wabuffo

Why has Japan had little to no inflation for the past 25 years despite running a meaningful deficit during that period? I don't know how Japan's monetary system works and haven't studied it closely, but.... there are a couple of things I would look closer at. 1) The Bank of Japan has bought most of the outstanding Japanese central government Treasury securities and replaced them with reserves frozen with the Japanese banking sector. In effect, the Japanese private sector holds very little Japanese Govt Bonds (JGBs) - in fact, very few trade every day. So the deficits go into the private sector as spending, the Japanese govt issues JGBs to replace those financial deposits with JGBs, then the BOJ buys all the JGBs and replaces them with reserves in the Japanese banking system. Reserves are stuck at the BOJ and don't circulate and that may be having an effect. 2) Unlike the US, Japan runs a large trade surplus instead of deficit. So to replace those reserves (which are frozen), it net saves in US dollars and US dollar assets by trading goods for them. It's a weird composition for the private sector in Japan as it holds more US Treasuries instead of JGBs. Its hard to inflate in a foreign currency you don't control, I would think. Those are my thoughts and I could be very wrong. I haven't studied Japan's monetary system. Bill

The inflation of the 1970s was due to the US devaluing the dollar after Nixon severed the peg in August 1971. The effects of currency debasement pre-dated 1971 and were bottled up through the 1960s and finally unleashed by the peg breaking. Sudden devaluations do that - they lead to inflation. We are in a different monetary system now - there is no peg. Volcker gets a lot of misplaced credit and in my solitary view is very over-rated. He frankly didn't know what he was doing by chasing monetary aggregates and his interest rate hikes were costly and unproductive in stopping inflation. This goes with my belief that the Fed can't stop inflation. The 1970s Inflation was broken by the Reagan tax cuts (the top Federal tax rate in the US was 70% at the beginning of Reagan's presidency in 1980 - its was 28% when he left in 1988). These marginal rate tax cuts unleashed the potential of the US economy and with that also significantly increased demand for US dollars and US dollar assets. After all - inflation is a too many dollars chasing too few goods. The Reagan tax cuts solved the too few goods problem as the US added the GDP-equivalent of West Germany's entire economy over those eight years. Just as the 1970s were the end of one monetary era (the dollar pegged to gold), we will see if the 2020s are the end of another or just the extension of it (the 10%+ deficit to gdp ratios end or continue through the 2020s leading to more inflation and the discrediting of the MMT belief in unlimited US Federal spending as a cure-all for everything). Bill

Can you elaborate? Because we just had 10+ years of massive and unprecedented deficits...and still didn't get massive inflation outside of asset markets. We did not. We had a big deficit splurge in 2008-2009 and then quickly got back to deficits that were 3-4% of GDP. The numbers are large but as a % of GDP they aren't big. Now 2020-2021 was much larger and it was more in the form of direct payments to individuals (stimmie round 1, 2 & 3) and businesses (PPP forgiveable loans). I think the key question is: Are these big deficits behind us and one-time in nature or is this the beginning of more deficit spending under this administration that will average much larger percentages of GDP? I don't know. But what I do know is that the Fed is a minor player in all of this action. The big gorilla is the US Treasury. Bill

Can you elaborate on this please? Its simple - the Federal government offers to us (the private sector) three types of liabilities that exhibit "moneyness": a) currency in circulation b) bank reserves c) treasury securities (I compare this to a bank offering you: a) cash b) demand deposit or c) time deposit.) There are three types of transactions that the consolidated Federal govt (US Treasury + Fed) does with the private sector that affects these three types of Federal government "moneyness" liabilities: 1) US Treasury deficit spending (net of taxes and fees received) 2) Federal Reserve buying/selling US Treasuries. 3) US Treasury issuing new treasury securities. Of these three, the only transaction that increases money supply for the private sector is deficit spending. The other two types of transactions with the private sector are asset swaps and change one form of Federal government liability for another and thus do not added to the total amount of Fed govt liability to the private sector. Some say bank lending also increases the amount of money supply - but I say that this is a private sector transaction that adds an asset but also a liability - and thus does not increase total private sector net assets. So the headline is - watch US Treasury deficit spending. Its the only thing that matters when it comes to money supply increases. Bill

The Fed can't stop monetary inflation (i.e., currency debasement) with interest rate hikes - let alone tapering. Bill

Definitely buggy lately....

What would need to happen for this not to get resolved in 2022? US Treasury security supply needs to increase. It would be helpful if the debt ceiling is resolved and the maximum is set at 3 trillion higher than where it is right now ($29T gross). Here's a way to picture it graphically. This is illustrative and not meant to be predictive. Normally, the US Treasury's net issuance of securities matches its net spending. (i.e., its account balance at the Fed stays constant). This has been true pre-GFC when the US Treasury used to keep a minimal balance (~$4B or so) This meant that the US Treasury's cumulative deficit spending over its long history = the amount of US Treasury securities outstanding in private sector hands. In 2021, the US Treasury started the year with a very large balance (~$1.8T) in its account but faced a deadline at the end of July because the debt ceiling was toggling back on (after a two-year) suspension. The US Treasury had to draw it down to $100b (where it was before the suspension - i.e., this was a control put in place by Congress to prevent the US Treasury doing what it did which was to run up its balance during the suspension). This chart show what the amount of US Treasury securities would be outstanding if net issuance matched the huge 2021 deficit spending of the US Treasury (orange line) vs the actual inventory of US Treasury securities in private hands (blue line). See what starts happening in an around the end of February? That's the "oh shit! moment" for Janet Yellen. She realizes she has six months to bring down the TGA. So net issuance falls while spending goes on - and the TGA starts to draw down. A huge gap opens up by the summer. This is the reason the Fed started doing its reverse repo lending (ie lending out US Treasury securities overnight which has now reached over $1.4t rolling over daily.) You can also see the point in late Sept/early October when a small relief was allowed in the debt ceiling. Net issuance surged but has now once again hit the short-term revised debt cap. Meanwhile spending continues. The US Treasury continues to create new deposits (and reserves) in the banking system - but cannot withdraw those deposits/reserves with new net Treasury securities. BTW - I think this little real-life experiment proves that US Treasury security issuance isn't really borrowing. Its not "financing the deficit". The US Treasury security issuance is an interest rate control mechanism. It removes the reserves that the spending creates. If there is no borrowing, but the spending continues, rates fall (and not rise as some of the macro dogma says). If the Fed had not begun its aggressive reverse repo operations, we would be drowning in negative rates. I think when the debt ceiling is raised (depending on how high), there will be a pretty rapid amount of Treasury security net issuance. The US Treasury has said that they would like to get the TGA back up to $750b - $1T. Add to that the Fed pulling back (and possibly letting its holdings go into run-off) and there could be a pretty good snap-back. But as the chart shows, there is a very large gap that needs to be closed - so it could take all of 2022 to close it. Bill

As it becomes clear inflation is NOT transitory how do bond yields stay low? We've talked about this ad nauseum. Technical issues this year with the monetary plumbing. Hard as it is to believe - there are not enough treasury securities in circulation for the private sector that wants them due to the TGA drawdown + debt ceiling blockage. Should get resolved during 2022. wabuffo

Biden = Carter, Powell = G. William Miller (GIK!). Disco must be making a comeback next. wabuffo

it wouldn't be at current rates without Uncle Sam's purchases. The real story in 2021 is the relative lack of Treasury security issuance (reduced supply) - which I calculate is 3-4x the factor that Fed open-market buying is. As I've documented here and elsewhere is all due to the US Treasury drastically running down its account balance at the Fed. That's gonna change in 2022 - maybe bigly. wabuffo

Going out to 2024 - 110 and 120 strikes. They're not cheap and I basically don't know what I am doing with options so don't follow me in this. wabuffo

WTF? Is Elon Musk making a hostile bid for BRK?

I must be in the minority here on the new Dune movie. Sure - special effects are more impressive (how could they not be), but the original Lynch Dune is much better in terms of story and important plot points. Hard to believe given the total running time (I'm including the inevitable part 2 here). Style over substance. Just my 2-cents. wabuffo

The debt ceiling drama appears to be temporarily over - and you can see it in the last few US Treasury Daily Statements. From a low general account balance at the Fed of $46b, the US Treasury is quickly ramping it back up to $135b in just 2 days (Friday last week and Monday). It is doing this by rapidly issuing more US Treasury securities than it is redeeming over and above its normal deficit spending. Of course, another debt ceiling crisis may still unfold in December, but I think US Treasury yields are going to start running higher. The commentators on CNBC will be confused as to why and wondering if its due to inflation or bond market "vigilantes", etc. But the real reason will have been the weird dynamics in 2021 of the US TGA drawdown. I have put on all of my TLT LEAP put positions (last one of the batch was on Monday) and will just ignore the Fed and US Treasury from here on in. It's always possible there will be another mini run-down of the TGA balance if Congress again plays games of chicken - but they will eventually raise the limit again (and again....and again). With the Fed also likely to pull back its aggressive buying soon, this will be interesting to watch. Fun stuff for us monetary plumbing nerds. wabuffo

Sounds amazing. What does it cost? Call them and find out. I will say that an annual sub is not cheap - though a lot cheaper than the other heavyweights (Bloomberg/Factset/etc) Request a trial first. Also - they have how-to videos on YouTube that give tutorials on how to use the tools. Watch them to get a feel for the functions/features. https://www.youtube.com/c/Sentieo It's a price-value thing. It's feature-rich if you are doing heavy-duty security analysis of equities. It might not be for you if you don't do a lot of analysis and just trade or buy a few stocks a year. It's also less useful for OTC stocks that have de-registered from the SEC's reporting requirements. This tool feeds on SEC reports, conference calls and published quarterly financials - so if those things don't exist then the tools get a bit bare in terms of usefulness. wabuffo

I thought I remembered Wabuffo recommending a service he subscribes to but it must have been in another thread. Maybe he can share that service name again. Its not cheap - but you were paying for Bloomberg, so.... For basic equity research - I use Sentieo. https://sentieo.com/ It's intelligent search capability is amazing. - You can search keywords and it will run through SEC filings, Conference Call Transcripts, etc and bring up information relevant to your search (plus you can customize the search with some advanced features). I use it to find liquidations, buy-outs, spin-offs, etc. Or you can search "inflation" but only in conference calls for the last two months. Bingo! It will even do charts over time that show how many times inflation came up in a conference call. - It can perform redline comparisons between the same document and show differences. Eg. compare the risk sections of the same company's 10-K year-over-year and highlight changes. I use it to compare mostly proxy statements and 10-K risk sections to flag changes to companies I own or am watching. - it's ability to create customized financial tables with its TableX tool that pulls from company's financial filings saves me a pile of work. And after you're done you can throw the result into excel. - of course, it does screening and plotting against hundreds of company financial variables.... And that's just scratching the surface of what I can do with it. I use it every day, many times a day. wabuffo

But in light of our funds flow discussion here, I believe they are saying that if the deficit spending just piles up in the accounts of people who are content to save it, there will be no inflation, just like cash piling up on your corporate balance sheets wouldn't cause inflation. KJP - I've heard Wray make this very argument in his book "Understanding Modern Money" but I'm not sure I totally understand it either. On the lighter side - it's funny to watch the macro commentators heads explode trying to square this circle: 1) inflation is running high AND 2) the Fed seems like they are throat-clearing for tapering and rate hikes -- BUT 3) Long-term yields are heading lower tonight. Huh? That's not supposed to happen? wabuffo

Are you saying high taxes would ultimately result in less work and less output, thereby driving down demand for money? (I assume you also think this effect in non-linear and really kicks in at very high rates, not moving a marginal rate from 35% to 37%.) Or are you suggesting very high taxes would push people to black markets in which they use alternatives currencies and pay no taxes, and thus have no need for government money? Yes to all of the above. I think MMTers have this blindspot to the effect that the private sector are just sheep to be herded or sheared by government spending or taxing. This is the part where I marry MMT with Laffer Curve theory. I know the Laffer Curve gets ridiculed - but I do think it has some high level applicability (ie - you get zero tax revenue with either a 0% or 100% tax rate - so all we are arguing about is the shape of the curve between those two points - probably different curve shapes depending on the type of income). I think both the Laffer Curve and MMT were revolutionary economic concepts when they were first introduced (Laffer 1978?) and MMT (early 2000s). I think even today we are struggling to comprehend just how big the fiscal capacity of the world's largest and most productive economy truly is. wabuffo

If the recipient of my spending decides she doesn't want to hold that money and instead spend it very quickly on some other goods and services, that's more GDP. If we keep going round and round this way and output can't keep up (it's presumably down at the moment as the result of COVID), then the quantity theory of money identity gets you inflation. In other words, if MV must equal PT because it's an accounting identity. KJP - Velocity of money is a bogus concept, IMHO because the concept of monetary-aggregates-growing-rapidly-leads-to-inflation mantra is a bogus concept. Basically the flow in 2020-2021 went like this (i'm way oversimplifying of course - but simple helps illustrate the idea). 1) The US Treasury sends stimmie checks to everyone creating new deposits. 2) Everyone spends the stimmie checks - thus moving the deposits. 3) The deposits cluster on the balance sheets of the biggest US corporations because everyone bought a lot of stuff from these corporations. 4) The US Treasury issues Treasury securities which the biggest corporations buy in exchange for their mountains of deposits (or deposit their cash in Money Market Funds and thus MMFs buy the Treasury securities). See what happened here? This is what we mean by the US Treasury soaking up reserves/deposits. It has to - otherwise, if there is no step 4, deposits accumulate on the balance sheets of corporations/MMFs and we go negative on rates - since MMFs can't make money and will start charging/gating to accept more deposits. That's kind of where we are right now. The US Treasury can't increase its debt net issuance because of the debt ceiling. (as I look at today's US Treasury daily statement, net US Treasury debt o/s (net of Fed holdings) = $16.854t. That number is marginally lower than where it was on Jan. 1st, 2021 at $16.940t. But meanwhile, the US Treasury has added to deposits (via its net spending) a total = $2t. (equals $2t in new deposits). That's why bank reserves are up - and more importantly why the Fed is doing over $1t of reverse repo + bank reserves are up almost $1t since the start of year. Its all to keep the system in balance and rates from collapsing. I think inflation is usually caused by real economic dislocation - ie, a debt default and devaluation (and I'm putting the US going off the gold standard in 1971 as a de-facto devaluation) or because productive private assets get destroyed due to war, etc. ) I also think excessively high tax rates can also lead to inflation mainly because they cause demand for the government's money to fall dramatically - thus weakening the currency severely. I don't think we had any of those things in 2020-2021 - but what do I know. I'm not a CNBC talking head. wabuffo

Is it stuck at the Fed as reserves It is stuck at the Fed as reserves (in aggregate for the US commercial banking sector that has access to the Fed payments system). There are only three ways reserves can be reduced in a permanent way: 1) The Fed sells assets (US Treasuries, MBS, etc) or doesn't roll over assets as they mature. 2) The US Treasury taxes more than it spends or issues treasury securities (that aren't purchased by the Fed). Currently - US Treasury is in the penalty box as far as Treasury security net issuance is concerned. 3) The banks could redeem their reserves for hard currency. (I'd like to see that armored truck delivery!) Notice that except for no. 3 (which is really a non-factor), the private sector banking system is completely at the mercy of the consolidated US government (Fed + US Tsy) for the size of its reserve asset balance. Basically the Federal govt gives you three choices in terms of how it presents its liabilities to you as a private sector: 1) currency in circulation 2) reserves 3) US Treasury securities. Its no different between your bank and you: 1) currency in circulation = cash/bills at the ATM 2) reserves = demand deposit (ie, checking account.) 3) Treasury securities = time deposits (ie, you get a higher rate but you have to lock up your money 30-days to 30-years). So what the Fed is doing with QE is going to the private sector and saying "I'll exchange your time deposits for demand deposits." The only nuance is that you and I don't get deposit accounts at the Fed - only banks do. So reserves are not great for the private sector - illiquid, frozen and stuck with the banks. We'd rather keep the time deposits (ie., Treasury securities) because if we have to we can pledge them as collateral for loans. You really have to imagine the US Treasury as the world's largest and richest depositor who pays for a lot of stuff (and gets some tax income). The Fed is the US Treasury's bank. The US Treasury has a deposit account at the Fed. So do the commercial banks. So the US Treasury and the banks are the Fed's depositors/customers. Just like your bank clears payments between you and the world around you - the Fed is mainly there to clear payments between the US government and the banks through their individual deposit accounts at the Fed. Its really that simple - but few people understand its innate simplicity. Instead we get these complex talking heads on CNBC who talk out of their arses. wabuffo

Instead of looking at the Fed "printing" money, watch the treasury spending money. I learned that from you @wabuffo.

But don't forget Fed's printing 120 bn per month and that's been going on for a long time. The cash is circulating around the economy. Nope. It is stuck at the Fed. wabuffo

As far as I know AJC never ran any fund. I think the better comparison is Gerry Tsai and his Manhattan Fund of the go-go 60s. https://en.wikipedia.org/wiki/Gerald_Tsai wabuffo

Buffett has been wrong on this point for over 20 years and cost BRK shareholders a ton of returns by hiding in cash and cash equivalents vs bonds. But maybe he's going to be right this year..... wabuffo

Oh no - the dreaded lockbox is going to be empty! There is no lockbox! 1) Social Security payroll taxes are just Federal tax receipts by another name. 2) Social Security checks are just another form of Federal government spending by another name. 3) The US government will never run out of its currency. It can fund social security checks forever if it chooses to. The real question is whether the private sector of the US economy will continue to be productive well into the future so as to produce the resources that society will need. I think so. In fact, I wouldn't bet against it. wabuffo