Among other steps, this is likely to mean:
- Negative-yielding long-term treasuries
- Direct purchase of stocks or ETFs, which would require congressional approval. Expect the discussions to start soon.
The steps already taken and the ones to be taken will create financial manipulation on a scale never before seen.
If the Fed loses this fight, game over.
This isn't the Fed's fight. Monetary policy won't fix this.
For example, one of the variant of debt cancellation I hear about is the proposal by Sanders and Warren to cancel all student debt. Isn't that extremely unfair to people who chose to not go to college because tuition is costly? Isn't it unfair to people who put financial prudence in front of needless consumerism, by saving more to pay down their student debt?
All finance is done, of course, with pure equality!
The people who didn't take student loans haven't had to live with them. They had more years working, with better pay, and without loan interest - they got nothing for their decision! Certainly not a piece of paper that entitles the holder to work in a job unrelated to their studies and without any useful pay bump.
> They had more years working, with better pay, and without loan interest - they got nothing for their decision! Certainly not a piece of paper that entitles the holder to work in a job unrelated to their studies and without any useful pay bump.
Not sure what you're talking about here. People who gave up on college gave up on in demand skills, higher future income, and got more stressful and demanding jobs.
I heard a good saying awhile ago. You shouldn't look into your neighbor's bowl to see if they have more than you, only if they have enough.
Student debt is not a good thing for our society. It's not a good thing that people made decisions based on having or not having such debt. If we rip the bandaid off we'll help millions of people, at the same time creating massive stimulus at a time when it is most needed. It's no more "fair" to do that then it was fair to bail out the bankers in 2008, the difference is the people getting bailed out will be immensely more in number and productive in their usage of the money.
The state of student loans in the U.S. obviously isn't even remotely as despicable as chattel slavery, but it's still deeply immoral and not far removed from loan sharking + debt slavery. Ignoring the moral aspect, it's just wildly counterproductive and detrimental to society (particularly since the generation who allowed this to happen - the baby boomers - never had to deal with this themselves.
A better solution still would be a one time initial handout to all us citizens over 18 years of age of 100k$, and then every us citizen that turns 18 100k$ of free money they may use however they see fit.
The fed has an important role to play of course, but they’re really a sideshow this time around.
No they are not. Most big European banks are technically bankrupt. Most big American banks are technically bankrupt too. The only reason people in general do not know about this is because they used a lot of financial tricks to make it look like they are healthy.
In fact, Deutsche Bank very likely had to announce that they are bankrupt this very month due to the fact they never learned from the former crisis -- causing a shockwave throughout the entire financial market worldwide, if not for COVID. Now they can just blame COVID when the entire financial system tanks.
Here's a video explaining what has been going on in Europe all these years. It will not be different for the United States (or certain parts of Asia for that matter) -> https://www.youtube.com/watch?v=Cu6Em4a4pG4
> In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.
Interesting time to be waiving reserve requirements of banks.
If you’re shooting for something like “TARP for Main Street”, this is a suboptimal path based on the incentives and historical behaviors of these regulated entities. Get the money velocity back up to speed ASAP.
Edit: We could’ve had the infra in place to plug into banking, credit, and IRS data for companies, to enable rapid analysis, decisioning, and funding of operating accounts in times of crisis as part of the US Treasury Dept. Perhaps next time.
If you are a bank in fractional reserve banking, who had a 10% capital requirement that is now lifted, you just got 10% more money to use to make money when it is getting increasingly hard for everyone to make money. And you think banks are gonna say, "nah, we wanna stay safe, we'll just sit on our hands"?
I agree with you that monetary policy is not enough, we also need fiscal policy. That said we can't say the Fed isn't trying to do their part.
Banks want (mostly) safe returns. “Borrow at 3, lend at 6, at the golf course by 3”, as the saying goes. You need action by an institution that prioritizes rapid injections of cash to accelerate monetary velocity over conservative lending practices, and where saving the economy (and we are clearly at the precipice as indicated by how fast the Fed is moving) takes precedence over appeasing shareholders.
Disclaimer: My opinions are my own, and in no way, shape, or form that of any employer past, present, or future.
> Sheila Bair, a top U.S. banking regulator during the 2007-’08 global financial crisis, said the Federal Reserve needs to quickly shift its focus to getting credit flowing to U.S. businesses crippled by the spreading coronavirus and workers losing their jobs.
> “They are throwing money in the wrong place,” Bair said of an unprecedented move by the Fed on Sunday to slash benchmark rates to zero and start a $700 billion Treasury- and mortgage-bond buying program.
> “This isn’t a financial crisis — at least not yet,” she told MarketWatch on Sunday evening following the Fed’s announcement, which drops the target U.S. benchmark rate to zero and aims to shore up liquidity for banks and investors in the $15.6 trillion Treasury and $8.5 trillion agency mortgage bonds markets.
> “Lowering interest rates to zero doesn’t help if businesses can’t pay their loans back and they don’t have cash flow,” she said. “We need to get help out there, especially to small businesses and people already losing their jobs.”
You're quite correct that this is a fiscal and not monetary crisis, as I commented up-thread, but that doesn't mean it won't have monetary impact and implications. For example as I pointed out the primary problem is cash flow for companies and households, but that also means they may not be able to pay back bank loans when they otherwise would and that will impact bank balance sheets. It's a secondary issue, but still a real issue that banks need to have the flexibility to absorb.
pulled numbers absolutely out of thin air.
I thought the issue was money sloshing around at the bottom, a couple hundred bucks can be a big deal when you're out of work.
Ah well, I'm sure the experts have it well in hand.
I think American finance would rather we end the world right now than give money directly to those who need it without Wall Street getting a cut.
But again, this is just Sunday afternoon armchair quarterbacking.
It is very last measure as in that point you are basically admitting that capitalism has failed.
1. it might be better to prevent a situation of people unable to pay rents and mortgages and have the entire banking system collapse on this enormous liquidity trap. That could mean end of capitalism for sure
2. from capitalist point of ciew, you can look at helicopter money as a dividend. Companies 'give out' money to shareholders and Alaska and Saudi Arabia give out oil money to citizens too.
The current government is considering doing it again too as you say. Though of course, since they were in opposition last time they've spent the last decade saying how it was such a terrible idea last time.
Helicopter money seems reasonable to me. Depending on how it's delivered, it could act like a temporary UBI.
All the quantitative easing has just brought us a giant bubble via asset price inflation. All I know, the bigger the bubble, the louder the blob. If central banks should do something, than finance entrepreneurship and start-ups, bring money to the people.
"It is very last measure as in that point you are basically admitting that capitalism has failed."
No, it has not. The boom-bust cycle is a feature of capitalism. Capitalism, call it a ponzi driven debt scheme, will only fail, if no further economic growth is possible anymore. This may be caused by energy limitations (wealth and growth are linked to Energy available) or other limiting things. Trust me, you don't want to go there. Some people call it seneca cliff.
Capitalism fails all the time. I use the market for lemons as my default example . It's ok. It the market works pretty well, and it's a good starting point for lots of situations. The problem is sometimes it doesn't. We know about a bunch of situations where it doesn't work so well, so we have regulations and such.
It's an extraordinary situation. I find it odd they're not implementing extraordinary responses. I guess, locally, we are taking extraordinary action with closing non-essential events and locations.
I guess I don't see much value in interest free loans for most people. I guess maybe personal loans? I don't quite see how I can get my hands on 10k interest free. We'll see.
I guess the Fed isn't accountable to the US public, so their job can be whatever they want it to be?
A big part of that is trying to avoid the 'bust' part of a boom-bust cycle.
As evidenced by your post, the fed should not be accountable to the public because the public cannot be expected to spend anytime trying to understand what they do and their methods of action.
The thing is you can't avoid the bust part, you can only soften it in a way it is not harmful for (some) people.
When they pumped the price to astonishing heights till 2015, what they did in 2018 was too late.
Yes, inequality is a massive economic problem. Yes, we need to find a way to fix it. Spouting poorly formed conspiracy theories about financial markets is not the way to do it. We weren't holding rates low to inflate equity markets. The fed doesn't care about equity markets more than any other economic gauge. We were holding rates low because we were trying to minimize unemployment and there were no signs of inflation.
When we started getting nervous about inflation, we started increasing rates, and selling off the balance sheet. That didn't go terribly well which is we stopped.
The fed is a completely apolitical institution that works very hard to monitor and assist the economy. They are academics, not billionaires. Their sole purpose is to make sure that you have a job and don't have to worry about the price of milk increasing 200% in a week.
Both of those things have been called into question this week, neither is because the fed didn't increase interest rates quickly enough.
I'm not going to assume anything about your political leanings, but I do want to address this. I have heard a lot of Bernie supporters spouting the theory that you just told me. The irony of that is that he wants to put labor reps on the fed. You know what labor reps would push for? Super low interest rates to weaken the dollar and increase manufacturing activity. Their position is completely contradictory.
On the other hand, US was growing a steady 2% and had record low unemployment before this. If US can flatten the curve, with only ~3000 cases thus far, US will recover quickly and come out way ahead. And the sideline cash will rush into US
Also 3000 confirmed cases does not mean 3000 actual infections. Depending on the model, the expected number is orders of magnitude higher.
I live in Shanghai. It normally takes about two weeks for things to go back to normal after Lunar New Year ends, which was two months ago. Things are not yet back to normal. Maybe 30% of office workers are back at work, 50% maximum. Gyms, bars, restaurants are almost all still closed. The dental hospital is still closed. You can basically write off February and at least half of March for economic production.
How is that any different than saying 2 months out of a decade is 1.7%??
That's exactly what it means. 3000 cases of positively identified infections in individuals, if you want to get more wordy. Some of those have recovered, some have died. Still the number is over that today.
Here in California as of today -- if you have a cough, and a fever, you will not be tested unless you have had international travel or known contact with a victim. This I know because I've spoken to two doctors and a nurse through Aetna.
FYI the governor of Ohio estimates 100,000 people in Ohio are infected. So there is that.
No, it's a correction.
>> > Also 3000 confirmed cases does not mean 3000 actual infections.
This statement is factually incorrect.
> The relevant measure is number of people infected no the number we happen to know for sure because we finally got around to testing
That is irrelevant to the response I gave. It seems to be a popular interest today, in trying to clarify a concept, which is unrelated. I am done engaging with this derail.
Yes, if practiced as intended, which there is no guarantee.
Did Italy do that?
Perhaps not as quickly as they should have. The rest of the world is learning from Italy's experience (they should have been paying closer attention to China, but that's another story)
Another thing to realize is that these numbers you are seeing are WITH CONTROLS. Sure, "only" 3,000 Chinese have died. Maybe it's more than that, it's hard to trust Chinese numbers. But even at 2x or 3x, that's far cry from the millions it could have been, had China not both imposed extreme controls to limit the spread of the disease AND allocated emergency resources to healthcare.
Some models show realistic scenarios where 5 million Americans die within a year, if the virus is allowed to spread at its maximum rate.
That would imply 100% infection, at a base reproduction rate of 15 (close to measles), and a mortality rate of 30% (close to Ebola).
If left unchecked covid-19 would infect 100-250 millions Americans. The R0 is 2.5-3. The average mortality rate is said to probably be closer to 1% rather the 3.4% previously advanced, so 1-2.5 millions deaths, which we will hopefully never reach if people follow the current social distancing and self-quarantine guidance.
That would implies 100% infection, at a base reproduction rate 15 (close to measles), and a mortality of 30% (close to Ebola).
Italy should not be looked to as a model of how to handle this.
Edit: S&P futures limit down at 5:15.
 If you disagree, picture this scenario: everyone went about their business as usual, vastly larger numbers of cases are reported with corresponding deaths, healthcare providers are hopelessly overwhelmed, the public starts to panic... and economies are still shutting down but due to fear.
Ultimately the Fed can give a lot of help here, but can't fix the underlying problem. Easing credit for businesses will help get some through to the other side but it won't replace lost revenue.
Things are going to be very volatile for the foreseeable future. Non-Farm Payroll data released in a few weeks time would have had the househould sample conducted last week, so we may not know the full impact on unemployment until May, realistically.
The treasury purchases will fund the government to help industries which are badly affected from going under, companies with cash flow issues, and employees who need to take time off - which they already announced on Friday. I think $500b will be the beginning, will likely be much more needed
- The fed became a huge driver of liquidity from from 2016-2018
- There was a noticeable increase in market toxicity when they started letting assets roll of their balance sheet in 2018
I'm more optimistic about the impacts of their role as a liquidity provider than I am about their role holding down the effective overnight borrowing rate.
I'm likely on the younger side of the hacker news demographic and I still believe that this is the right action to take at this moment.
We might be stuck paying it off for awhile, but I would rather deal with an inflated fed balance sheet than an entire generation of Americans coming of age during a giant economic pullback.
The odds of this action working out well now are slim to none. Then when it's actually needed they will have to do it again. You'll end up with the same non recovery recovery where people are barely getting by but certain asset classes are inflated to the moon.
They had to do rate cuts now because it takes a long, long time for them to work (measured in years rather than months). That was a preventative measure, not a band-aid.
Look, guys, I promise you the fed knows wtf they're doing. These guys live and breath to be ready to respond to these type of emergencies.
We should be far more worried about (the lack of) policy responses from DC. DC has no idea wtf they're doing, and it shows.
Isn't that the same thing we were told in 2008?
There's no possible way this could go wrong.
If the fed hadn't announced that action last night then the hell that would have rained down on Monday would have gone down in history with Lehman and Black Monday.
So a lot of things have changed, at least in the US, that make the infrastructure of resilience possible in a way that was specifically impossible in 1930.
More, yes, but not much more. Agriculture, commodities, finished manufactured goods and finance were all global markets before WWI. The re-integration of markets only overtook that period in the 90s, after the fall of the Soviet Union and before that the demise of Bretton Woods and managed trade.
This seems unlikely. The Fed does not seem to be on track to contract the money supply by 30% causing a wave of bank collapses, and leading to a trade war that means international trade collapses this time. They may not pursue optimal policy but every macroeconomist knows that that would be a bad idea. The joys of limited data are a better appreciation of history than microeconomics.
Though sometimes I wonder exactly how much policy makers sophistication has evolved
Only in the sense that the fate of the world rests in inflated asset prices. That's not to say actions of the Fed cannot stabilize the markets, which is very important. But if the world is scared and scared for a long time (demand shock), there's not much the Fed can do. Then it will come down to whether or not the USG can become the "consumer of last resort" via fiscal stimulus.
The fed is pushing on a rope. Any upcoming depression will be driven by collapse in demand, not supply. Slashing interest rates won't do anything to prop spending when consumers are sitting at home, not working, and not buying anything.
All this is, is an attempt to boost asset prices, to bailout investors.
Let us say if they buy one index, will it be fair for companies who are not in the index?
> If the Fed loses this fight, game over.
It might be game over for the Fed, but not the country. For most of america's history, the Fed didn't exist and the US did very well without the Fed.
It's the same silly fearmongering rhetoric by the abusive powerful to the masses. Without us, it'll be chaos. The same argument was made to justify the existence of monarchies. Without monarchies, it would be anarchy. The same to justify the existence of the pope and catholicism. Without catholicism, it would be depravity. Abusive spouses say that their to abused spouses, without me you are nothing.
Just maybe, the cause of our financial woes are the Fed itself? Maybe if we got rid of kings, religion, abusive spouses or the Fed we might be better off.
After all, the Fed is just a private institution ( an international banking cartel ) used to parasitically leech off the american people.
More aptly, the Fed is like an anarchist who sets your house on fire and then comes to your house to "help" you put out the fire.
Why would anyone buy a negative-rate treasury bond instead of just hanging on to their cash?
Turns out that assumption was wrong for a few reasons a) holding onto money is expensive b) in many cases banks have incentive to hold government securities c) sometimes they are outright required to hold government securities d) this is related to (a), but there is risk in holding onto cash where government debt is in many cases perceived as risk-free.
The thought today is that rates can go only slightly negative for short periods of time, which we will continue to believe until some government tries to push the lower bound again.
It's the same reason I keep my money in a bank with no interest even though I sometimes have to pay ATM fees when I need it: the convenience and security offset the costs.
Negative rate treasuries can be preferred over cash because it's owed by the US gov't which has less credit risk than having your cash sitting at some savings & loans credit union in small town in Utah.
Edit: for the other replies: cash in this context does not mean physical paper money.
Why would that need congressional approval? Seems like exactly what they've done with Maiden Lane LLC
Basically fiat's appeal as an asset, its above market return, puts the private asset market in a gridlock.
It's normal for private asset returns to go negative in a crisis. Before paper money existed, losses on assets were a common thing. Your land would suffer from drought, your live stock would get an infection. You didn't stop working and shut everything down because you temporarily expected to get a poor return. You still wanted to eat something at the end of the year.
The existence of an artificial government asset that has difficulty following the private assets rate of return into the negatives, can sometimes block a large part of the private asset market from existing. Business owners choose to stop any investment, wind down their business and sit on cash. The world moves towards everybody holding pieces of paper and nobody producing anything you could buy with these pieces of paper.
Counter intuitively, in order to prevent people from holding too much government paper, you have to print a lot of it very early to make it seem less appealing.
For example, if toilet paper companies had been ahead of the curve and kept the shelves stocked, they probably wouldn't have needed to manufacture so much toilet paper because fewer would have hoarded it if it didn't look scarce. The fact that they didn't produce enough early enough, means they ended up having to produce more overall.
This is what happened in the 1930s. But as you say, counteracting it is as easy as printing money. Which normally has the disadvantage of causing inflation (this is what they were excessively afraid of in the 1930s), but when there are existing deflationary forces in effect, all it does is even things out.
The real question is, what happens to the money they print? Buying treasuries with it is the usual option, which isn't a total disaster (it pushes investment back into stocks by lowering the yield on bonds), but a better option right now might be paying out the new money as a UBI.
That would serve two purposes at once. One, you fight the deflationary effect, and two, you help people out whose businesses are suffering, both by giving the proprietors a UBI and by giving their customers one as well so they then have some more money to patronize businesses with. So instead of propping up stock prices artificially, you maintain their value organically by strengthening consumer demand.
This also provides a nice answer to the question, what do we do once interest rates are already zero? At that point we can use any additional new money to fund a UBI instead of driving interest rates negative.
From the announcement on Friday it sounded like the financial aid to companies that need it will be distributed through IRS as tax credits, or directly as cash to those companies with cash flow issues. I don't know how they aim to decide which companies qualify for the aid.
There will be several similar fiscal stimulus measures announced over the coming weeks, perhaps even bailouts.
But how much sense does it really make to have the Fed buy treasuries at a negative interest rate? They'd be paying someone else for the treasuries which they'd then have to pay interest on (instead of collecting interest), for the sole purpose of getting new money out into the economy. Obviously at that point it's time to consider alternate ways of getting the new money out there -- like just giving it out to everybody in the country as a UBI. Or if you want to do something equivalent with slightly different accounting, have Congress pass a UBI funded entirely with debt, but then the Fed monetizes the debt (and the new debt causes treasury rates to be zero instead of negative against the monetization).
Doing some kind of "targeted tax cuts" along the same lines might also work, but probably not as well, because governments suck hard at detail-oriented master plans like that and usually just end up creating a lot of harmful economic distortions. Across-the-board even distribution reduces the incentive for people to change their behavior in order to get the money while still getting the money out there, and not putting it disproportionately in the hands of the rich.
So low aggregate demand for stuff (this includes consumables but also investments stuff such as factories) is the same as high aggregate demand for money (including money like instruments such as gov bonds).
Does the Federal Reserve Bank do vaccines, now? This isn't a financial crisis. Money won't fix it. People aren't transacting in big chunks of the economy because they're immobilized by a plague.
Now... certainly once the virus is under control, economic recovery is going to depend on finance and liquidity, so it's not like the Fed has no role to play. But... it's not the Fed's fight to "lose". Until case counts are down and infection risk is negligible, we're looking at a depression regardless.
Most ski resorts in North America are shut down for at least a week, but Jackson Hole closed for the season and others are expected to follow. Hospitality and service industry workers who have seasonal jobs, are making a large chunk of their annual earnings during spring break, which is now. Already people are asking about rent reductions. How does that work? Landlord takes a haircut? Will the bank take a mortgage haircut? Who even owns the actual loan, do they take a hair cut? And if no one does, then that means the renter is effectively taking the full hit.
Maybe some of them will qualify for unemployment insurance, but I have no idea how long that lasts or what percent on the dollar it pays.
They've already lost it. It's clear they're scrambling. You can't print your way out of this is the lesson we KNEW from '08.
Printing our way out of 2008-2010 is exactly what we did that worked, and it's what Europe mostly didn't do and their results were terrible by comparison (leading to another bad recession a few years later, after which the ECB finally learned a lesson; and finally after that, Europe began to properly recover, including countries hardest hit like Spain and Portugal).
The Fed's balance sheet makes this exceptionally clear:
It took the Fed a short amount of time to ramp up the programs, including eventually moving on to QE. And it worked just fine.
See that epic balance sheet expansion in 2013 and 2014? That's the Fed avoiding what hit Europe. That's the Fed further printing our way out of the mess. It's how the US economy kept expanding for ten years.
You can in fact use the Fed to debase USD-based productivity + assets and then redirect those resources in a concentrated manner at a problem, such as the housing market. The Fed can take a trillion dollars from every holder of dollars and dollar assets, and put that trillion dollars toward a problem. This only stops working if the USD has no value (or in more realistic terms, if the USD loses very immense amounts of value, becoming mostly worthless, which makes the dollar debasement & redistribution efforts lose their punch).
The Fed bought all the toxic mortgages. They recapitalized the banks, keeping the majors and the real-estate market from collapsing under the weight of trillions in junk mortgages. They largely removed those mortgages from the market, which very rapidly helped the housing market begin to stabilize and turn around.
They successfully directly bailed out homeowners to the tune of trillions of dollars and reinflated the housing market and the stock market via low interest rates.
It was always just a band-aid. The reason the Fed has had to take interest rates so low now is that they were unable to raise them during the lastest 'boom'.
It's the Japanification of the US economy, including a similar Federal debt problem (which is the single biggest reason the Fed can never raise rates back to a normal level again).
Japan still has a highly functioning country and functioning economy (one of the wealthiest and most productive on earth), even though their central bank policies and debt situation are an enormous mess.
The US has a lot of household wealth (~$100-$110 trillion) that the Fed can debase on a perpetual basis, as a never-ending band-aid. Then there is all the other dollar based wealth around the world. They can run a never-ending $80 billion per month QE program and it'll barely scratch the massive US asset base (which over time, averaged, may well outgrow a trillion dollar per year debasement). Ideally you want to see the US Government bring its irresponsible fiscal situation under control, sooner than later, so that approach doesn't have to go on for 30 or 50 years (but nobody is going to hold their breath for that). The counter is to point out that foreign actors will pull their confidence in the USD during this process (increasing the real cost for the Fed to keep doing it), whether after 10, 20, 50 years - and that may well happen, but it's impossible to forecast when. This is especially true given the currency competitors are all a mess as well, with China overloaded with debt, Japan in far worse shape than the US, and the Eurozone with no growth and their own miscellaneous debt & economic problems.
If you've downvoted me then you probably need to watch this: https://www.youtube.com/watch?v=PHe0bXAIuk0.
This is a wet band-aid.
Also who the hell is downvoting me? LOL. If you downvote, please comment here so we can debate. I'm dying to see you defend the bull market case (even sideways to slightly up which would be best case scenario).
We don't need to merge two different ways for the financial system to collapse.
To bad for them, there's collateral damage sometimes… only the strong will survive.
I think more people would probably hope that central banks don't make bad bets anyway.
You know when you hear about Japan being this futuristic society? You go and visit and you feel like they are "ahead" and have things figured out?
Their economy is what our economy is going to look like. A short-medium term down and then long drawn out sideways market. Who knows when a recovery will be.
Good time to refinance.
Was there for a couple weeks in dec '18… kyoto, fujisan, hiroshima, tokyo… I didn't think this at all unless the "ahead" was meant in jest
> Their economy is what our economy is going to look like. A short-medium term down and then long drawn out sideways market. Who knows when a recovery will be.
So people can look forward to a 30 year bear flag? lol
> Good time to refinance.
Yeah, if you aren't already underwater facing no bids when trying to get liquid.
Tokyo is a hell of a lot more advanced than the bay area (where I grew up).
> So people can look forward to a 30 year bear flag? lol
Facetiously, I don't know what you're talking about because you look like someone from /r/wsb, but I'll entertain your comment: the markets are highly manipulated and the fed is going to turn on the money machine to pump them up again.
It's all a bubble. Until you run out things to turn into bubbles.
Have a look at any country in history that printed it's way out of trouble, and see how that worked out for them in the longer term.
Zimbabwe is a good recent one to look at.
Yes, as the poster to whom you responded to said. The United States, for some definitions of printing.
It's the kind of thing that you can do, when you control the world's reserve currency.
It doesn't really matter where that fiat money enters the market. So long as there are millionaires and billionaires at the top of the food chain who keep amassing big money without having to lift a finger, cryptocurrencies will have increasing value.
The Fed's policies have created a large and growing class of people who simply don't know what to do with their money - And these people just keep dumping their money straight into cryptocurrencies and corporate stocks.
It doesn't matter where they dump their money in fact. So long as what they're buying is more scarce than their fiat money, it will go up in price - And to many rich people today, pretty much everything which exists is more scarce than fiat money so the bar for what makes a good investment is very low.
Now, if you put value on days of human life (which you totally can do; first, as a matter of policy, you won't pay a million dollars to give a 90 year old another year of life, nor would you pay a billion to cure cancer in one teenager; second, you do it every day when you take quantifiable risks to make money or for convenience, everything from being a logger or a deep sea fisherman, to merely driving)... if you put value on human life, how much would this waste of life be worth? And how much waste of life is a worldwide recession or depression going to produce - in direct deaths, days lost by billions of people
in s terrible economy, esp. if it gets to GD levels or worse, or in the developing world where it definitely will if the economy grinds to a halt; and on top of that in purely monetary terms, as people are not able to do things from buying houses to merely making ends meet, depending on the circumstances?
At this point everybody seems to admit it's beyond containment and the only thing we are trying to do is flatten the curve and prevent the deaths. Is entering a recession, or worse a depression and risking a total collapse really worth it?
I am starting to doubt it.
PS. Frankly this reminds me of plane crash reporting. Everybody is, comparatively speaking, overreacting because the event is visible and distinct, even though many more people die in cars every day.
But yeah that's another factor against this.
That's quite an assumption!
Alternatively, as a base case we are going to have years of a recession. Evictions, foreclosures, wiped out retirements, divorces, ruined childhoods and early careers messing up millions of lives for decades, suicides, preventable deaths in the developing world where losing your livelihood is a much bigger deal, potential flare-up of wars as young men there don't have jobs, etc.
I honestly tried to think about it and the only tangential thing I could definitely predict is LOTS of people from the city councils all the way to the white house not being re-elected. Which, obviously, made me even more cynical.
He brings up the Statistical Value of a Human Life (SVHL) which is a valid point yet uncomfortable to people who are new to learning how our world functions.
Also some of us are old enough to still remember the swine flu (H1N1) and the bird flu (H5N1).
So, is saving lives worth the economic impact? I think the answer is very simple.
Would you rather lose your job or your parents?
Then, as I also said, if you are 60 and your very old mother is on her death bed, and you get to buy her one more week of life by eliminating your entire retirements savings, would you do it? If not, after that we are so to speak just haggling about the price.
Oh, and what if I came for your retirement savings because they could save my mother, that you don't even know?
There are trade-off on another level too. Recessions have very real human consequences that I mentioned in another comment. Many of them involve deaths, but many more just involve ruined lives. I'd sooner let one 80yo die than make one 40yo miserable for the rest of his life.
No. Only the UK is operating on that fatalist assumption. South Korea, China, Taiwan, and Singapore have all successfully contained it, and Italy is starting to do so as well.
> Matt Hancock insists 'herd immunity' not part of government's plan for tackling coronavirus
> Mr Hancock added: "Herd immunity is not a part of it. That is a scientific concept, not a goal or a strategy. Our goal is to protect life from this virus, our strategy is to protect the most vulnerable and protect the NHS through contain, delay, research and mitigate."
That is a lack of testing, same as what keeps US numbers depressed. India is severely lacking in cohesive response to viral outbreaks, to the point they are still dealing with a Swine Flu epidemic from 2009 (https://www.indiatoday.in/india/story/9-swine-flu-deaths-utt...)
> There is a theory that humid and warm places will not have these mortality rate
There is no scientific evidence to support this. The wild spread in the Middle East indicates heat may not be a factor.
Anyway, reserve requirements are generally not effective, including in the USA. Much has been written about this. Banks are usually not reserve constrained (especially post QE), there are many ways to game reserve requirements, there are many ways to get reserves when you need them, and central banks increase reserves systematically when they are in demand via interest rate mechanisms.
What happens now if someone deposits $100,000, the bank lends out $100k because it can, and the someone tries to withdraw their money?
This is very simplistic. 10% of what? Checking account deposits? Savings account deposits? If savings and checking accounts have different reserve requirements (and afaik they do), then depositors just moving money back and forth between different kinds of accounts can change the bank's required reserves. Banks also have flexibility on how they report their accounts.
Furthermore, the reserve requirement is enforced across a 2 week period. Banks don't need to have all the required reserves all the time, just some of the time.
And what if they don't meet the requirement? Is it that they are forced to close by regulators, or do they just pay a penalty? If it's the latter, then how often in practice do banks actually meet their requirements? Because it might be cheaper to pay the penalty than to meet the requirement.
> What happens now if someone deposits $100,000, the bank lends out $100k because it can, and the someone tries to withdraw their money?
No one's doubting that banks need cash on hand to meet the demands of their depositors, and that they need assets to use for net settlement with other banks. But cash demand on any given day is probably much lower than 10% of deposits (and afaik, the reserve requirements don't expect banks to hold anywhere near 10% of deposits in cash). As for inter-bank settlement, there are a lot of ways to get sufficient liquidity, including borrowing on the repo market and the overnight market.
Holding reserves costs banks opportunity-cost (because they only earn interest-on-reserves, which for most of US history was 0). And there is no shortage of safe, liquid assets out there (US government debt). Even mortgage debt is liquid. And there are tons of reserves sloshing around there, due to QE.
So banks are definitely not reserve constrained... not even close. But banks might be capital constrained. There's a big difference between reserve requirements and capital requirements.
But in many cases, banks might be constrained by neither. They are probably constrained by a lack of demand from lenders. There are not enough people to lend to.
That doesn't appear to be the case at least according to the Fed's website (https://www.federalreserve.gov/monetarypolicy/reservereq.htm ), which shows the most recent change to the requirements being in January - setting it at 3% for large banks.
last item, heading is "Reserve Requirements"
"... the Board has reduced reserve requirement ratios to zero percent effective on March 26"
Start of paragraph 4.
This should in no way be construed to be advice because I'm unqualified to give it. It's just an option.
A really good option during this time. My bank actually sent an email prior to the last interest rate drop, and I moved most of my savings (that I didn’t think I’d need to touch for a year) into an 11-month CD before the rates dropped.
I'm not going to put my 6 month emergency fund or the downpayment for my future house into stocks and ETFs; they're too risky. It hurts to keep it in a savings account paying less than 1% though, which is the alternative.
It does, except for when cash performs better than equities (like during a bear market).
I'm willing to sacrifice my 401(k) and retire on just SS if need be if my government is willing to help everyone worse off than me.
Promoting the general welfare is right in the preamble of our constitution:
> We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
And in the letter of transmittal, Washington wrote:
> Individuals entering into society, must give up a share of liberty to preserve the rest. The magnitude of the sacrifice must depend as well on situation and circumstance, as on the object to be obtained. It is at all times difficult to draw with precision the line between those rights which must be surrendered, and those which may be reserved.
A few days later, Lehman Brothers began to falter. Treasury Secretary Hank Paulson, who in July had publicly expressed concern that continuous bailouts would lead to moral hazard, decided to let Lehman fail. The fallout from Lehman's failure snowballed into market-wide panic. AIG, an insurance company, had sold credit default swaps insuring against Lehman's failure under the assumption that such a failure was extremely unlikely.
I was talking about starting recessions, not digging out of them, so my statement holds.
So, how does that change your view?
This means China will have a head start on getting supply up and running.
If the ROW is at a standstill in production, China will fill that gap which could further displace a lot of production in the west.
China getting containment in order didn’t bounce back but also bounce ahead in many places.
I’m not suggesting that we should move manufacturing back to US, but we should diversify. I’m seeing that some of my suppliers have already moved to other Asian countries. I expect that diversification to continue.
Unless we see negative fed rates. Not that I think going so negative we see consumer level 0% mortgages is likely.
Interest Rate = Real Risk Free Rate + Expected Inflation + Default Risk Premium + Liquidity Premium + Maturity Premium
Fed bond rates are what determine the 'risk-free' rate. A bank can have the fed hold on to their cash and it is really safe there. Safe enough, that financial markets consider it 'risk free'. This is why all of your loans are dependent on this number.
Banks add on a premium for inflation -- they want the dollars they get paid back in to be worth the same in real value, not nominal.
They also add a premium for default risk. This is the obvious one -- the riskier the loan, the more the bank will have to charge to break even over a large number of loans, where some of them won't be paid back.
The liquidity premium is kind of like a charge for FOMO. If it is hard for the bank to sell (or liquidate) your loan, they might be stuck with a your loan contract in a filing cabinet when they really need some cash. If they can sell your loan on the open market, then they'll give you a better rate here.
And finally, the maturity premium is a charge for uncertainty. A bank can be pretty certain that they know what the financial markets will look like in the short term. But for a 30 year loan? The financial market could be a much different beast in 30 years. This is a lot of risk on a bank that has their cash tied up for that long of a period.
- Many other rates in existing contracts are tied to the fed funds rate so things like existing mortgage and student loan payments may get smaller as a result of this action
- This will only work for new contracts insofar as credit risk does not materially increase (which it will in an economic downturn); banks will increase consumer spreads against the fed funds rate on a go-forward basis
It's like people complain about gas prices not dropping as much as the price of oil, ignoring that the non-oil costs largely don't go down.
Also, as something I read pointed out, the fact that people are rushing to "risk free" debt doesn't mean they are equally rushing to loan money to you, which has some risk.
So for both reasons, consumer loans aren't dropping as much as you'd hope.