seems to understand the nuance, that a lot of Fed decisions are for the CREDIT markets, not the stock markets.
I highly recommend reading the Greenspan or Bernanke biographies to hear what, and why, they use the levers that they do. There is simply too much nuance in financial markets and the Fed to play arm-chair politics about whether it is effective or not.
I just wrote a thread [0] responding to a joke going around about our first response to everything being to lower interest rates.
[0] https://mobile.twitter.com/elamje/status/1242129602040008704
Lowering rates wouldn't be seen as dishonest if the Fed ever actually raised them. We're at 0% because their algorithm seems to be if (problem) lower() else party().
The response to 2008 wasn't a problem in isolation, but continuing that policy into 2010-2019 was. Rates even started going up slightly a year ago, but then got nipped in the bud to keep the stock bubble rising.
I'm willing to agree that at this current point, these bailouts seem quite prudent. The problem is that after the crisis is over, the hazardous financial and business practices that necessitated the bailouts will never be reigned in, but allowed to continue thus necessitating another bailout in the future.
"the Greenspan or Bernanke biographies"
Which ones would you recommend? The autobiographies?
The Age of Turbulence, and The Courage to Act
>We are talking about companies which have plenty of assets and strong businesses.
Do they? That's kind of a big assumption here. If the virus is going to have a major negative effect on their ability to deliver value, then that means they aren't (currently) sound businesses, and the market is correctly marking down their value.
There could definitely be fiscal -- and epidemiological! -- measures that can reverse this state. However, to buy up the bonds without those measures doesn't change the fundamental soundness of the business; it just loads up the Fed's balance sheet with garbage.
"then that means they aren't (currently) sound businesses, and the market is correctly marking down their value."
There is definitely an unsound premise here - the market hasn't marked down public companies as if they are generally unsound...yet. All the "crash" so far has done is take us back to the levels of 3-4 years ago.
Your point about buying bonds not changing "fundamental soundness" is like saying keeping someone from dying of an acute condition doesn't cure their illness. It still keeps them from dying right now! What is the advantage of causing a preventable catastrophe, just because everything eventually ends?
>There is definitely an unsound premise here - the market hasn't marked down public companies as if they are generally unsound...yet. All the "crash" so far has done is take us back to the levels of 3-4 years ago.
Yes, because maybe it hasn't accepted the gravity of what's going to happen to their ability to deliver value, or anticipates free money.
>Your point about buying bonds not changing "fundamental soundness" is like saying keeping someone from dying of an acute condition doesn't cure their illness. It still keeps them from dying right now! What is the advantage of causing a preventable catastrophe, just because everything eventually ends?
My point was that if they're not actually sound, then buying the bonds doesn't change that; it's just doing that weekend-at-bernie's thing. To the extent that the business can't deliver value, markets depend on such businesses shutting down, and subsidizing their bonds only delays.
Now, you'd be right that, if there's something fixable about them with collective action, then we should do that thing. But that would still obviate the need to subsidize their bonds, because it would revitalize market interest in them!
If someone has an acute problem with low blood sugar, do you let them die right now because increasing their blood sugar won't cure diabetes? This is how insane people sound to me right now.
And from what I've read, this is how the great depression was created - people said "oh, the banks that are failing are weak, so they should fail".
Except the patient we're trying to save is the market, not any one business, and malignant businesses are like cancer. It's important for the cancer to die so the patient can live.
I mean, if you want to debate this thing entirely in analogies.
I think the average person, or at least the average internet commenter, is too ready to consider large sectors of the economy "malignant" even in the best of times.
But without debating which analogy is right, it does matter whether it's cancer or not. And if aggressive treatment of advanced cancer involves cutting out major organs and the patient will only survive a month longer at best, it makes more sense to assume it's not terminal cancer and act accordingly even if there's a chance.
If someone appears to have a seizure and/or falls down and passes out, it could be a stroke, they could have cancer that's metastasized everywhere, but you don't make that assumption when there are many easily treatable possibilities.
They make sense to do, but there are better bailouts.
https://docs.google.com/document/d/1YbtJGn7ida2IYNgwCFk3Sjhs...
We need a consistent approach across the board -- small businesses, individuals, etc. Pausing the economy makes much more sense than targeted bailouts to specific industries.
It is 110% not good to have any major corporation go into a technical default. We are talking about companies which have plenty of assets and strong businesses.
That's where the problem lies. Who is going to decide that? Traditionally we have debt markets for that.
The biggest problem at the moment is the debt markets have almost completely stopped functioning. Let me repeat what the other poster said: “We are talking about companies with plenty of assets and strong businesses”. And they still can’t get needed short term financing. Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed?
I'm not going to answer your question, but I'll just comment that moral hazard is real. Debt financing is not required to operate a business, but when liquidity is guaranteed through a lender of last resort companies will inevitably leverage their balance sheets far beyond what is justified by the underlying risk of the business.
Also, is it really accurate to call a company "clearly creditworthy" if a 2-3 month gap in cash flow results in bankruptcy? Surely the CFO can get down on his knees and find some spare change under the couch cushions to get through this.
>> Debt financing is not required to operate a business
Exactly. No one forced them to take on loans and then operate their balance sheets like they'd always be able to revolve bonds.
> “We are talking about companies with plenty of assets and strong businesses”.
We are also talking about companies with specious "assets" and incredibly fragile businesses.
> Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed?
No, but they are not all creditworthy. Do you happen to know the ratio between the two? It seems to me that is a rather important data point that a logical person should be examining as part of their decision making process.
>> Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed?
There two major assumptions there.
"Clearly creditworthy companies"
and
"Credit markets are temporarily closed"
The bonds are devalued. People are issuing credit to those who qualify. (I've secured two LOCs myself for both my business and personal needs.)
It's just that the bar is higher than normal. What is the function of a market if you don't allow it to clear?
If the companies are clearly creditworthy how come no one wants to lend them any money? It appears that whoever has the money doesn't think these companies are clearly creditworthy.
It's circular reasoning. Why aren't you buying stocks or bonds? Presumably because nobody is offering you a large amount of extra money to do so, like with a 0% loan. Everybody who can get cash or has cash wants to prepare for zombies.
Well, yes, if you define "appropriately pessimistic bond markets" as "non-functioning", sure.
These aren't sound businesses, because the current virus is going to screw them.
This is circular reasoning, but it's also counter to the facts, which are that markets aren't yet pricing securities for an apocalypse.
No, you're the one assuming they're functioning companies to prove that the deserve to be saved. That's itself circular.
And if you think the market is correctly pricing the equity, you can't turn around and say it's mispricing the bonds so the Fed has to "correct it".
I didn't say the market is correctly pricing anything. I'm saying if it is correctly pricing securities, then it can't be used as evidence they are nonviable.
I mean, circular reasoning is one level of stupidity, but getting it going with a counterfactual is just enraging to me.
If the banks periodically need a bailout, shouldn't bankers be paid like civil servants? (because that's what they are, apparently)
No banks need a bailout. In fact that banks are now required to act so super safe is part of what is driving the rapid decline.
As corporate bonds get more risky banks are not allowed to hold as much of them. Triggering sales, which increases the risk, and thus triggers more sales.
Banks are fine, it is the corporations which need to re-issue bonds that are going to hit a wall.
Banks are fine as long as they aren't holding the debt of companies that hit the wall. It's a bailout.
>> Banks are fine, it is the corporations which need to re-issue bonds that are going to hit a wall.
"Need" to re-issue bonds? Did anyone force them to buy into a model that has a huge linchpin failure?
Wait until the mortgage payments stop coming in and then tell me whether they need a bailout.
Edit: Why is this controversial? If people can't afford to make their mortgage payments, and political aid doesn't come through, many banks will definitely be in need of a bailout.
Agreed, deleveraging fast is dangerous. That said if any large company gave themselves less than six months to refinance that’s on them. Everyone knows markets can become dislocated and closed for periods.
Also want to point out that if companies can't afford their expenses, they'll stop paying rent (usually a huge expense and one that is fairly easy to stop paying while still occupying the real estate)
Then landlords can't pay their expenses, and will default on their own payments
This trickles up all the way to the banks and could result in their insolvency, which is what the Fed is (rightfully) trying to prevent
In my industry (software), rent is typically peanuts compared to payroll
Indeed. Payroll will also be significantly affected even in "rent-heavy" industries
https://www.wsj.com/articles/ge-to-cut-aviation-workforce-as...
Why is it legal for corporations to build financial houses of cards like that?
For the exact same reason why it’s legal for individuals to take 30 year mortgages. Would you prefer world where you first need to save up for decades before being able to stop renting? It’s the same with businesses: they take loans, because they allow them to make money now, and it works just fine in normal times without an actual pandemic and forced lockdown of everything.
Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage.
Debt is risky, period. Someone has to pay for that risk when bad things happen and the debt cannot be repaid. Also, people respond to incentives. When individuals and companies are allowed to keep all the profits from their risky activities, but are shielded in whole or in part from the losses, they will respond by taking on more risk than they would otherwise. It's called moral hazard.
Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations?
> Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage.
There is a certain truth in that the ballooning housing prices in many places have a lot to do with availability of credit to the buyers. At the same time, if you're planning to build a new house, you'll find that the costs of building itself are also high. Quite simply, building requires lots of labor, and labor today is much more expensive than it used to be in the old days. To build a house under modern standards and code, you're going to spend at least $200k, probably more. It definitely will take a decade if not two before a typical American family can save up as much, especially while making rent payments at the same time.
> Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations?
In truth, the real risk-takers are millions of regular people, who don't build any significant savings to weather the storm. I find it strange to complain about moral hazard of government or Fed bailing out businesses by loaning them money, when at the same time individual people are given various kinds of unemployment insurance, child benefits, subsidized housing etc. These might be right thing to do, but they create even bigger moral hazard, and it should be recognized before complaining about businesses getting some government support. Can you imagine government instituting a "loss of profits insurance" program, where every business must pay in some percentage of profits, and which will pay out replacement of profit should something happen, the same way unemployment insurance works? Or a program where government simply gives cash to businesses that are owned or employ people government decides are worthy of support, the same way child benefits work?
People also pay for unemployment insurance and the other things you mention through taxation.
The moral hazard you are deftly sidestepping is the fact that bonds/loans do not operate the same way for an individual with collateralized debt vs. a large corporation. And thus, a large corporation can - and does, occasionally - act in accordance with those incentives by assuming bailouts are coming after a black swan event.
Huh? If I default on my mortgage due to this pandemic, the loan is collateralized and the house is seized / a lien is put on it.
Why, then, do corporations get to avoid their collateralized downfall?
The government can require collateral, or equity with liquidation preferences, that's totally fine by me. I thought the issue raised by parent poster was why companies require so much debt for their operations, and the answer is, of course, that it makes perfect sense in most scenarios other than global pandemic and shutdown of everything.
> it makes perfect sense
it makes financial-risk/reward sense. But only because interest rates are at record lows, and there's evidence in the past that bailouts can happen for too-big-to-fail type companies. Essentially, these big employers can extort a country for a bailout, with the economy tanking as the weapon.
If they cannot rely on the interest being low, and if they cannot rely on a lender of last resort like the FEDs, i'm sure they will be more fiscally responsible.
Unfortunately, these risky behaviour these companies take are the result of years of poor monetary policy by the FEDs and lack of investment into increasing competition in all sectors of industry by the gov't.
All this does is result in further leveraging for the next cycle, when even unlimited QE cannot save the bond markets.
Thanks for the detailed explanation. I really don't understand a lot of what's going on, I hope you don't mind a few beginner questions
> these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
Are the measures being taken now just adding another layer onto the "house of cards" as some people describe it?
Will these measures just make it all fall harder at some point in the future?
It’s divided between 3 schools of thought (1) governments can just continue to prop up financial markets indefinitely (2) you can temporarily prop up these markets but you can and will want to unwind government intervention over time and (3) this is just going to make a huge bubble that will burst eventually. People say you can grow out of these problems...
The Fed has an enormous amount of flexible firepower, it’s tough to sit back and not do everything you can to stop economic turmoil. They launched the most simulative economic policy of all time and stocks dropped today. If only there was action in other executive arms and congress.
(2) and (3) are basically the same thing.
> We are talking about companies which have plenty of assets and strong businesses.
Technically true, but I would argue misleading (note: not implying intent on your behalf).
"We are talking about companies which have plenty of assets and fragile, taxpayer supported businesses" contains kind of the opposite message of your statement, yet this statement is also technically true.
> Thus the FED is acting as a lender of last resort directly to major corporations. Without this last resort said corporations would need to either fire-sale off assets to pay the principle on these bonds or face a technical default.
Again, technically true, under the circumstances we find ourselves in. But might the existence of the Fed, and its past policy responses to such events, have possibly creates an environment of moral hazard whereby events like this are practically guaranteed?
> Which is to say: these bailouts are going to happen. No one who understands what is at stack would choose to "let the house fall".
This seems like a bit of a false dichotomy to me, as if letting the house fail or bailing them out (once again) in this fashion are our only two options.
In a true capitalist system, the US government would receive equity in all the companies they bail out.
At some point I think it would be a good idea for us to admit to ourselves what kind of economic system we really have in the West, and try to determine if it is up to the task of competing with China and their economic system, which to my eye is clearly superior (based in part on observable relative performance in the last 20 years).
Why don't companies with lots of assets like airlines sell them? Companies without assets need some help, not airlines.
But some companies obviously won't go back to business as usual - cruises will for sure take a couple of years before people forget
This is acceptable as long as the billionaires all take big haircuts this time. In 2008, they paid themselves huge bonuses while Main St. got evicted. Not happening this time!
Pitchforks, torches, and nooses if necessary.
You're welcome to participate on HN, but please don't use it for political warfare. That's destructive of the intellectual curiosity this site attempts to organize around. This is in the site guidelines, which we'd appreciate if you'd read and follow: https://news.ycombinator.com/newsguidelines.html.
Also, it's not great to use a politically provocative username. That ends up having a politically provocative effect on every thread the account posts to. If you want to stick around and use HN as intended, we can rename the account for you if you email hn@ycombinator.com.
Do you have some data to back up the theory that they all paid themselves huge bonuses? Most billionaires lost huge amounts of money as their wealth was in the market and in real estate so when that crashed so did their net worth. The ones who paid themselves bonuses were the wall street bankers who received bailouts from TARP. To be clear less then 20% of the worlds billionaires made their fortunes via finance.
https://www.nytimes.com/2009/07/31/business/31pay.html
> Thousands of top traders and bankers on Wall Street were awarded huge bonuses and pay packages last year, even as their employers were battered by the financial crisis.
> Nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008, according to a report released Thursday by Andrew M. Cuomo, the New York attorney general.
> At Goldman Sachs, for example, bonuses of more than $1 million went to 953 traders and bankers, and Morgan Stanley awarded seven-figure bonuses to 428 employees. Even at weaker banks like Citigroup and Bank of America, million-dollar awards were distributed to hundreds of workers.
The amount of economic waste involved in people having silly arguments over their perceptions of reality would likely be a horrifying large number if one was to see it.
If a million, a billion, and a trillion are all equal, or equal to whatever big number you want them to be at any given moment, then what's the point of discussing anything?
Is this in reference to my comment? If so, I'm not seeing what you're getting at...
The real problem is that these corporations are brittle. The Fed is bailing out innefficent corporations once again under the same pretext as last time. I recall that the government promised its citizens back in 2008 that it would be the last time and now look, only 10 years later, same story; more bailouts and all corporate executives get to keep their jobs too.
The US today is more communist than China. The US tends to make fun of China's government for still calling themselves 'communists', but now the tables have turned and I wouldn't be surprised if China starts to make fun of the US for calling themselves 'capitalists'.
I don't disagree with this, but it's a shame we don't address the suffering of humans who've lost their jobs, or small businesses having to go bankrupt due to this crisis, with the same degree of urgency. I get that the Fed doesn't have the power to provide "liquidity" directly to the people right now, but they should. This is socialism/welfare for the rich, free markets for the poor.
If businesses go insolvent, what happens to _all_ of their employees? The Federal Reserve's job is to a) minimize unemployment and b) target inflation. From what I can tell, they are doing everything in their power to accomplish those goals.
I agree that more needs to be done directly for folks who have already lost their jobs or will soon, but that type of stimulus would require an act of Congress, who apparently can't get their collective heads out of their own asses at the moment.
> that type of stimulus would require an act of Congress, who apparently can't get their collective heads out of their own asses at the moment.
Yes that is the problem. I believe that the Fed's powers should be expanded to allow giving that money directly to the people, instead of only to banks and financial markets.
If we really cared about minimizing unemployment beyond simply paying lip service to it, we'd institute a job guarantee.
Thank you for putting it so well. Keeping the corporate bond market going does not sound like a noble goal on its face but it's vital in so many respects.
I appreciate (and indeed once shared) the knee-jerk libertarianism of the people saying "let them fail", but this view does not fully appreciate the consequences of allowing a violent deleveraging such as we're experiencing now to continue indefinitely.
There's no indication that they would actually deleverage if bailed out in this fashion.
FFS, these "strong businesses" are so extremely fragile that they are liable to go bankrupt because they can't roll over some of their debt. And now the Fed just wants to let them roll it over again consequence free.
Exactly. If your business was so dependent on rolling over bonds that you go bankrupt/de-lever massively in a 3-6 month window... how strong was the business?
I don't think its unlibertarian to support the Fed's action here. If the Fed was a private organisation, that convinced people to use dollars by promising to maintain steady 2% inflation, then it would be printing a lot of money right now. So the government not printing a lot of money right now would actually be a greater intervention away from what would naturally happen.
A libertarian purist would say that money creation shouldn't be government controlled; but given that it is they should at least do a good job of it.
We've been writing corporate America a hall pass for quite some time. With many of these, I'm sure it's time to say "We'll loan you the money, on the condition the government owns you if you don't pay up." And if there is any company trying to lend more than their value...just end them - they've effectively become a cancer.
And of course this is all just emotional paranoia.
None of those things are real except as emotional gates on social agency so the privileged under the law can get first dibs.
Remember Thiel & Trump, probably the rest, really believe romantic notions like tough guys must rule as “that’s the way society has to be because that’s how it has always been”.
Trump literally said it the other day and Thiels ramble was posted here recently.
> It is 110% not good to have any major corporation go into a technical default.
Too big to fail, eh? If that were true, there is no point having technical bailout as a possible state for companies to be in. Just remove it as a legal option and given them a permanent exception from having to do anything if the situation arises.
The justification is flimsy. If the businesses were any good they wouldn't need a bailout. They'd get new owners ad carry on as before. Capitalists are perfectly capable of putting an operation on ice for a few months for all that it would be painful and disruptive. Businesses go bankrupt because they are bad businesses and the economy is signalling the resources should be redeployed.
I can agree that the bailouts are going to happen; but these bailouts have been set in stone since 2008. Once 'give money to the wealthy and powerful to preserve the status quo' was identified as an acceptable solution it was going to become the default solution to any and all crisises. Someone could have come up with a better plan in the last 10 years but there was no incentive to.
>> We are talking about companies which have plenty of assets and strong businesses.
If their businesses were so strong, they shouldn't have taken a loan that would jeopardize them so easily. The Fed should let them default and take all their cronies down with them. Give the system a good clean by wiping out the parasites.
A lot of these so-called 'strong' companies had been using debt as a way to evade taxes... And now that their highly unethical schemes are about to crumble, we bail them out?
The Fed are aggravating the 'too-big-to-fail' problem. They're turning every corporation into 'too-big-to-fail'. If we continue down this path, we'll end up with communism. It will be the worst, most perverse form of communism ever invented.
This line of thinking is so much in fantasy land. Here is what would really happen:
1. Lots of businesses would fail, and we would experience another great depression. 2. You don't like populism now? The risks of outright fascism (beyond what you could say we already are experiencing) would go up exponentially.
The main problem with the Ron Paul acolytes is they think that society wouldn't have a massive breakdown in the face of an extremely deep depression - it would just be "the smart entrepreneurs would buy up the assets and build something better!" - but they never talk about how they would deal with the breakdown in democracy and basic government systems that would be a likely result.
>> 1. Lots of businesses would fail, and we would experience another great depression.
We need a great depression. Every depression brings new opportunities.
Have you considered the other side of the story? There are many people who have been locked out of opportunities (especially millennial) and who have been struggling to start or grow their own businesses for a whole decade because they could not compete against corporate monopolies. The failure of these corporations would be a huge opportunity for them.
>> 2. You don't like populism now? The risks of outright fascism (beyond what you could say we already are experiencing) would go up exponentially.
It's better to have fascism officially if that means everyone will be subject to the same rules and same level of hardship.
Every decade or so, with regularity, the world seems to go through a significant economic or financial crisis triggered by some or other "unexpected" shock:
* The current crisis, starting now, in 2020;
* The global financial crisis from 2008 to the early 2010's;
* The dotcom, telecom, and tech bust of the early 2000's;
* The Asian debt crisis of the late 1990's;
* The Latin America debt crisis of the 1980's;
* The oil shock and stagflation crisis of the 1970's;
In each of these crises, a significant swath -- or all -- of the world's financial infrastructure has seized up, requiring government intervention to prevent collapse.
A natural question to ask is whether the financial infrastructure we have today has been well-engineered to be robust to these remarkably regular shocks.
Judging by the regular seize-ups, it doesn't seem to be.
I mean, actions by the Federal reserve and congress are both part of the system so it's a little unfair to say the system should work without government intervention.
Particularly this time around, healthy and well run businesses following reasonable best practices are being decimated. And why shouldn't they? A large percentage of our economy was just shut off.
Add in leverage - which isn't inherently a bad thing - and suddenly you have a recipe for disaster with a system wide increase in debtors needing to default.
We need government intervention because the free market solution to half of businesses being forced to close, is for those businesses to go under and their employees to starve and their banks get squeezed and so on
> healthy and well run businesses following reasonable best practices
A business with zero debt financing would not go bankrupt during this crisis, but they would still have to lay off employees in the meantime, and those employees might "starve" without another source of income.
I really, really don't understand the need to bail out companies here. If the problem is a loss of income for the employees, then strengthen unemployment insurance. If the underlying business was sound, then it will start back up again when the crisis is over. If the owners of the business were leveraged and cannot sustain debt payments during the crisis, then they can go into bankruptcy protection and emerge with new ownership.
> A business with zero debt financing would not go bankrupt during this crisis
There are fixed obligations that can exist outside of debt financing. Rent, for example, is one that everybody is familiar with.
Anyways, I generally agree that helping the employees is more important than saving the businesses. If a business does die, it hurts some current investor or proprietor and benefits some future investor or proprietor after the crisis is over, with some efficiency lost in between as assets are sold off and eventually bought back up (and probably you get a better off company in the long run as a personal opinion).
I'm just saying, it's not necessarily some moral fault that a business doesn't have the structure to survive the a pandemic. This is outside of normal recession-preparation.
I think the current argument is that the fastest, easiest, simplest way to help employees, is to make sure they don't get fired. And the easiest way to do that is to make sure the businesses don't feel the need to fire them (to either cover those fixed obligations, or to plain shut down). Give the businesses 8% more cash (by removing payroll tax), you might allow the business to survive a month-long slump, and not fire anyone.
This would seem a good strategy if the issue was simply a month of lost productivity, with an otherwise healthy business. And where the game theory would lend itself towards the business owners knowing this, and so choosing to not fire anyone. And where the 'lost efficiency' of shuffling around ownership would be significantly greater than the short term loss. If those are not true, and the business then fires its employees anyway, it really was just a gift to the business owners, and would be a failure.
You are framing the situation as if there only would be two options; do nothing or pump trillions of dollars into financial markets. But there is a third option. Use those trillions of dollars to take care of the people hurt by the crisis. Provide unemployment benefits and free healthcare to the people affected. The money could also be used to fund a jobs guarantee program. For example, to construct a high-speed rail network or to build homes to solve the homelessness crisis.
No, I'm not.
" actions by the Federal reserve and congress are both part of the system"
Normal actions by the Fed are not tantamount to bailouts.
The Fed exists just as much to bail out the rich as it does for anything else.
It's a massive and existential form of systematic inequality.
'We need the government to intervene' - ok, but then 'we' also need to take ownership of said companies and allow the feckless investors to eat dirt.
Then maybe they can price in risk more effectively, which is what recent market rallies indicate they won't do.
Imagine what stock prices would be without the looming guarantee of bailout ...
So, what are the probable and worst case scenarios? Right now, it's hard to cut through the hyperbole.
Nobody really knows because the virus itself carries so much uncertainty. That's why market volatility is so high- 2 weeks of lockdown? Two months? A year? Oh it's ending next week? Nobody knows
Worst case you can just imagine up some great depression 2.0 where all confidence in the economy is gone and nobody has jobs , or maybe a government so intent on preventing this that it causes hyperinflation. I don't think either of these are particularly likely
If there is government intervention every time, naturally there is no reason for anyone to implement robustness measures.
What happened before fiat currency allowed governments to step in, in the way they do now?
> A natural question to ask is whether the financial infrastructure we have today has been well-engineered to be robust to these remarkably regular shocks.
Of course it isn't. If you go back in history even further, the pattern continues. That was the reason why Keynes' General Theory was developed. But people still refuse to believe that the instability is internal to the (capitalist) system. The economic theory needs to move away from equilibrium towards fully dynamic models, for example those that Steve Keen is developing.
People are terrible at grokking cycles with periodicity greater than about 1/10th of their lifespan I've noticed.
Something about the lure of "everything will be different" and subpar internalization of the lessons of the past just seems to end up causing unholy amounts of pain in the long run.
How does injecting money solve a problem that’s not caused by lack of money? This market downturn isn’t a lack of liquidity, or a lack of money, or toxic assets like the mortgage backed securities.
People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money.
Printing money isn’t going to create customers for businesses effected by this pandemic.
It stops the stock market slide. Which is more valuable than political talking points. Eventually these bankers are going to start doing some math and see that with 0% interest rates and unlimited firepower on Treasuries, there’s going to be massive pent up demand after this medical crisis is solved. Money will be lent to everyone, including airlines and leisure companies because there’s simply no where else to put their money. Inflation be damned. Market is always looking 6+ months ahead. And the moment bankers see a light at the end of the tunnel, this thing is going to take off like a rocket ship.
I think it's just as likely that the markets will simply stop performing any sort of useful price discovery function, leading to huge misallocations of productive resources -- resources we desperately need right now.
This is actually the goal, to prevent price discovery and to make it less likely that the political system would require firms to use adequately cautious levels of underwriting capital.
The perverse incentive for firms is that the more accurately they structure their financials to be highly vulnerable to systemic risk, the more likely it will be that the decision to do so will be rewarded by policymakers.
Simply put, capitalism isn't capitalism without firm failure and an very clear winners and losers when unexpected events occur. The US economy, which people think is capitalism, is nearly as nationalized and intertwined with government capital as China's economy.
In my view, if we're not going to have capitalism, then we should have a system that is significantly more fair and generous to those in need. If average peoples' life savings are at risk, so too should be banker and executive bonuses (and even jobs).
One can only imagine how much stronger the US economy would be today if the 2008 crisis had led to the smart decision makers being rewarded and the stupid ones being bankrupt. Instead, we had the opposite situation, where the stupid investors got bailed out and the smart ones had their well deserve gains slashed by government policy.
i don’t disagree with your points at all, but just want to point out something i think a lot of people may not be thinking about in these scenarios:
maybe govts are looking at their economies not just as systems of production but literally matters of national security, i.e if an economy looses its largest producers of certain products and industries, it looses a huge amount of economic leverage and hegemony... by bailing out companies temporarily they can be saved, and at least in theory recover faster without becoming vulnerable in the short term
letting companies that are over leveraged or inefficient die may be more “capitalist” (and lead to stronger economy long term) but practically speaking it would most likely be unacceptable damage to a sovereign nation like the u.s
just imagine the u.s without general motors or chrysler or ford for example...
(just to note, i’m not qualified to opine on whether this is good policy, just stating my understanding)
I'll admit that I think national security justifications used by politicians are often quite lacking in substance.
From an economic perspective, we need to think about what our economy is "good at". Generally speaking, when there is demand for something, the economy successfully figures out how to supply it.
With bailouts, there is very little demand for the expertise needed to package and re-sell parts of failed companies to the highest bidder. If Ford had been allowed to fail, perhaps Tesla could have purchased crucial IP or hired entire teams.
The legacy of Henry Ford's entrepreneurship is not the Ford name, it's in the firm's unique business acumen and many years of experience creating excellence. If the larger business (effectively a holding company) called "Ford" fails, the sub-units still have significant value, and the world is better off if that value can be utilized by more capable managers in other firms.
The bailout of Ford effectively punished Tesla, punished consumers, and even punished employees, since their lot is largely a function of the wisdom of those formulating the strategy, something that Ford did poorly enough that it deserved to fail.
> The bailout of Ford effectively punished Tesla
that’s a good point, and well taken
i guess the other side of it is, if it’s easy for people to find another job, and/or there is a sufficient safety net, then it’s also probably easier to “just let the companies die”... but i think our system is basically run by those with the money to direct resources in the other direction unfortunately....
That honestly happened a while back with the shift to longer periods of VC funding.
Whether true or false, VCs make up a tiny, tiny fraction of the market, so their influence is minuscule when we're talking on such a global scale.
I mean it’s just digits in a database.
Price discovery sounds useful until you realize that the important thing is to just make enough food and meds for everyone, and the rest are mostly details.
That is asbolutely wrong.
Price discovery is the thing that tells people to make food. It is the thing that tells people to make meds.
It's also the thing that tells people to continue making and doing things that people need and aren't meds and food - like keep cleaning the streets, keep up basic sanitation, continue making the electricity run, etc.
I agree generally with what you say, but I think that the fed is not threatening price discovery but addressing a huge danger to it, which is an abnormal demand for credit. At all times there needs to be a certain amount of credit for people and business to function and in a crisis, demand suddenly spikes.
This has nothing to do with the stock market, it's to prevent the credit and treasury market from seizing up. The treasury market is not acting well, the spreads between bid/ask is really high...and this is supposed to be the most liquid market in the world.
Lack of liquidity is just firms stubbornly trying to force this kind of move to happen. Yes, marking down prices based on actual demand would result in a financial loss for some firms (and likely insolvency due to lax underwriting requirements), but there are also winners in that scenario who should be rewarded for anticipating the future.
It stops the stock market slide.
Apparently it doesn't, markets are down, in spite of the promise of infinite money.
I think whether we bounce back quickly will depend on how the next few months go and whether countries manage to contain the virus in time or it starts to overwhelm healthcare systems.
> Apparently it doesn't, markets are down, in spite of the promise of infinite money.
All of the funny money in the world won't answer these questions:
1. will a given firm exist in 12-24 months?
2. will anyone want to buy anything from that firm (or that firm's customers)?
3. when will anyone want to buy anything that is not the roof over their head, food or toilet paper?
this is not about helping the stock market or even helping banks. it's about making sure corporations have enough liquidity to make payroll and basically function at all day-to-day, which depend on short-term lending markets that are now at risk of freezing.
Why not use new cash to massively scale up healthcare resources and prevent such crises? Giving more money to leisure recreation companies is just kicking the can down the road, we must have strategic reserves of epidemic response. This should be higher priority than nukes, aircraft carriers, or enriching stock holders...when do actual citizens lives' matter above mere dollars and cents in rich people's accounts?
> Why not use new cash to massively scale up healthcare resources and prevent such crises?
This should be the job of the federal government, not private investors. At other times we've had better support for these functions of government; the current administration in the US is not so friendly to such silly things as disaster management agencies.
> It stops the stock market slide.
This doesn't seem like a huge public health issue, but it is.
Stopping the market slide gives the public health officials like Dr. Fauci a bit of breathing room. Continued stock market slides will cause politicians to panic and demand lifting of restrictions, even if they're the only thing helping right now.
> Continued stock market slides will cause politicians to panic and demand lifting of restrictions, even if they're the only thing helping right now.
Or .. and hear me out .. we can ignore the fucking stock market and move to address the public health emergency as our sole concern. The stock market right now is tens of thousands of market participants running around wearing flaming underpants on their heads.
The bond/credit market - yeah, that has consequences. The Fed is already intervening there.
> we can ignore the fucking stock market and move to address the public health emergency as our sole concern
We can. Can Trump? Is he capable of that for more than a week or two?
A panicked President worried about reelection makes bad choices.
The problem isn't caused by a lack of money, but it's creating one, which exacerbates the crisis.
Current problem is that money right now will be evaporating when loans default.
The financial system is built on itself so that loans create money. It does not expect to come to a grinding halt. If it does, loans aren't repaid, and money literally disappears. Deleveraging occurs. Wealth disappears.
I think the aim is that we don't lose money from defaults over the short term.
Issuing loans is risky, and the price of borrowing should reflect actual risk. The US economy is moving to a more and more highly leveraged scenario where all firms avoid worrying about systemic risk because it's profitable to do so since they know they will be bailed out when the inevitable occurs.
If the government wanted to so decree, they could decree banks could not forclose on bankrupt customers and must restructure loans. They've already done that for rent and mortgage agreements in many areas where people are hard hit by this. That would stop the loss of money right there.
The market is demanding liquidity to be able to manuver an uncertain future; this has caused an effective collapse of the credit market due to demand. Much like there's no TP on the shelf, there's no credit on the shelf; the fed however can print a lot of money if it wants to which ironically enough, can then be invested to print TP. If everyone has cash in the bank account, they feel secure, and that in of itself will stop the stock market from collapsing further.
The way they avoid inflation is by providing loans at a rate under the rate of inflation; free money, but it has to be paid back and over a reasonable term. This will expand the amount of money in the economy for a time.
History will remember this as is a perfect storm; the medical industry has been a tremendous burden on government and employers backs in the form of an unscrupulous blackbox of spend. A couple million deaths especially of elderly patients is going to upend the medical industries cash cow and at the same time force a hard look at what the industry is doing to be prepared for pandemics like this one. If you have cash going into this downturn, now's the time to start plotting where you are going to invest it for maximal gains.
> If you have cash going into this downturn, now's the time to start plotting where you are going to invest it for maximal gains
If much of this money is effectively going into the stock market - either via credit to public corporations or direct stock purchases by the Fed - is that most likely where maximal gains might occur?
Not having to pay for the care of some amount of elderly and some amount of people who were in bad health for whatever reason is sadly a positive outcome of this whole mess.
The savings to pension plans alone...
but isn't loans defaulting (risk) the original reason for having interest?
Yes.
And that’s why it’s so close to zero - because there’s the gov/fed safety net.
There actually is a lack of money because the usual lenders got scared.
Also, there is no situation so bad that it can't be made worse, and companies laying people off makes it worse. There are bills to pay and people still need to buy food.
I guess the idea is to keep companies solvent so they'll still be there when the quarantine restrictions are lifted.
Why can’t they survive by issuing corporate bonds?
And as far as I know this Fed policy isn’t to buy failing stock it’s to inject cash overall through treasury bonds, since the Fed isn’t allowed to buy stock.
> Why can’t they survive by issuing corporate bonds?
The purpose of the Fed policy is to make coporate bonds (and other lending/borrowing) more attractive.
Because:
1. Nobody would buy them.
2. Small biz doesn't have access to corporate paper markets, even in the best of times.
How does the current Fed strategy help small business right now? If anything, it seems like this strategy will leave larger companies in a position to soak up those small businesses' market share when this is all over.
Indirectly, by avoiding a liquidity crunch.
Specific direct aid is called fiscal policy, and would have to be enacted by Congress (or possibly to a limited extent by the executive): reduced taxes, direct payments or credits, loan guarantees, government spending, other economic policy.
The Fed's tools are monetary policy, and manipulate the overall money supply. That's a powerful, but limited, power.
The Fed is set to announce small business loans very soon. This is just part of a larger plan.
I'm really curious how startups are positioning themselves for the availability of such loans. Might the terms be so favorable that it drives out the VCs?
Unlikely. Even in these troubling times the fed likes to have assets backing loans. Maybe an SBA program could be competitive but not in the near term.
>> 1. Nobody would buy them.
Sure they would. If you price it correctly.
>> 2. Small biz doesn't have access to corporate paper markets, even in the best of times.
Not true. I am a SMB owner and have secured a LOC for my business as well as refinancing of my house personally. It's out there. Just at prices you might not like. But then again, we aren't guaranteed good prices. Or at least, we shouldn't be.
Have you looked at the credit market this month? It’s in shambles as yields are soaring. It’s not that higher yields is bad. But moving so quickly is dangerous. Bonds, etc are necessary to maintain supply lines, pay people, etc.
Where are yields soaring?
Here it looks like they are going down:
https://www.treasury.gov/resource-center/data-chart-center/i...
It wouldn't surprise me if the 80 year bond bubble popped this year, but I don't see that happening yet.
The same reason mortgage rates are up even as treasuries are at an all time low. Who wants to loan money in this environment?
Have you looked at BBB bonds? A lot of companies have been downgraded because the conditions have changed so dramatically, driving yields up as well.
I see, thanks!
When do you think it will translate to treasury bonds crashing? I can't imagine them having 5 more years, but on the short term they can easily go to negative yields.
Corporate bonds.
An environment of high yields should be the reward for people who made hay while the sun shined.
If we're gonna have socialism, let's have socialism for the poor and capitalism for the rich and not the other way around.
If companies don’t have customers, as you noted in your prior comment, how will they secure debt financing at a reasonable rate?
Because the lenders know that they will be profitable after the virus has passed.
I'm not sure if I agree. Restaurants are low margin businesses to begin with and they might not be able to sustain a high interest loan even in the best of times.
> How does injecting money solve a problem that’s not caused by lack of money?
Not an expert on this but decreased money velocity (the thing we witness right now) can be seen from the outside in fact as "lack of money".
If low V is due to businesses not being able to get loans when they're sound, sure, that could be called a problem of lack of money.
If low V is due to exogenous factors -- like a virus making their products ultra-low-demand -- then no, that's not a problem of lack of money.
> This market downturn isn’t a lack of liquidity, or a lack of money, or toxic assets like the mortgage backed securities.
There absolutely is a lack of liquidity, that's why you see all these stock sales.
To name just one example, lots of companies have been buying back stock on margin because of extremely cheap loans. That stock is now worth far less, the loans keep maturing, new loans are harder to get and more expensive. So how do you raise cash? Sell stock. The cycle continues.
How did we get there? Not being over-leveraged in times of cheap money is a competitive disadvantage.
> People aren’t going to stores, restaurants, and airlines because of SARS-CoV-2, not a lack of credit or money.
They are also not going to work in many cases, supply chains have been disrupted, production has been slowed. That's a lot of income that has either disappeared or been put into question. That income is supposed to turn into spending, that spending is supposed to be someone else's income. It's a vicious circle.
The problem isn't so much what people are doing now, but what they're (not) going to be doing months down the line, and the uncertainty surrounding that.
> Printing money isn’t going to create customers for businesses effected by this pandemic.
Pretty much every business is affected by this pandemic. Without injecting liquidity, a massive wave of bankruptcies is going to follow suit in short order and the whole economy is going to go tits up.
You can argue that liquidity shouldn't have been injected in the past years during "the greatest economy of all times", but that milk has been spilled.
People aren't not going to stores, etc. because of the virus. In WA this weekend, with lockdown theater in full force, there were tons of groups eating outside restaurants on benches and grass out of takeout containers, hiking trailheads were overflowing with cars, running in a city park near my house was impossible because of the crowds (larger than on a regular sunny weekend). It was really inspiring to see (from a position of a person who absolutely disagrees with lockdowns, even if the worst case exponential spread was the alternative).
Imagine what the economic impact of the virus alone would be if there weren't lockdown pleas all over the news, social media, even highway signs. It would be close to zero now, and if Spanish Flu teaches us anything it would be negligible even at the peak.
So, the government is killing the economy. Hence, the government is also trying to prop it up. I suspect it won't end well either way.
The credit crisis just beginning is what locks in a protracted difficult recovery. As you can see though the market agrees with you.
There are certainly money problems as we speak. Millions have already lost their jobs.
I bet lenders are getting nervous wondering if they're going to get their money back. "when you owe the bank $10k you have a problem, when you owe the bank $10B the bank has a problem".
I fail to understand why any economist would prefer QE over helicopter money. Give everyone a check. If they need it to purchase everyday goods and services, great. If their everyday needs are fulfilled already, they will invest that money into stocks, bonds, treasuries, etc, adding the needed liquidity to the market.
I understand if you're against the idea of giving people money. But this is just giving money to mostly the rich. Neo-trickle down economics.
> Give everyone a check
The Fed doesn’t have the legal authority to do this. That’s why the Congress is passing stimulus bills.
The Fed is focussing on our liquidity problem. That keeps solvent companies from going under due to illiquidity.
Congress, and helicopter money, are needed to solve the solvency problem prompted by demand destruction.
More specifically:
- The Fed operates under a dual mandate. It is tasked with managing both inflation and unemployment.
- Its mechanisms are "open market operations" (the purchase and sale of assets, usually government bonds, though occasionally other securities), "the overnight window" (a lending operation for banks needing cash, lent at a benchmark "prime" interest rate), and bank reserve requirements.
These adjust the total amount of dollars in the financial system, the basis for interest rates (the cost of renting money), and the multiplier by which banks themselver create money through loans.
Why wouldn't helicopter money solve the liquidity problem? Imagine you're a rich investor and you get a check from the government. You see a Company X that is suffering from liquidity issues but otherwise is doing great. Company X's stock is now plummeting because of fears of its insolvency. You, along with other investors who also received checks from the government as part of this helicopter money policy, decide to buy Company X stock. Company X is now better able to do an equity capital raise thanks to the money that you have injected.
Is the argument that the Fed is better than private households in being a distressed investor? Or that wealthy households would decide to cash in the check from the government and literally store it under their mattresses instead of investing it (directly or indirectly) and add to the liquidity?
I think the real answer to your question is politics. Helicopter money is a political question in a way that QE is not. The question of what social programs we have, and what they cost, who gets them, etc., has been a major issue already in the 2020 election, and people are already drawing parallels between cutting checks in this crisis and a UBI for example.
The Fed can do this at all right now because we created a body of subject-matter experts and deputized them to pull the trigger without having to check with anyone. This is a rare thing in a democratic government, and is possible mostly because we have given them boring powers that only wonky people bother to even read what they are. Even then, a few people read what they are and complain about them, so even that is a bit perilous.
If you wanted the Fed or a Fed-like mobilization for the helicopter money you first need to make the process of getting $1000 boring, or wonky, or at least politically uncontroversial so that people accept an unelected body of bureaucrats outside the government process doing it unilaterally in the middle of the night without telling the rest of the government. I would not rule out those conditions being the case at the end of this crisis, but they aren't the case at the beginning.
But the way we solve political problems (or, more recently, the way we don't solve them) is through Congress, which is an inherently slower approach.
> Why wouldn't helicopter money solve the liquidity problem?
One, it is not targeted. The Fed can pump vast quantities of liquidity into the heart of the credit markets in a way private actors aren't set up to.
Two, it is not fast enough. Companies will go bust while waiting for politicians to authorize a cheque, the Treasury to cut it, investors to cash it and then to identify and decide upon an investment.
Three, it isn't reliable. Investors trust the Fed's discount window will be open in a crisis. That knowledge, itself, stops many runs before they start.
Four, it's riskier. Helicopter money cuts cheques. Once it's done, the money is out the door. The government is never getting it back. If they sent out too much, we'll have inflation. Monetary policy involves collateralized loans. The collateral limits downside. And unwinding a loan is easier than raising taxes to drag surplus cash out of the economy.
I think if there was proper planning in place, you could have money sent out to people in a day, especially the demographic that would most likely be investing the extra cash. People already electronically pay their tax returns. Payments are taken up by the next day if you so specify; there is no reason to believe the same thing can't be done in the reverse direction. You don't need to physically cut checks for everyone, only those who specify or can't be reached with other means. Betting against investors to be able to quickly find investments is almost like betting against capitalism itself. If you're slow to invest, then you'll lose out on making money. Additionally most people while thinking of something more specific to invest in will probably be depositing this money into a generic savings accounts at first: while this happens, banks will be able to reallocate this capital to fit their needs.
If I knew that the policy was going to be that every time there is a liquidity crisis people will be getting checks (or electronic payments), then I wouldn't be scared of any runs in the same way. Again, is the argument that the Fed is better than private households in being a distressed investor?
Helicopter money can be taxed back. I know that is unlikely but so is the probability that the Fed's balance sheet going to zero: https://fred.stlouisfed.org/series/WALCL.
Ah finally someone who understands basic economics. This is exactly right btw
This is about making sure rich people don't lose money. It's not about helping people at the bottom.
And that, most of all, is what needs to stop.
> I fail to understand why any economist would prefer QE over helicopter money.
It's not either-or, it's both-and.
* https://twitter.com/paulkrugman/status/1241690862448529408
The most recent episode of the Neoliberal Podcast covered this in layperson's terms. Despite being pro-helicopter money, they point out that the bureaucracy to do so isn't in place and that there isn't precedent/procedure for FED action of this kind. So for now the FED is using all of the tools it's used to and waiting on congress to act, hopefully with helicopter money but it will be slow even if the current arguments around constraints are resolved.
Is this, in some sense, by design?
Not by design from the FED, but yes, it's by design.
Helicopter money has many other desirable characteristic, like a much short lag to get into the real economy (so the government can adjust it with an easier to control bullwhip effect) and its wide distribution meaning that it distorts less one market or another.
There are very few reasons to explain why a government would make money creating so unconstrained that banks actually do not create as much as they can, and allow interest rates to go negative, instead of going for the helicopters.
Absolutely.
QE is revenue neutral or positive. They buy an asset with created cash, and sell it later for a small profit.
Helicopter money is revenue negative and the created cash cannot be recovered.
QE is revenue neutral in theory just like helicopter money along with taxing that same amount back on a future date is revenue neutral in theory. In practice it is more like "buy $4 trillion worth of assets with created cash and never be able to sell it for fear of creating a liquidity crisis": https://fred.stlouisfed.org/series/WALCL.
And they buy assets at whatever price is required for the financial institution to remain solvent. At least, that's what happened during the mortgage meltdown.
Sure it can: tax it out of existence. Or apply deflationary monetary policy; braise interest rates, increase reserve requirements, or sell bonds.
We're about to see what works best, it appears Denmark is doing a multipronged approach that includes paying reduced salaries for the entire working population of Denmark for three months. https://www.theatlantic.com/ideas/archive/2020/03/denmark-fr...
Right. And I don't believe any "stock buyback exclusion" the President and/or Congress would ask for would have any teeth at all. We're definitely going to see the money being used for bonuses and buybacks. The rich can't help but use any opportunity to get themselves richer.
I asked a similar question in a similar thread recently. The answer that made the most sense was that the Fed feared future inflation. If you've done QE then you can just sell the stocks again when you want to limit inflation. But if you've done helicopter money then you're stuck.
The Govermment has something called ‘taxation’ in case that happens.
Really, the Fed has something called "raise interest rates" in case that happens. Something they've been wanting to do since the housing crisis and the primary reason they can't is that there hasn't been enough inflation, and raising interest rates against low inflation causes deflation (which is very bad).
Congress could do everybody a huge favor right now by printing quite a lot of money and handing it out. Which would address the deflationary forces created by the demand destruction of the coronavirus in the short term and allow the Fed to actually raise interest rates after the pandemic is over.
So the Federal Reserve is admitting to a Martingale strategy. Interestingly they’re the one entity on the planet that can pull it off at scale.
It's not going to work much longer. We've already seen the Fed make moves that are significantly beyond what it did in 2008, and since 2008 firms have been aware this would happen and have been less risk-averse as a result.
Creative destruction is nearly absent as an engine for growth in the US economy, and we are all suffering from the lack of innovation that would otherwise occur.
Hadn't seen this language used to describe the everything bubble, but it fits. There's no gambler's ruin when you have an infinite supply of money.
shudder
> Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.[9] The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.
> With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other "blue chip" stocks. The tactic was similar to one that had ended the Panic of 1907, and succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing with it down only 6.38 points for the day.
...On October 28, "Black Monday,"[10] more investors facing margin calls decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 12.82%
This is exactly how it should be done, by private industry and individuals, not the government.
Awful policy. The fed needed to hold off on this and the previous rate cut until Congress finally passed a useful bill. Powell had all the power to force Congress to act and he's blown it again.
The Fed's job is to keep the value of currency steady and support full employment, not to play games with Congress.
The dollar index is well within its normal range.
No amount of buying corporate debt will keep people employed.
This is to artificially reflate asset prices.
How can the Fed support full employment if governments are forcing people to stay inside and business to close?
By making lending to the closed businesses so attractive that they can stay open over the course of the quarantine. (Likewise people can stay fed.)
But that's not what this is doing at all. This is keeping existing corporate debt artificially priced.
Unless they lower rates to negative, new debt isn't getting any cheaper.
If the fed plays politics, the politicians will play politics back, but harder.
Wrote a thread about a different perspective of the Fed. I want to gently suggest that your concept of what the Fed is, is not correct. It’s complex, and a very unique government/private entity, but it certainly is explicitly not supposed to respond to any sort of political influence.
https://mobile.twitter.com/elamje/status/1242129602040008704
Additional coverage:
https://www.washingtonpost.com/business/2020/03/23/fed-unlim...
https://www.nytimes.com/2020/03/23/world/coronavirus-news.ht...
https://www.wsj.com/articles/federal-reserve-announces-major...
https://www.foxbusiness.com/business-leaders/fed-takes-actio...
https://www.ft.com/content/b71f0c32-6cfb-11ea-89df-41bea0557...
https://www.theguardian.com/business/live/2020/mar/23/market...
https://www.reuters.com/article/us-health-coronavirus-usa-fe...
(Feel free to add others here.)
> The Fed will be moving for the first time into corporate bonds, purchasing the investment-grade securities in primary and secondary markets and through exchange-traded funds.
The only step remaining is for the Fed to begin buying stocks. The Bank of Japan has been doing this (by buying ETFs) for some time now. That bank now owns ~80% of the Japanese ETF market.
So: my investments remain in very bad shape, inflation skyrockets, meaning my current net worth as well as future earnings are far lower. What does this help someone in personal terms?
Hard to say, but if FED does inject a lot of liquidity into the market, it's possible that the stock market will re-flate. So if you have equities and other hard assets (gold, real-estate, bitcoin etc.), you might do good in the future.
Market inflation expectations are currently below the Fed's 2% target.
Not for long.
What makes you think that? People said similar things in late 2008 when the Fed greatly expanded its balance sheet, and then inflation went negative for the next year.
There was great inflation in financial assets, for the whole decade leading up to the current crisis. So there is a good chance the same thing will happen again, now that the central banks have taken the big guns out. I keep hearing that the FED (and other CBs) our out of bullets, but I think they have unlimited bullets. If you inject enough liquidity even a dead horse will bounce back; and for an example of that, you can check out the Venezuelan stock market (https://tradingeconomics.com/venezuela/stock-market).
So you're making the opposite prediction to the person I originally replied to? Investments will gain value faster than the cost of living?
Inflation is a loaded term, so I replied to mention that asset inflation was high, even though that is not reflected in the reported inflation numbers. As for you second question, I think the answer is yes, because for now I see CBs injecting money through the financial system. If the CBs start handing out checks directly to people, then we might see the CPI going high as well, in a more correlated manner with investments.
Yeah I really don't get how people can uncritically repeat that inflation is low. There is a massive asset inflation bubble as you've said. And consumer goods should have been naturally going down in price, from all the outsourcing and cost cutting. Instead tons of manufacturing jobs went to Mexico/China, making items of lower quality (eg disposable rather than repairable), while all the purchasing power benefit of this was erased by policy. The price inflation is clear when you compare domestically produced goods, good quality tools, non-GMO produce, food from local farms, commercial equipment, etc - quality we used to take for granted now costs a hefty premium.
The Fed kept interest rates artificially low for the past decade such that everyone could dance around a stock market bubble, and now they've backed themselves into a corner. Rather than let interest rates naturally rise as the bond market is currently signalling, they're making further moves to suppress them. Fundamentally they're continuing to undermine the distributed decentralized economy, and reshaping it into a centrally planned one revolving around who gets access to newly created money.
If you were like the wealthiest 0.0001% -- you would have vastly more wealth/assets than you could ever accumulate by laboring. In this case, everything you mentioned is good. For everyone else, it's bad.
If you're retired, this is possibly good for you. Reducing bond yields to 0 is usually very bad for pensions and retirees... But maybe you've got a lot of equities?
How does the fed determine which corporate bonds to buy and how much it's willing to pay for those bonds?
Unlimited money cheat activated
It seems like at some point you have to let a wound bleed. If we keep bailing out bad investments every black swan event, you're never allowing for a correction. Eventually the accumulated amount of bad business would be too much for the gov't to save. To borrow from biology, it seems like we're constantly interfering in the process of autophagy.
Unfortunately there's no political capital to be saved with such a decision.
I was watching the Dow futures.
They literally went from -700 to +400 in 30 seconds.
And somehow the Dow opened lower still, it’s like lighting an unlimited pile of money on fire does nothing good, almost like there is a health crisis instead of a monetary one..
This feels like we're watching bitcoin.
There's way less volume during this time.
Opened -400 on the Dow anyway
This warning is from the Bible, written well over 2,000 years ago.
"Woe to him who accumulates what is not his—For how long?—And who makes even greater his own debt! Will not your creditors rise up suddenly? They will wake up and violently shake you, And you will become something for them to plunder" Habakuk 2:6,7
Every financial crisis in recent memory is caused by excessive debt by some party.
- Consumers - Homeowners - Financial institutions - Corporate institutions - Governments
It's stunning how poorly this problem of excessive reliance & use of debt has been tackled by governments and regulators.
That, despite debt being well known as a source of financial meltdown for centuries!
Even with all the research, regulations, and rules on the book, this well-known problem of recurring debt crises has remained unsolvable by world leaders.
A major change that's gone at least partly unreported: since 2008 we have made the final steps toward a fully backstopped market. The market before was always somewhat backstopped, but now I think it's safe to say that everything big is backstopped.
That means we've moved toward a financial system with one single point of failure at the top. It's got quite a lot of mass and weight, but if it fails everything else does. This is not dissimilar from the Chinese model, which means America is now (perhaps unintentionally) copying China.
This also means short sellers should beware: even if you are nominally correct, the market may defy your logic because something else is backstopping everything.
Spend 11 years buying back stock instead of saving anything then immediately bailed out at first sign of trouble.
Private profit, public risk. 'Tis lame.
Let's add another floor to the house of cards!
Keep in mind they're only able to buy US treasuries and mortgage backed securities. If Congress changes the rules to allow the Fed to purchase stocks, we'll be in for some very interesting times. It could be that we get an economy of zombie companies, or valuations soar beyond what we've come to expect as normal. In any case, this is unprecedented and in my opinion not the right move. They're sacrificing our future in order to inflate stock prices now so that the current president can get re-elected.
> They're sacrificing our future in order to inflate stock prices now
You're trivializing the issue. It's not just "inflating stock prices". Credit markets that are required for the basic functioning of the economy have completely frozen up.
Companies that are completely solvent can't meet short-term obligations because the commercial paper market has frozen. Money market funds, which are basically savings accounts, have fallen below par despite only containing short-term high-quality bonds that would never default in any reasonably scenario. Repo markets are forcing mortgage providers to de-leverage positions (which will in turn lead to foreclosures) based on the fact that there's no liquidity for the collateral. International trade for basic and necessary goods in the supply chain has grinder to a halt because banks are no longer extending trade finance.
Whether you like it or not our economy is completely dependent on having a well-functioning "money market", where short-term bonds, notes, and IOUs from high-quality issuers are used interchangeably with cash. And it's been this way for at least 150 years. Once the money market stops functioning economic activity grinds to a halt.
At least in 2008, there was maybe some moral hazard argument against the Fed intervening. From 2001-2007 banks and other financial institutions were playing fast and loose with their risk. Maybe in 2008 it might have made sense to let banks stew in the financial crisis they created to teach them a lesson.
But in this crisis what would be the point? This is a pandemic that came out of nowhere, that nobody could have possibly been prepared for. "You guys should have really had a contingency plan for global quarantine" doesn't make sense. I'm not even that big a fan of the Fed, but if there's any time ever to print money to prop up the economy, it's in the middle of a literal global pandemic when the government can already borrow money at zero percent interest.
bill gates saw this coming in 2015 [1] and proposed many solutions so we could better prepare including assembling a medical reserve corps, simulated "germ games", and investments in medical R&D along with increased investment in 3rd world health infrastructure to stop the infections before they spread
also many asian countries were better prepared due to their exposure to mers/sars [2]. so there was a precedent and influential people calling for change
but investing health infrastructure is not the Fed's job, that is congress/government's job - AKA the job of corporations through lobbyists who have no incentive to do any type of preparation, just perpetuate the consumption cycle
the fed is just responding to an economic crisis by trying to bail water out of a sinking boat, but they don't have the power to actually rebuild/fix that boat
[1] https://www.ted.com/talks/bill_gates_the_next_outbreak_we_re...
[2] https://www.ft.com/content/e015e096-6532-11ea-a6cd-df28cc3c6...
“bill gates saw this coming in 2015“
Let’s not make Gates the hero here. Most people working on infectious diseases knew about these problems.
Most people in general. Every time ebola started in Africa, there were information campaigns. But as long as you don't touch and it doesn't mutate, nobody cared much for some poor uneducated africans.
Everybody just thought it won't happen during their life/term, like some big asteroid impact. Well, not anymore
> the commercial paper market has frozen
This is similar to when companies continually complain about a "talent shortage" from not able to hire people, when the real reason is that they just don't want to pay market rates. There is an easy answer to obtaining business credit - pay the current interest rates, which have gone up due to uncertainty. Instead, the Fed is telling everyone that interest rates are even lower because they want to perpetuate the stock market bubble.
No, it's not. There's literally no bid on some issues of commercial paper and MBS. Literally nobody is offering to buy these securities at any price.
And we're not even talking about speculative assets here. We're talking about things like 30-day collateralized notes from Microsoft. Do you really think the market is "pricing" that Microsoft is likely to go bankrupt in the next 30 days? Or is it more likely that there's a huge shortage of money relative to the liquidity demands imposed by the dislocations.
Despite their destructiveness in earlier decades, I'm willing to loan Microsoft cash for 30 days for double my money back. Where do I buy?
> would never default in any reasonable scenario
Our reality is about to stray pretty far from any reasonable scenario.
Yes, you're right. The guys at the top collect all the benefit, and everyone at the bottom absorbs all the risk.
The Fed is also buying corporate bonds as of today: https://www.federalreserve.gov/newsevents/pressreleases/file...
Let's see how this is going to play out!
https://thesoundingline.com/do-not-allow-the-fed-to-buy-corp...
> Which companies will the Fed give free money to? Which companies will they allow to fail? How low should corporate borrowing costs be and for which companies? How much debt should they allow each company to carry? What if companies issue bonds to buyout competitors? What if a company defaults on the Fed? The Fed can’t answer any of these questions. That won’t stop them from showering America’s largest and most indebted companies with free cash
Look at the ECB they are buying stocks for quite some time now.
https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.h...
"The SNB (Swiss Nation bank) is the 35th largest investor, on average, across its top 50 holdings. In most securities, the only firms with larger investments are big asset managers like Blackrock and Vanguard, which hold investments for many individuals and institutions. That means that the SNB is the largest individual fund, bigger than any hedge fund." [1]
[1] https://qz.com/1140322/check-out-the-swiss-central-banks-ins...
and BOJ https://www3.boj.or.jp/market/en/menu_etf.htm
The scale of BOJ's ETF purchases is quite something.
A foreshadowing of all developed country central banks’ actions.
It’s only a matter of time before the Fed, BOE, and the ECB do so at similar scale.
Incredibly disappointing as an educated investor that you must be judicious about asset acquisitions and allocations, and yet central banks just make the money printer go brrrrr when they deem it necessary (something, somewhere is always “too big to fail”).
What would you prefer? 20% unemployment?
Anyway, central banks don't really do asset allocation -- they buy the least risky assets they can. Their real goal is to keep the currency from deflating.
I'd rather see the government become employer of last resort, than investor of last resort. With some kind of 30 hrs of work and 10 hrs of skills/education training. And a couple hours week of mental health/addiction services optionally. With some kind of medical and other benefits.
I believe the issue with the gov being the employer of last resort is that you end-up with a fat, inefficient government. What politician will dare to fire all the redundant workers once that crisis is over? You can see this issue in ex-communist states.
Why fire people? wouldn't companies be able to lure workers away from the government with better pay and benefits? The government could offer some kind of incentive to companies where the government pays the person for some length of time and they work for a private company for free as long as the companies keeps that person on for 1 year or something like that.
That doesn't really happen in the real world. People are reluctant to change jobs. Especially if they need to support families. They would rather vote for the guy who promises them higher wages and fat pensions rather than to vote for the guy who promises incentives to work (again) in the private sector(and then risk the insecurity being fired<again>). Once you hire in the public sector is really hard to get rid of them.
https://en.wikipedia.org/wiki/New_Deal
We’ve done it before, and it worked. So much so that they instituted presidential term limits, as FDR served four terms he was so popular.
Whoa there with the false equivalency. Helicopter money would be more helpful than propping up the wealth of the top wealth brackets using price floors through broad scale asset purchases. Literally give away hundreds of billions of dollars to citizens who will spend it right this minute. Have the government be economic demand of last resort to steady the ship until people can actually move about again. There will be no inflation to speak of due to how GDP has plummeted over the last few weeks.
Monetary velocity > asset price protection. The stock market isn’t the economy, people producing, consuming, and exchanging fiat in the process are.
This.
Can someone with some financial background refute this? Why is buying assets a better idea? In concrete, non-abstract, non-hand-wavey, laymen terms, how is it going to make the Average Joe get through this crisis? How is it going to help him pay for his rent/food/etc in the next 2-3 months, and potentially longer when he possibly will have no job?
Legally, the Fed can't do that. Only the government can. Anyway, the Fed is mostly buying government debt or government-guaranteed debt. By buying up the existing debt, this creates space for the government to borrow and spend on supporting Average Joe.
Alternatively, the Treasury could print money and mail it out to Average Joe. But then there's no way for the Fed take the money out of circulation if we get inflation.
> The stock market isn’t the economy, people producing, consuming, and exchanging fiat in the process are.
You might get tarred-and-feathered if you keep speaking like that. Be careful ;)
Judge me by the enemies I’ve made.
What do you think helicopter money looks like? The Treasury borrows a bunch of money from the Fed, and then sends it out. The Fed ends up owning large amounts of Treasuries. The only difference is that the Fed isn't waiting for the Treasury. If the Treasury starts writing checks tomorrow, it's effectively helicopter money.
I find it funny that while I am actual economist, whenever I comment on my actual area of expertise, I get voted down. Random topics where I know nothing, I get upvoted. Actual expertise, voted down.
> Keep in mind they're only able to buy US treasuries and mortgage backed securities.
They announced they will buy municiple bonds also.
https://www.cnbc.com/2020/03/20/the-federal-reserve-is-expan...
> If Congress changes the rules to allow the Fed to purchase stocks
Corporate bonds first. If that fails, then stocks. Baby steps.
They're already buying corporate bonds: https://www.federalreserve.gov/newsevents/pressreleases/file...
Why didn’t congress have to approve the munis?
They’re government securities.
> Keep in mind they're only able to buy US treasuries and mortgage backed securities.
It's those MBS that were the real problem. Total panic on Wall Street with those, because everyone is so heavily tied into them and with all these unemployed people, foreclosures are going go through the roof.
Now that they can offload them to the Fed instead of trying to sell them for pennies on the dollar, it's all champagne and caviar back on Wall Street.
These are agency MBS, which are already backed by the US government, so Wall Street was already pre-bailed-out on them. They already had that champagne and caviar.
There's already a 2 month freeze on foreclosures. If they give checks to Americans, it'll go to mortgages most likely.
This is absolutely bonkers territory. 10,000 years from now, I wouldn't be surprised if archeologists find money between the rock layers.
We already have zombie companies with 10 years of 0 rates.
This was exposing that.
Once you start with this shit, you never get out of it. The market starts pricing it in, and if you ever try to back off, asset prices fall, and that's the end of the world to the 0.001%.
See us with 0% rates since 2008. See Europe with negative rates since 2012. See Japan since 1989.
We will have a zombie economy if this happens, just like Japan.
it's not so our current president can get re-elected (Fed is largely independent of executive branch) but to prevent massive riots, social unrest, and ultimately a large amount of human suffering now at the cost of pushing it down the road
Agreed, these actions are to prop up the existing economic system.
It's my opinion our economic system needs a major overhaul, one that is preppered to address real situations like this without setting unrealistic growth expectations across the board and better stabilizing the majority of the workforce/labor market.
This national economic stress businesses are feeling is quite similar to the stresses a large portion of the US workforce/families feel every single day/week in respect to future financial stability, risk valuation, growth, etc. It's about to get even worse for most Americans and may strain mass acceptance economic policy and acceptance of our system. That questioning of the system may be a good thing.
I don't think a knee jerk correction where many are hungry, suffering, rioting, without healthcare, etc. is the way about correcting these problems to be clear.
It doesn't seem like the issuees we're seeing will gradually self-correct (concentrated wealth, increased wealth inequality, massive barriers to entry in markets, declining workforce/labor economic growth, ever consolidated market share to fewer big businesses...)
Perhaps this is the invisible all-knowing hand of the market self-correcting?
American Gosplan.
> or valuations soar beyond
Can you explain why you think Fed purchases would cause stock market soar instead of decline to slow down a little?
It is expected that they change their mandate and start buying corporate bonds directly
https://thesoundingline.com/do-not-allow-the-fed-to-buy-corp...
Regarding the zombie companies. A high stock price wouldn’t keep a company from going bankrupt. They could try to do a capital raise but that’s going to raise a lot of eyebrows if the fed is buying your newly released stock. I’d be curious how that works.
"Fed to lend against stocks and bonds in bid to stabilize markets"
https://www.ft.com/content/cf485398-689d-11ea-800d-da70cff6e...
From the article: "The Fed will be moving for the first time into corporate bonds, purchasing the investment-grade securities in primary and secondary markets and through exchange-traded funds."
Wouldn't this mean that FED, which already has the control over the money supply, can now go and buy companies with the money it creates ?
If you define FED as a private entity - this sounds like theft.
If you define it as a part of the government then you are transitioning to socialism (government ownership of means of production).
Neither of these sounds like something that would be acceptable in the US political system - am I missing something here ?
The Fed doesn't control the money supply. That's the job of the Treasury.
By controlling the amount of loans made to banks, the Fed controls the money supply. Money is created out of thin air (without a printing press) by issuing new loans, which is what the Fed does.
It's not socialism if the poor unwashed people don't get anything for free. /s
”When there is pressure for leaders to respond to problems or crises, they often simply intensify their efforts in their particular defined sphere of activity – even if that’s not relevant to the real problem. To do otherwise requires taking on entrenched practices and asserting power in areas where it often will not be well received. And leaders tend to see major crises more as threats to their own position rather than as systemic challenges for the societies that they govern or the institutions that they manage.
Frenzied grand constructions, wars and great rituals are among the common responses of ancient leaders to crises. These demonstrate powerful responses by the leaders (enhancing their threatened hold on power), but almost never really address the problems themselves. A cynic might characterize the giant U.S. stimulus bill of 2009 as such an effort.” -Arthur Demarest
After the crisis is over, they’ll just do the same thing again, inflate a new bubble, faster this time, which will once again explode, and bail it out again on the backs of working Americans. There’s no learning curve at all. They think the problem is that they didn’t inflate the bubble fast enough and with enough leverage. But, this is probably what we should expect. It’s a repeated pattern throughout history that when things go wrong, leaders usually don’t try new approaches- instead they just keep doubling down on what they were doing before, thinking that the problem was that they just need to do whatever they were doing before, but more. It takes a total collapse, historically, for true behavioral change to occur. The whole society, like a drug addict, has to hit rock bottom.
I'm afraid this is another wealth grab similar to 2008 but x10 bigger. What was an international health emergency turned into another large scale robbery of the common folks.
Could you elaborate on how its a wealth grab?
Short:
There are money runs on funds causing liquidity issues. Funds sell assets to market makers for cash to give rich people their money. This causes a downwards spiral and asset prices plunge.
Now, the fed will continue to buy assets (eg. but not limited to corporate bonds which have tanked and taken out a couple firms and MMs) so that rich people can liquidate their assets.
We will be bag holders as the fed will own corporate bonds that – frankly – the existing financial system players expect to default. We take the hit and own junk so that wealthy people can extract money now.
This is the high level to my knowledge. Please add more colour and correct me if there are things that I'm missing :)
Last week US Fed bailed out hedge funds that were highly leveraged. $1.5 trillion transfer to save high net worth individuals. https://www.bloomberg.com/news/articles/2020-03-19/before-fe...
The $1.5 trillion was a fund of one day fully collateralized loans, of which only ~$100 billion was actually used. There was no wealth transfer, just the fed following its mandate to keep interest rates on short-term loans within an acceptable band.
Here's the daily totals of repo loans:
https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
Thank you for posting this, it's both informative and highly infuriating
Is the fed going to buy up the BBB- debt from firms about to be downgraded?
This is a recipe for stagflation -- economic slowdown (inevitable, and by choice, in response to the circumstances) with excessive liquidity in the market. The capital injections aren't going to open up restaurants until shutdown orders have been lifted, and even then, you're kidding if you think small businesses will materially benefit from Fed actions.
I'm reminded of this story of the Federal Reserve on 9/11: https://www.dailykos.com/stories/2014/09/10/1328813/-The-Ast...
I worked for the FRBNY for 24 years. They always took disaster recovery and business continuity very seriously. We planned (and practiced several times a year) for NYC to be gone, the northeast to be gone, and for the whole east coast to be gone.
Look out for TLTROs and dual interest rate policies next.
Can anyone with a better economic understanding share their thoughts on how viable this is? From a layman's point of view, it seems like the FED are using up a lot of their arsenal very quickly.
The only action from the Fed "arsenal" that is used up is lowering the Fed funds rate. And even then, going negative is an option. The Fed still has numerous things it can do, including helicopter money, massive expansion of QE, buying new types of assets like stock, and making loans to non-bank businesses.
I like how socialism's used to save capitalism, yet you'll still have people claiming capitalism its the only system that "works".
Yes, it "works" because it has to, i.e. there's no defined scenario of it not working, apparently nor the Great Depression, nor 2008, nor measures like these still don't mean anything as far as it not working, so it works because it apparently never does not work, no matter what.
P.S. I don't mean to claim capitalism 100% does not work and socialism does, merely that maybe we need a healthy mix of both?
You labor under the delusion that we have capitalism. We don't. We have socialism, and have for over 70 years.
We do indeed, but only for bailing out megacorporations.
Haha, money printer go brrr.
About friggin’ time...
Hope this works
Define "it works" and for whom...
The economy of the entire world is at stake and you ask me to define ‘it works’ and for whom...
The USA just went Zimbabwe
Absolutely terrible comparison.
The Zimbabwean dollar is not the world's reserve currency. Zimbabwe cannot park a naval fleet off the coast of any country that tries to move away from the Zimbabwean dollar, or direct the worlds largest banks to freeze assets, or apply crushing economic sanctions.
The US is probably the only country in the world that can print money without runaway inflation, and I don't doubt that we will maintain dollar hegemony with force if needed.
The US is absolutely not not the only country that can use monetary expansion without causing excess inflation. Basically any country with its own central bank, fully flexible exchange rates, with all Government bonds denominated in its own currency, with a decently large and productive economy, and federal taxing and spending can do it. There are at least several who meet that criteria (even New Zealand, for example).
Once you satisfy all that, high inflation just means you’re either spending too much, or not taxing enough.
A big part of what happened in Zimbabwe, by the way, was that land reforms caused a massive collapse in food production (a major part of their economy) and unemployment skyrocketed. They spent a lot in response (also having foreign denominated debt I believe), but mostly not focused on policy that would increase capacity. At the same time, they were having to spend much of their foreign reserves on food because of the supply collapse. So the spending and hyperinflation were inevitably consequences of previous mismanagement.
> A big part of what happened in Zimbabwe, by the way, was that land reforms caused a massive collapse in food production (a major part of their economy) and unemployment skyrocketed. They spent a lot in response
Okay.
Fed officials are predicting 30% unemployment, and we're seeing a massive collapse in goods and services production (not food, but it may as well be in a 70% services based economy) as cities go into lockdown. To respond to this, we intend to spend a lot.
I'm a bit confused as to how the current situation doesn't mirror, nearly perfectly, the Zimbabwe example. We are literally printing and spending into a severe supply (yes, services follow supply curves just as much as goods do) and unemployment shock.
> Fed officials are predicting 30% unemployment
One official said it may happen: https://www.bloomberg.com/news/articles/2020-03-22/fed-s-bul...
Here is why the situation in the U.S. does not nearly perfectly mirror Zimbabwe. One word: confidence. People have far more confidence in the dollar than they do Zimbabwe's currency. As the global financial system is currently setup losing confidence in the dollar is highly unlikely. You might lose confidence in the dollar and buy gold and I might do the same but we aren't the people whose confidence the dollar's value relies upon.
I'm not an economist but as far as I understand these things we won't get hyperinflation as long as there is confidence in the dollar as a currency.
Yeah, the US is the only country in the world whose debt is dominated in its own currency. Want to sell me some goods and services in exchange for an IOU of one whathisface buck? Countries around the world have been answering "yes" for a century and now the inflation tax will be levied against everybody, not just Americans.
No it’s not... All Government bonds in my country are denominated in $AUD (by AOFM policy). Japan’s are in Yen. The UK’s is in pounds, etc.
If a meteor was headed for the earth tomorrow, the president would get up in front of the nation and say, “my fellow Americans, we have created 100 trillion dollars of imaginary money in a database in upper Manhattan, so everything will be fine..”