What Steve Mnuchin Saw

What Steve Mnuchin Saw

Most citizens in advanced economies aren't accustomed to economic suffering. That's a generalization, of course. Every nation has some poverty, and there's a case to be made that America has far too much of it considering the US is the richest nation in the history of the world. A testament to that: America ranks inexcusably low on various lists of societal achievement including, unfortunately, childhood poverty (figure below). While it's obvious that everyone can't be rich (if everyone's r
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12 thoughts on “What Steve Mnuchin Saw

  1. The same old story writ large. We just can’t stop digging our hole because, as H has described time and again, not enough of us are willing to sacrifice for the greater good. The climate disaster happening before our blind eyes is going to bury us in that hole before long. As a species we really haven’t learned anything since our ancient relatives cut down the last tree on Easter island.

  2. Mr. H

    I appreciate your patience in allowing me to comment and pontificate.

    I was fairly early in internet adoption back about 1994, it fit my nature of exploring infinite rabbit holes, including your burrow, which I think of as a stable jumping off point, a worm hole that gets me to other places, faster.

    Seeing the Mnuchin name as part of a story immediately triggered my ingrained sixth sense esp alarm, sending me off in search of danger, or a unique connection.

    I quickly reviewed his pandemic activity and ran across a sentence about the CARES Act that briefly touch on municipal bonds, a rabbit hole I generally avoid.

    However, in our post pandemic recovery period, connected to the Ukraine invasion, the stuff I just stumbled across is very unsettling and I want to share this puzzle.

    “In March 2020, investors pulled a record $45 billion from muni funds. Municipal bond prices dropped, and the yield on muni bonds rose sharply above the yield on comparable U.S. Treasuries.

    In March 2020, the Federal Reserve made municipal securities eligible for its Commercial Paper Funding Facility (CPFF) (meaning the Fed was willing to buy short-term muni debt directly from state and local governments) and for the Money Market Mutual Fund Liquidity Facility (MMLF) ”

    That connected to this:

    “Volatility Returns in Muni Market’s Worst Quarter Since 1994
    Benchmark yields saw biggest jump since April 2020 on Tuesday
    State and local debt has lost 5.5% in 2022: Bloomberg indexes”

    Which connected to a review of 1994 history @ wikipedia

    “Some financial observers argued that the plummet in bond prices was triggered by the Federal Reserve’s decision to raise rates by 25 basis points in February, in a move to counter inflation.[4] At about $1.5 trillion in lost market value across the globe, the crash has been described as the worst financial event for bond investors since 1927.[1][5]”

    Which connected to this from today:

    “The ICE BofA Treasury Index has recorded its worst start to the year in history, down 6%.
    ..portfolio manager with the Swarthmore Group, said he had seen a “pretty big disconnect” on the short end of the U.S. Treasury curve earlier this month – in a reminder of the lack of liquidity seen in the aftermath of the global financial crisis.

    “Bonds and credit are the lubricant for the economy, and when you get the short end drying up, that’s a very big warning sign for us,” he said.”


    This seems like a fairly dangerous rabbit hole!

    1. Roughly speaking, UST yields from are up YTD
      1M 9bp
      3M 45bp
      6M 75bp
      1Y 116bp
      2Y 175bp
      5Y 133bp
      7Y 111bp
      10Y 94bp
      20Y 81bp

      Seems to me that
      – Bond market believes Fed will tighten more or less 200bp
      – Bond market doesn’t believe outyear growth will stay good
      – Bond market doesn’t believe outyear inflation will stay high

      I guess we’ll get a better read on what the bond market believes in the interregnum between QE and QT.

      1. Jyl,

        I always was fascinated by bonds but never saw them as providing a decent return. I hate to be somewhat off topic but had a few more tidbits to toss out.

        It seems like bonds are almost mirroring the early pandemic chaos with simultaneous supply and demand friction, with municipal stuff flooded with too much supply and no demand, while in other spaces it’s reversed. It’s like the normal inverse relationship functions are misbehaving. The issues of duration and convexity, which are usually complicated are now totally in new virgin territory.

        Here’s an interesting inflation context:

        “Derivatives-like instruments known as fixings imply that the headline, year-over-year consumer-price index gain for March and April will be 8.6%, up from a 40-year high of 7.9% in February. Only the March reading will be available to Fed officials by the time of their May 3-4 meeting; April’s data isn’t set to be released until the following week.”

  3. H is making a good case for universal basic income. The smartest policy to help folks out in situations like this is to help on the broad income side. By not subsidizing scarce goods but helping people pay for expenses at least relative prices are not distorted too much. So your gasoline, heating and electric bills went up $250 a month? So here is a $250 subsidy per month directly- if you conserve energy you pocket the difference- or if you want spend it on the higher gasoline, heating and electricity. Other goods of course may go up in price because of transport costs. But you get the general idea. If you want to reduce excise taxes a little to help out energy intensive users a little more- that is ok to a limited extent I suppose. Arguably folks in Wyoming probably spend more on gasoline than oh say Manhattan, NY. Help folks out but do not distort relative prices as much as possible. And per the story, perhaps you put an income cap of 400 or 500k on the income aid. BSDs don’t need the subsidies anyway.

    1. State and local systems and budgets probably can’t handle it, but in principle gas, electricity, and sales taxes (on food stamp eligible goods) could be flexed up and down to respond to episodes like this.

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