$27,000,000,000,000 US debt

[Cigarbutt]

The following has been edited to minimize or even eliminate the ‘political’ component and focuses on the policy aspect and potential investment implications.

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The 2008 “liquidity” operations were simply part of a trial-and-error framework and underline the uncertainty related to the Fed’s market operations and their outcomes.

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Looking back in history, the ‘consolidated’ Fed has often offered constructive resistance to debt profligacy. It became standard practice for the Fed, during the Great Depression, to make large scale open-market operations involving government debt securities, deviating from the long held real-bills doctrine. Since that time, the controversy around the emphasis about the need to prevent excesses versus the need to deal with the consequences has continued. Around WWII, the Fed was submitted to a strait jacket but the 1951 Accord (allowing the central bank to conduct monetary policy without Treasury approval for the first time since 1934) reveals that it was possible to have an independent Fed and to “lean against the wind” in order to contain debt expansion and inflationary forces. Chairman McChesney Martin did, to some degree, accommodate the Treasury during the simultaneous Vietnam War and Great Society program but the Fed did offer resistance, delayed the rise of inflationary forces and, before entering the 70s, the Chairman tried to take the ‘liquidity’ punchbowl away and underlined the importance of an independent Fed. In the 80s, federal debt increased significantly but, compared to GDP, remained at a relatively constant level and a strong case can be made that Chairman Volcker’s policies contributed to limit debt expansion through higher interest rates than what was required by the  ‘game of chicken’ played by the people holding the Treasury purse. The Fed and the Treasury should work together for common objectives but they have competing and sometimes conflicting objectives. The Fed, as an institution, was founded on the concept of independence and to maintain price stability (purchasing power). The founders (ie Paul Warburg and others) clearly feared the potential consequence of debt monetization that could be achieved somehow and were fully aware that, historically, there was an easy path leading to debasement in the absence of appropriate constraints. Monetary financing is still a two-step process but perception is important when considering moral hazard and when considering that trust cannot be reduced to a simple accounting equation. Unrestrained open market purchases of government securities can become a blurred concept and eventually an equivalent to direct lending.

 

For this money experiment to work, one has to believe that the Fed has maintained sufficient independence and that the policies are right, under present circumstances. i don’t. This feels like a relatively lonely posture now but global markets have now (again) a record amount of government securities trading with a negative yield and 10-yr German bunds are trading near record lows at -0.62%.

 

It just seems that global markets have become addicted to debt. Historically, central banks have shown their usefulness in providing liquidity during acute periods of stress, which is similar to the key support required during the rehab period. An argument could be built that the Fed should put more emphasis on upstream prevention but that’s complicated. These days, the central banks are accomplishing neither of their primary missions, they have become critical intermediates in the supply of the very product that is causing the problem which is presently denied.

 

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If our total wealth doesn't change, but the Fed switches some our wealth from time deposits to demand deposits, why does the Fed think we will spend more? (ie, more consumption and investment).  If one thinks about it that way, it shows how ridiculous the Fed's policy is.  Plus, as I've shown before, lowering interest rates hurts savers more than it helps borrowers - so savers save even more, further hurting consumption. 

Its crazy, stupid policy.

wabuffo

i would add the mirror image that the unintended redistribution effect has produced on who's deeper in debt and who has excess savings along the income quintiles distribution. And I submit that it may help explain some of the fractures that are seen developing. My line of work has involved repairing fractures. Most fractures cannot be prevented and need to be dealt with responsibly but there are some fractures that are preventable and those, by far, are best fixed before the break appears.

[wabuffo]

My line of work has involved repairing fractures.

 

So a financial orthopedic surgeon!  Interesting.  8)

 

wabuffo

[Cigarbutt]

^There's no need to confirm or infirm as it's not really necessary or relevant but the concept of impending fracture can be applied to other areas, including financial ones. With impending fractures, one can look at one picture or a series of imaging studies (very much like financial reports), use criteria (mostly objective but not all) to identify risk factors for things to come (very much like financial and operational margin-of-safety measures) and even apply (with a prospective perspective) various templates to make it through somehow (very much like capital restructuring options etc). This has been quite a useful concept for some investments made over the years in candidates entering (or about to enter) financial distress and even for those entering (or about to enter) major but reversible hardship.

 

For this thread, Covid is only a crack and there is a crack in everything but that's how the light gets in. (L. Cohen)