‘The Fed Will Likely Monetize The Entire Stimulus Delivered By Congress’ (And Making The Covert, Overt)
Given massive deficit spending to fund multi-trillion dollar stimulus, you might be inclined to suggest that, eventually, the curve will bear steepen aggressively as the expected supply deluge outweighs offsetting Fed purchases.
This is the "crossover" argument, and Deutsche Bank's Stuart Sparks breaks it down in a new note.
A simple chart illustrates the point. As Sparks writes, "coupon supply net of Fed purchases is likely to turn positive during Q3, even if the Fed monetizes the entire fisc
as they currently exist. It has had a monetary effect. It is soon to be understood politically. We thought we were crossing the Rubicon now. We already have crossed and it would take wild inflation and one hell of a GDP to get back to the other side. Or deflationary suicide and default. This works well while all Currencies are in tandem.
Coming soon… Suspension of Federal taxation? I mean that is one way to simplify the tax code.
don’t have to worry about inflation..because the dollar just drops to 0 the next day. Biggest threat to the fiat money scam is these MMT professors who delude themselves that it is a science, but scamming is an art.
Does it though? I mean there is certainly the element of story telling to make sure the narrative is “buyable” but as a global reserve currency there would still be plenty of international demand, especially as less trustworthy currencies embark upon the same path. Realistically though if taxes do not pay the bills… why bother collecting them in the first place? There is certainly an element of mathematical balance. Old English style balancing on gold is easy, you just buy all the gold you can by printing fiat until the price of gold rises to the set point and sell all the gold you have until it drops to the set point. Doesn’t matter how much gold you have as long as it’s enough to keep up the selling on the other side. Similar principle should apply to fiat as long as it balances on inflation. You replace gold with a basket of goods central to the economy. The trick to MMT and the likely reason for it to fail eventually would be that it’s easy to start on the print more to bring up prices but it gets politically hard to destroy money if you overshoot. That should take a little while at least though. For it to go to 0 immediately needs some additional explanation. Bitcoin isn’t even $0 today and that’s about as speculative an item as you can imagine.
Largely agree with that but would just add on thing that it not appreciated at the moment. While mesmerized by the notion of a demand side shock driving inflation toward deflation, the bigger risk is inflation. At present the inflation options market probability of inflation being over 3.0% in 5-years time rounds down to 0. The changes to globalization, the supply side inflation forces, food and other stuff, like the fact that 98% of antibiotics for the US market are produced in China are going to change. Then, there is possibility that the policy support, Fed plus fiscal 10% of GDP is not just filling a hole but chases the prices of goods higher. Here is the thing about the switch from deflation to inflation. It is never gradual. It is sudden. It happens with zero advance warning.
This analysis is flawed on multiple levels. What is clear from the history of previous QE episodes is that in the first 150 days yields rise even as CB are buying securities. While that sounds strange it is a function of a decrease in the risk preference for safety and declining asset vol which compels investors to buy riskier assets. With the Fed now backstopping credit, this is even more so today. There is also a convexity angle. Pension funds are stressed when credit and equities decline as Treasuries increase in value. It causes funding levels to plunge. This is unwinding now which is set to impact demand for safe Treasuries. Long ago, I worked with Stuart, but I am sorry this is flawed on multiple levels.
Just playing whack-a-mole right now –municipal debt is good example. 500 billion and only short term are strictures that will be too constraining. Fed either will slowly inch towards the assumption and monetization of state and local debt on top of federal debt or have taken an ineffectual half measure that will leave some levels of government sufficiently funded and others slashing services, capital projects and pensions in order to balance budgets. One Illinois is enough
While I am supportive of what the Fed is trying to do- the big picture is that one can only conclude that Pax America is going to end soon. Trump and his toadies have single handedly accelerated the downward spiral of the US as a major power in a little over 3 years. We will be seeing a changing of the guard geopolitically very soon. The US is going to be a regional power in world politics. That is it. Our economy and population cannot support 2 major wars in Iraq, one major war in Afghanistan, a kleptomaniac in power now and government policy with little rhyme or reason.
Insane.
No it’s not. It’s correct. Objectively and completely correct.