The Dam Begins to Break - Caleb Jones

Read the title of this recent CNN report: For a second day, the New York Fed spent billions to calm the financial market. The actual article is here. I’ll let it speak for itself:

For the second straight day, the New York Federal Reserve injected a huge sum of money into the financial system in a bid to calm stress in the overnight lending market. The Fed on Wednesday poured another $75 billion into the market following a $53 billion rescue by the NY Fed on Tuesday.

The Federal Reserve did what they always do, conjured $128 billion of your money out of nowhere and cheerfully handed it over to massive, corrupt, incompetent banks to keep them in business forever (that’s corporatism) instead of letting them go out of business (which would be capitalism, which we don’t have).

Now here’s the thing: this article was published almost three weeks ago. Did you hear anything about this? I didn’t and I tend to keep my eye on this kind of thing. I just heard about this yesterday. This is a really big deal, folks. The article says it itself:

Until this week, the Fed hadn’t launched an operation like this since 2008.

Remember 2008? That’s when the big, corrupt banks went begging to big government to give them hundreds of billions of dollars in free bail-out money, which big government gave to them. (Again, this is how corporatism works.) And today, we have even more debt than we did in 2008. That’s right; the financial system is in even worse shape than right before the crash of 2008.

Again, I go back to why you or I didn’t hear about this $128 billion given to the banks, the largest sum since 2008. Why is it that these New York banks who just received the $128 billion of your money for free didn’t have to ask the government for it like they did last time? Why did they just magically get it?

Answer: The Dodd-Frank Act big government passed back in 2010. This bill was created by Chris Dodd and Barney Frank, two of the most left-wing senators in all of American history. This bill contained numerous regulations of the big banks. Now wait… in a corporatist government, big business (and big banking) and big government are on the same team, so why would big banks allow all these regulations?

It’s because buried in this 2,300 page bill (it’s as big as three Game of Thrones novels, seriously) is a special clause where banks can simply suck money out of big government whenever the fuck they want without having to go ask for it. I’m oversimplifying all of this of course, but the gist of what I’m saying is accurate.

This means that thanks to left-wing politicians and right-wing Wall Street corporatists there here is now a permanent pipeline between big government and the big banks that permanently and near-constantly suck money from the Federal Reserve into the banking system.

That’s why this happened with so little fanfare. It was pretty much instant and automatic.

The fact these banks suddenly needed $128 billion to keep overnight lending rates south of 10% is not good. It’s a sign of very bad things to come.

As I’ve said before, these very bad things may come in two or three years or they may come in 25 years, but they’re going to come,and you’ll be alive when they happen.

As always, this creates the refrain from left-wingers, Keynesians, MMT guys and even some neocons when they say that “It doesn’t matter, we can print all the money we want, because we owe it to ourselves!”

This is factually incorrect and you can read why right here. My simple response is to ask these guys why our government doesn’t just print up enough money every January 1st to give every adult American a check for $100,000 tax-free and do that every year. That would be awesome! That would solve every economic problem in this country immediately, right? Why not do this? It doesn’t matter, right?  Because we owe it to ourselves, right?

Wrong. Of course it matters in that it would destroy our nation and our currency in short order. Sure, it might not matter right now. It might not even matter in ten years (Japan has been doing this crap for 25 years sustaining their depressing, zombie-like economy). But it will eventually matter. And you (and your children) will pay the price.

Alpha Male 2.0 financial structures, folks. Get your 2-4 small, international, location-independent Alpha 2.0 businesses going, pay off all of your debt, get some money in savings, hedge it with gold and get some solid non-Western investments going.

You’re going to really kick yourself in a few years if you don’t get started on these things now.

And you won’t have the excuse that you didn’t know or weren’t warned.

46 Comments on “The Dam Begins to Break

  1. Oh, look, media adding up overnight loans on consecutive days! It’s 2008 all over again. If it’s $53 billion for one night and 75 billion for one night, does it really matter? You lapped it up uncritically beacause it agrees with your ideas.
    If you’re on top of those things and you only heard after 3 weeks, doesn’t that tell you something about how irrelevant it is?
    I’m a trader and I can tell you it was all the rage in financial Twitter when it happened, and still no one could explain why it deserved attention. Your confirmation bias is showing, Mr Jones. If the repo thing is the sign of something to come in 2 to 3 years or in 25, then sorry, it’s the sign of nothing to come. I’m starting to think sometimes you have a warped view of things. Not everything is further proof of decadence, and certainly not an overnight loan.

    Debt grows because the economy grows, and that’s not even counting inflation! You sound like climate alarmists that refer to value of property destroyed by hurricanes. Of course it keeps making new highs, because the economy keeps getting bigger and everything is worth more, not because hurricanes are more destructive. 🙂

    I was pessimistic in summer last year but have liked the economic data lately. I think the economy will do just fine next year. And I would love to hear reasons why it’s bad to go the way of Japan. Haven’t been there but I only hear fantastic things about them. 🙂

  2. You are the first twot I have seen on this blog, Shura.

    What are you? Twelve?

    You forgot to add “neener neener” to you post while putting your thumbs in your ears and blowing raspberries.

    The more mature approach is to offer the data and and compare notes.

    The economy may or may not be on a crash course.

    The reality is NO ONE REALLY KNOWS.

    But you plan for things like this. Contigency plans. If it doesn’t happen then you are in no worse a position as an Alpha 2.0.

    But if you can’t feel it in your gut that things are currently not sustainable then go about your business elsewhere.

    Something is rotten in the state of Denmark

    ~Hamlet (Act-I, Scene-IV, Lines 87-91)

     

  3. If you’re on top of those things and you only heard after 3 weeks, doesn’t that tell you something about how irrelevant it is?

    If the repo thing is the sign of something to come in 2 to 3 years or in 25, then sorry, it’s the sign of nothing to come.

    Are these really your arguments?

    Are you even aware what you’re writing?

    I’m not joking. These are serious questions. I’m assuming you’ve either been having a really bad day today, or you’ve been drinking.

  4. You completely misunderstand what’s going on here.  First, the Fed isn’t “giving” the banks anything.  It’s a repo operation, which is basically an overnight asset swap.  The banks give up a bond and receive a reserve balance in exchange.  They can keep rolling that over, or swap back at any time. The bank gets a very small amount of interest from the repo agreement, that’s it.

    The reason that they haven’t done this since 2008 is because with the onset of the global financial crisis, the Fed conducted QE operations (which was also just an asset swap BTW) which flooded the system with reserves and sent the overnight rate to zero.  Therefore, for the past 10 years there was no point in trying to manage reserve balances in the way that the Fed did before the crisis.  The reason that they need to start doing this again now is that for the past several years since QE ended the Fed has been in the process of unwinding its balance sheet and returning reserve balances to more normal levels so that they can return to setting the policy rate via OMO (Open Market Operations), as they did before 2008.  Repos are the most common form of OMO, as opposed to outright bond purchases/sales, which are more rare (except during QE of course).

    Bottom line is that this news is really only important to policy geeks and bond traders.  And it has nothing to do with Dodd-Frank.  But yes, there was a flurry of activity on twitter and elsewhere when this was in the news by people who don’t actually understand how it works (which is most people).

  5. I’ve been overweight foreign stocks for quite a while now, waiting for the dollar to take a breather.  And Dammit, it’s not happening.

  6. https://www.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/

    Rome managed to continue currency debasement for 200 years. That said, currency production technology has come a long way since then, so our debasement will probably occur in a shorter time span.

    The way I see it, the US is following the 3-centuries of hegemony model (which I pretty much came up with after reading about the 3 generations of wealth model for families):

    1800-1900: builds an empire/hegemony, capitalist economy, socioeconomic decisions driven by the upper class
    1900-2000: maintains the empire/hegemony, mixed economy (transitioning from capitalism to socialism), socioeconomic decisions driven by the middle class
    2000-2100: squanders the empire/hegemony, socialist economy, socioeconomic decisions driven by the lower class

  7. A few others share the sentiment that the U.S. is heading downhill. Mostly due to poor leadership

    By 2019, Orlov felt[16] that most of the ingredients precipitating collapse of the USA were in place, and that the one single ingredient still missing–a humiliating military defeat–was under way:

    The function of the US military is to intimidate other countries into letting the US buy whatever it wants by printing US dollars as needed . . . Once their ability to intimidate the world into submission is gone . . . all that will remain of the “richest country in the world” is a pile of worthless paper.

    Patrick J. Buchanan

    According to Patrick J. Buchanan, “Post-Christian America, in many ways, is beginning to mirror what we were once taught that the pre-Christian Roman Empire looked like.”[18]

    The Roman Empire, Byzantium, the Tatar/Mongol Golden Horde, and the Ottoman Sublime Porte all provided these two essential services—unhindered trade and security—in exchange for some amount of constant rapine and plunder and a few memorable incidents of genocide. The Tatar/Mongol Empire was by far the most streamlined: it simply demanded “yarlyk”—tribute—and smashed anyone who attempted to rise above a level at which they were easy to smash.”

    According to Dmitri Orlov, the American empire is “a bit more nuanced: it uses the US dollar as a weapon for periodically expropriating savings from around the world by exporting inflation while annihilating anyone who tries to wiggle out from under the US dollar system.”[19]

    Dimtry Orlov (not the hockey player)

    Dmitry Orlov argues that the US is now in a rapid decline, “retracing the trajectory of the Soviet Union in the early 1980s toward national bankruptcy and political dissolution”. Orlov argues that U.S. is bedeviled by “runaway debt, a shrinking economy, and environmental catastrophes to rival Chernobyl”. He believes that there are some parallels with the U.S.: outsized military spending, growing international debts and trade deficits, unwieldy governments, rigid ideology, ecological crisis, resource decline.[22]

    Paul Kennedy

    Kennedy argues that continued deficit spending, especially on military build-up, is the single most important reason for decline of any great power. The costs of the wars in Iraq and Afghanistan are now estimated to run as high as $4.4 trillion, which Kennedy deems a major victory for Osama bin Laden, whose announced goal was to bankrupt America by drawing it into a trap. By 2011 the U.S. military budget — almost matching that of the rest of the world combined — was higher in real terms than at any time since WWII.[21]

    According to a 98-page report by National Defense Strategy Commission, “America’s longstanding military advantages have diminished”, and “America’s ability to deter and, if necessary, defeat opponents and honor its global commitments have proliferated.” The report cited “political dysfunction” and “budget caps” as factors restraining the government from keeping pace with threats in what the report described as “a crisis of national security.” The report wrote that, to neutralize American strength, China and Russia were trying to achieve “regional hegemony” and were developing “aggressive military buildups”.[24] In 2018, air Force General Frank Gorenc said that the United States airpower advantage over Russia and China was shrinking.[25] According to Forbes, the military’s decline began when defense secretary Dick Cheney stopped a hundred major weapons programs 25 years ago when the Soviet Union collapsed.[26]American culture is in decline, according to Allan Bloom, E. D. Hirsch and Russel Jacoby.[27]

    Allan Bloom

    E.D. Hirsch

    Russel Jacoby

    Samuel P. Huntington

    American culture is in decline, according to Allan Bloom, E. D. Hirsch and Russel Jacoby.[27] Samuel P. Huntington also believes that the American culture and politics had been in a constant decline since the late 1950s, coming in several distinct waves, namely in reaction to the Soviet Union’s launch of Sputnik; to the Vietnam War; to the oil shock of 1973; to Soviet aggression in the late 1970s; and to the general unease that accompanied the end of the Cold War.[17] The rise of postmodernism since WWII has contributed to the decline of American culture, according to Goldfrab. Bloom observes that “instead of the pursuit of truth, there is an adolescent certainty that all is uncertain.” He criticizes his students for their relativism, narcissism and the decadence of love and friendship, pointing to such cultural icons as Mick Jagger, who portrays himself as a nihilistic rebel, both hetero and homosexual, embracing drugs and “the rock ideal of universal classless society founded on love.” Because youth bond with such decadent anti-heroes, they miss embracing the positive heroes of the past, never achieving a deep love for culture.[27]

    Though I don’t totally agree with the reference to Mick Jagger a doctoral dissertation could be written on the positive and negatives of such a portrayal. Nonetheless, most are not sophisticated or discerning enough to know when such attitudes should be expressed.

    William J. Bennett

    William J. Bennett argues that America’s cultural decline is signaling “a shift in the public’s attitudes and beliefs”.[28] The rate of maternal mortality has more than doubled in the U.S. since the late 1980s in stark contrast to other developed nations.[29] According to the Index of Leading Cultural Indicators, published in 1993, statistically portraiting the moral, social and behavioral conditions of modern American society, often described as ‘values’, America’s cultural condition was in decline with respect to the situations of 30 years ago, 1963. The index showed that there has been an increase in violent crime by more than 6 times , illegitimate births by more than 5 times, the divorce rate by 5 times, the percentage of children living in single-parent homes by four times, and the teenage suicide rate by three times during the 30-year period.[28] By 2015, around half of American children were born to an unmarried mother.

    Economy

    By 1970 U.S. share of world production had fallen from 40% to 25%,[2] While economist Jeffrey Sachs observed the US share of world income was 24.6% in 1980 falling to 19.1% in 2011.[23] The ratio of average CEO earnings to average workers’ pay in U.S. went from 24:1 in 1965 to 262:1 in 2005.[31][6] A survey carried out by Pew Research Center shows that a majority of American predicted the U.S. economy to be weaker in 2050. Also, the survey says, a majority of the people thought the U.S. would be “a country with a burgeoning national debt, a wider gap between the rich and the poor and a workforce threatened by automation.”[5]

    Most right wingers and some centrists believe that the American fiscal crisis stems from the rising expenditures on social programs or alternatively from the increases in military spending for the Iraq and Afghanistan wars, both of which would lead to decline. However, Richard Lachmann argues that If none of military or overall spending are pressuring the U.S. economy, they would not contribute to U.S. decline. Lachmann describes the real problem as “the misallocation of government revenue and expenditure, resulting in resources being diverted from the tasks vital to maintain economic or geo-political dominance.”[4] Kennedy argues that as military expenses grow, this reduces investments in economic growth, which eventually “leads to the downward spiral of slower growth, heavier taxes, deepening domestic splits over spending priorities, and weakening capacity to bear the burdens of defense.”[21]

    Longevity

    The U.S. placed 35th in a 2019 ranking of countries on health, vs Canada’s 16th-place. “Life expectancy in the U.S. has been trending lower due to deaths from drug overdoses and suicides.”[32]

     

  8. Redbaron I’m pretty sure you didn’t come up with that. It was Sir John Glubb in Fate of Empires who said it first but you might’ve came to the same conclusion.

  9. That inspired me to do some reading, and apparently Glubb (a Brit) may have been influenced by the German Oswald Spengler.

    Also. Lol Shura is a trader, which may very well mean Wall St. His motto is let them eat cake. Safe to say he is here to provide entertainment value.

  10. You completely misunderstand what’s going on here.  First, the Fed isn’t “giving” the banks anything.  It’s a repo operation, which is basically an overnight asset swap.  The banks give up a bond and receive a reserve balance in exchange.  They can keep rolling that over, or swap back at any time. The bank gets a very small amount of interest from the repo agreement, that’s it.

    I understand all of that. You have a tendency to take whatever I say literally and assume that I mean it literally; instead, I often use simple language in my articles so that most guys reading will understand. Always remember that most of the internet reads at a sixth grade level.

    None of what you said changes the fact that by doing these swaps they are increasing the monetary supply in the economy and artificially influencing both the value of the currency and interest rates. That’s the problem, not the specific methods they are using to do it.

    The reason that they need to start doing this again now is that for the past several years since QE ended the Fed has been in the process of unwinding its balance sheet and returning reserve balances to more normal levels

    I know that’s what they say, but that is not why they did what they did during in those two days back in September.

    You agree that there should be a limit to the amounts of these swaps they do, right? Or do you think they can do this with hundreds of billions or trillions of dollars whenever they want and everything will be more or less okay?

    I know hong kong is one of your favorite places. Would love to hear your analysis on the current unrest.

    Subscribe to my YouTube channel. The answer to your question is there:

    https://www.youtube.com/watch?v=von08-Eg65A&tA

    Deloitte offers economic outlooks and after living (or staying six months) in several countries they have rated I agree with and recomend their assessment and analysis.

    Yes, China is in for some very serious problems soon, on their way up. The overall trend will still be up, however.

  11. You have a tendency to take whatever I say literally and assume that I mean it literally;

    Considering the context of what you wrote, I don’t know how to take it other than literally.  You said:

    Why is it that these New York banks who just received the $128 billion of your money for free didn’t have to ask the government for it like they did last time?

    I was pointing out that they did not, in fact, “receive $128 billion of my money” for free.  They performed a swap for an asset of equal value, namely, a gov’t bond.  Value for value, exchanged on the open market.  That’s not giving anybody anything “for free”.

    and artificially influencing both the value of the currency and interest rates.

    Only if you believe that there is some “natural rate of interest” that the CB should try to hit and any deviation from that is “artificial”.  Yeah, I know, Austrian economics.  But that whole notion is extremely controversial.  But that’s a whole can of worms that I won’t expand on right now.

    I know that’s what they say, but that is not why they did what they did during in those two days back in September.

    Right, they’ve been aggressively taking reserves out of the interbank system for several years, and during those two days they had to add a little bit back.  There were trillions in excess reserves in the system before …. adding a hundred billion or so back is chump change in comparison and not a big deal.  The fact that they needed to do this is only an indication that reserves in the interbank system are becoming relatively scarce once again, which is just a sign that we’re returning to the pre-QA situation, where the central bank sets the benchmark rate via open market operations (OMO), and repo/reverse-repo operations are conducted as a matter of routine.  Interbank reserves are a closed system …. only banks, the fed, and the treasury have reserve accounts.  Banks can trade them between themselves, but only central bank OMO can affect the overall quantities in the system, which they do both to manage the overnight rate and guarantee the functioning of the payments system.

    You agree that there should be a limit to the amounts of these swaps they do, right? Or do you think they can do this with hundreds of billions or trillions of dollars whenever they want and everything will be more or less okay?

    Really, there is no such limit, so long as their exchanging value for value with assets that are close substitutes.  Holders of US gov’t bonds essentially *already* have money, and could already have easily sold/hypotheticated/repo’d those bonds for cash and spent the proceeds at any time.  The fact is that they didn’t, and won’t, because they are savers, not spenders, and they’re not going to change their behavior just because the fed enters the market.  So these operations don’t actually cause more spending in the real economy … they manage the level of bank reserves and that’s about it.  Also, don’t confuse this type of asset swap/monetary operations with the type of fiscal spending operation advocated by MMTers …. that’s a different animal and would require a different analysis.

    I’m going to guess that, like most people, you have a 19th century view of money and banking.  If you really want to get a handle on it I suggest the excellent primer by William Hummel at wfhummel dot net.  It is called Money: What it is and how it works.  You’ll be surprised what you’ll learn about things that you thought you already knew.  I’d also suggest Perry Mehrling’s course on money and banking on Coursera, but that’s a much bigger time commitment.

    I’m not a trader like Shura in the first comment …. my interest in this is more academic.  But he’s right, this was really a non-event, which is why you haven’t heard much about it.  As someone who actively trades those markets he’s in a better position to grasp that than most people.

  12. They performed a swap for an asset of equal value, namely, a gov’t bond.

    You’re talking about the internal bookkeeping of the Fed. I’m talking about what the banks received. The banks did indeed receive free money. They did not receive government bonds.

    Even if you argue there is some expectation that the banks will pay this money back someday, you know there are numerous scenarios under which they won’t or don’t.

    exchanged on the open market

    Incorrect. The Fed printing up magical money and writing IOUs to itself then handing cash over to the banking system is not the open market. Can you do such a thing? Can I? Nope.

    Right, they’ve been aggressively taking reserves out of the interbank system for several years, and during those two days they had to add a little bit back.

    Because of very serious problems with NY banks. Correct, just as I said.

    I’d like to see you argue that a corporation suddenly needing $128 billion in bail-out money is not a serious problem.

    There were trillions in excess reserves in the system before

    Yep, and that’s the problem.

    adding a hundred billion or so back is chump change in comparison and not a big deal

    I agree. In and of itself, taken in pure isolation, it’s not a big deal as compared to the entire US economy. I said it was indicative of other major problems coming.

    Really, there is no such limit, so long as their exchanging value for value with assets that are close substitutes.

    Great. Then answer my question none of you guys ever want to answer: Why doesn’t the Fed just sell a bunch of bonds to itself every year and cut a check to every American for $100,000, every year?

    Holders of US gov’t bonds essentially *already* have money

    No they don’t. Bonds are not money.

    The fact is that they didn’t, and won’t, because they are savers, not spenders, and they’re not going to change their behavior just because the fed enters the market.

    Forever? No matter what? China, Japan, the Saudis, US investors, et al, are never going to sell ever no matter what happens? That’s what you’re betting on, and you’re wrong.

    I agree they aren’t going to sell today. But I’m not talking about today. I’m talking about the future.

    So these operations don’t actually cause more spending in the real economy

    Great. Please show me links that indicate the TARP bailouts of almost 1$ trillion didn’t cause any more spending in the economy at any economic level and I’ll be happy to take a look.

    I’m going to guess that, like most people, you have a 19th century view of money and banking.

    Incorrect. I’m not 100% Austrian, as I’ve stated before. I agree that you can print up a hunk of money under certain conditions, at lot in fact, and have everything be more or less okay. I’m saying there’s a limit to what you can do, and that the USA (along with Germany and a few other nations) are pushing that limit and will hit it in our lifetimes.

    If you really want to get a handle on it I suggest the excellent primer by William Hummel at wfhummel dot net. It is called Money: What it is and how it works.

    I’ll take a look.

    I’m not a trader like Shura in the first comment …. my interest in this is more academic. But he’s right, this was really a non-event

    He could have been an adult and attempted to make actual points like you have so we could have a real conversation. Instead he chose to rant incoherently like a child and made guys on your side of the issue look really bad and guys on my side look more rational.

    which is why you haven’t heard much about it

    We haven’t heard much about it because A) the elites in the media agree with you and don’t consider it an important event (and they are wrong) and B) the elites do not want people hearing about any of this. Trump really wants to get re-elected so the corporatists in the banking sector and on Wall Street (and their media) going to suppress as much of this data as they possibly can, at least before November of next year. (And it will probably work. Tantrum Trump will probably get re-elected.)

  13. Much of what Ken wrote sounds like it has merit, but the problem is the general mental gymnastics it requires in order to bypass the basic principal of market mechanics. There is constructive criticism, and then there’s this…shortsightedness. That is the problem with pretty lies and it’s something I observe more and moreso these days. Feelz over realz. Now a hard rain is gonna fall, sooner or later. Except, when you try to tell others, they lash out at you for doing so. Honestly, I struggle with the notion that other people are even worth the effort sometimes. The gift of knowledge comes at a severe price.

  14. You’re talking about the internal bookkeeping of the Fed. I’m talking about what the banks received. The banks did indeed receive free money. They did not receive government bonds.

    Even if you argue there is some expectation that the banks will pay this money back someday, you know there are numerous scenarios under which they won’t or don’t.

    You’re confused.  The banks *gave* their gov’t bonds to the Fed, in return for reserve deposits.  That’s not “free money” because they had to swap something of equal value.  When either side decides they no longer want to roll over the repo agreement, they swap back.  If for some reason they can’t, then they don’t get the bonds back.  No free lunch.Incorrect.

    The Fed printing up magical money and writing IOUs to itself then handing cash over to the banking system is not the open market.

    The Fed can indeed create reserves just by enter numbers into a spreadsheet, and they’re unique in their ability to do so.  However, they cannot just “hand cash over to the banking system”.  They are prohibited by law (Federal Reserve Act and its various amendments) from proceeding in that fashion.  They have to purchase something with that money, and the FRA puts various constraints on what they can purchase.  So they go into market via the Primary Dealer (PD) network and bid on Treasury Bonds, just like anybody else in the Treasuries market, and pay market price.  Or enter into Repo agreements through via that same PD network.  That’s what OMO are.

    Because of very serious problems with NY banks. Correct, just as I said.

    I’d like to see you argue that a corporation suddenly needing $128 billion in bail-out money is not a serious problem.

    During normal, that is pre-financial crisis times, this is the kind of operation that the Fed did routinely.  They have not done it for 10 years because QE flooded the interbank system with reserves so there was never a scarcity.  Now that they have been unwinding their balance sheet and the system is no longer so flooded, you can expect that kind of operation to become routine once again.  It is not a sign of distress on the part of any bank …. they can still lend and borrow on the Fed funds market, but it would be at a higher interest rate.  However, that interbank interest rate is the very policy rate that the Fed is charged with controlling.  So if they don’t do these kinds of operations, they’ll overshoot their target rate to the upside, which they don’t want to do. Hence open market operations.  I think you’re probably confusing bank reserves with bank capital …. too very different concepts (and those references I gave you will help you sort them out).  When we talk about banks needing a “bailout”, it’s because they’re in danger of not meeting their minimal capitalization requirements.  That happened to quite a few banks during the GFC.  But that’s not what’s going on now … this is just a return to normal reserve/liquidity management by the Fed.

    Great. Then answer my question none of you guys ever want to answer: Why doesn’t the Fed just sell a bunch of bonds to itself every year and cut a check to every American for $100,000, every year?

    First off, they don’t “sell a bunch of bonds to themselves”.  The bonds that they buy are already financial assets held by the private sector, and that’s who they buy them from.  Simple asset swap, changes nobody’s net worth.  They can’t “cut a check to every American for $100,000” because the Federal Reserve Act would prohibit them from doing such a thing … that would be a fiscal operation that must be appropriated by Congress and conducted by Treasury.

    Second, if the Congress did decide to do such a thing, it would indeed be a problem.  Sure, they could force the Fed to clear the checks with money that the Fed creates, but that wouldn’t be exchanging value for value … that would indeed be handing out money for nothing and putting into the hands of people who are likely to spend it.  With production of real goods and services for sale in exchange for that $100,000, we would have a big inflation problem. Very different situation than the Fed swapping Treasuries for cash balances and back again in repo agreements.

    No they don’t. Bonds are not money.

    Depends who you ask, really.  Treasury bonds are not included in the current classifications of M0, M1, M2 (or discontinued aggregate M3), that is true.  In an earlier time they used to track an aggregate beyond M3 called “L” that did include at least some Treasury bonds. But many economists would argue that they are indeed close substitutes and should be included in the aggregates, and I would agree.  Nobody holding a Treasury has ever faced a liquidity issue if they wanted to spend.  They can be sold, used as collateral for bank loans (which are really bank created money), etc.  The Bank of England tracks a quantity they call M4 which does include various types of bonds.  I believe that the current classification system is a holdover form gold standard days and should be revised, and so do many other people.

    Forever? No matter what? China, Japan, the Saudis, US investors, et al, are never going to sell ever no matter what happens? That’s what you’re betting on, and you’re wrong.

    I’m not “counting” on anything.  If those entities someday decide to “sell”, that means somebody else “buys”.  All of my arguments here have nothing to do with what any of the actors that you mention ultimately do.  If they would rather hold cash than an interest bearing bond then that’s their problem. Unless you think they’re all going to go on a spending spree and start demanding real goods and services … then we could have an inflation problem if we can’t produce those goods in the quantities demanded.  Then we’d have to consider other measures like tax policy to dampen aggregate demand in this unlikely event.  Most people would consider this a high quality problem.

    Great. Please show me links that indicate the TARP bailouts of almost 1$ trillion didn’t cause any more spending in the economy at any economic level and I’ll be happy to take a look.

    Different animal.  TARP was a fiscal operation authorized and appropriated by Congress and conducted by the Treasury.  Not a monetary policy liquidity reserve operation conducted by the Fed. It was designed to address the bank capitalization issue, which is a different as I described above, by giving the gov’t an ownership stake in the banks (and also outright purchase of some distressed assets).  What the effects were and were not of that would be another whole discussion.

    Incorrect. I’m not 100% Austrian, as I’ve stated before. I agree that you can print up a hunk of money under certain conditions, at lot in fact, and have everything be more or less okay. I’m saying there’s a limit to what you can do, and that the USA (along with Germany and a few other nations) are pushing that limit and will hit it in our lifetimes.

    That part of my comment didn’t have anything to do with Austrian economics.  Most people, including many economists who don’t specialize in money and banking (i.e. most economists) believe we have a “fractional reserve” system …. but the banking and payments that we and every other country has today doesn’t resemble a 19th century FR system much at all … it has evolved and changed in many ways.  And it’s important to understand how it actually works if you want to understand what the Fed does.  Yes, there are obvious limits to spending in the real economy … you are constrained by the availability of real resources for sale in your currency!  But there you’re talking fiscal operations, which are different than these asset swaps that the Fed does, which is really just about managing the overnight rate.

    We haven’t heard much about it because A) the elites in the media agree with you and don’t consider it an important event (and they are wrong)

    Honestly it’s not that they agree with me, it’s that they for the most part don’t understand any of this.  So they did indeed get excited about for a few days, and then moved on to other things. Which is fine, because it isn’t really an important event.  It’s an interesting event, if you understand it in context, but we’ll soon be back to a time when repos happen every week, just like before QE.

     

  15. Caleb, I would appreciate it if you would put dates on your web pages.  It sucks to read an article, then find out it’s 3 years old and you wasted your time.  Right now you rock.  Please don’t suck like that.

    If the repos are overnight loans, is it proper to add them up and give a cumulative total?  It seems like each day would be a start over from zero.

    I’m also having trouble seeing how this is increasing the money supply.  The bank bought a bond — money taken out of circulation.  Now the fed lends them the money back — money put back in circulation.  Then they change back, since it’s overnight.  Net zero.

    QE was definitely an increase in money supply, since it was a permanent bond purchase.  Fed gov’t spends an extra $1 trillion a year by issuing bonds from nothing.  If you or I buy them, the money supply stays the same.  When the fed buys them with their magically conjured dollars it increases the money supply.  That is why gold went up and the dollar went down during QE.  Neither are responding to the repos.

    Not that any of this matters. The west is failing and it will get worse and worse as time goes on.

  16. Caleb, I would appreciate it if you would put dates on your web pages.

    Good idea. I’ll have my tech guy put dates on the bottom of the articles. Not sure if that will help your problem though. (I will not put the date at the top of the article; it harms traffic and engagement.)

    It sucks to read an article, then find out it’s 3 years old and you wasted your time.

    Reading an article I wrote 3 years ago is not a waste of your time. My advice and observations are still valid 3 years later. (It would only be a waste of your time if I was referring to a current event of some sort, but you’d have that figured out within the first paragraph of the article.)

    If the repos are overnight loans, is it proper to add them up and give a cumulative total? It seems like each day would be a start over from zero.

    Only if 100% of the balance were paid by these banks the very next day. Maybe they were but I doubt it.

    You’re making the assumption a lot of people make in that you’re assuming when these kinds of shenanigans take place the banks always pay 100% of the money back exactly when they’re supposed to. That is usually not the case.

  17. You’re making the assumption a lot of people make in that you’re assuming when these kinds of shenanigans take place the banks always pay 100% of the money back exactly when they’re supposed to. That is usually not the case.

    That’s not true.  It’s almost always the case.  If they don’t, they forfeit the bond and take a haircut on the deal.

    Then they change back, since it’s overnight.  Net zero.

    So long as both parties agree they just keep rolling it over each day indefinitely.  This was the fed’s most common way of adjusting reserves before the financial crisis, and will be again going forward.  Outright bond purchases or sales are more rare.

  18. The banks *gave* their gov’t bonds to the Fed, in return for reserve deposits. That’s not “free money” because they had to swap something of equal value.

    We’re both saying the same thing just using different words. They exchanged bullshit IOUs they should have never had in the first place for money (and I realize you don’t think it’s money) and you’re saying these things are of equal value and I disagree. But we could go round and round on this so lets agree to disagree.

    The Fed can indeed create reserves just by enter numbers into a spreadsheet, and they’re unique in their ability to do so. However, they cannot just “hand cash over to the banking system”.

    Again, potato patoto. You’re a very literal guy. Just because they don’t actually and them stacks of 100 dollar bills doesn’t mean they’re not getting money. It ends up being the same thing (or so similar the distinctions don’t matter).

    During normal, that is pre-financial crisis times, this is the kind of operation that the Fed did routinely.

    I know. They shouldn’t have done it then either (ideally). Doesn’t change my opinion.

    if the Congress did decide to do such a thing, it would indeed be a problem.

    Good. We have some agreement.

    TARP was a fiscal operation authorized and appropriated by Congress and conducted by the Treasury. Not a monetary policy liquidity reserve operation conducted by the Fed.

    Again, I know that, that’s not relevant to my overall point. Despite their differences, both TARP and these swaps are creating money (and I know you don’t consider it money) artificially. And I’m pretty sure you probably supported TARP when it happened when I was completely opposed to it.

    We’re both starting to repeat ourselves now, so the bottom line is that you don’t consider bonds or cash reserves as money, and I do despite the limitations you’ve outlined. I agree that these swaps are less bad than TARP or handing everyone $100,000 a year, but I still think they’re a problem, and we are approaching the limit of what we can do with this stuff. If I’m wrong and you’re right, you have nothing to worry about, carry on, vote for Joe Biden, and enjoy. I’ll be in New Zealand.

  19. so the bottom line is that you don’t consider bonds or cash reserves as money

    The opposite, actually.  I consider them both to be money.

     

  20. but I still think they’re a problem, and we are approaching the limit of what we can do with this stuff.

    Well, they’re the time honored way for central banks around the world to hit their target policy rate.  How would you do it then?

  21. Again, potato patoto. You’re a very literal guy. Just because they don’t actually and them stacks of 100 dollar bills doesn’t mean they’re not getting money. It ends up being the same thing

    Wasn’t trying to make a distinction between printed currency and virtual account balances … that wasn’t my point at all.  My point was they can’t just “give” either to the banks or anyone else …. they can only trade for it or loan it on good collateral.

  22. Well, they’re the time honored way for central banks around the world to hit their target policy rate. How would you do it then?

    I’m against the entire concept of having a central bank. So were men like Jefferson, so I’m in good company. If “time honored” means a 95% decrease in the value of the US dollar in the last 100 years, I don’t “honor” that like you do.

  23. If “time honored” means a 95% decrease in the value of the US dollar in the last 100 years..

    Why is that important to you?  I’m sure you don’t hold cash as a store of value over that long of a time horizon.  You invest in real assets and only maintain cash balances as required to meet your short term liquidity needs.  In that short run time frame real depreciation of those cash holdings due to inflation is small.  And as a consequence of the modern system we no longer have to deal with the sort of bank runs and panics which were once common. I count that as a good thing on net.

    You shouldn’t care what *one* of your dollars will buy in 2019 vs 1919, but rather what *all* of your dollars will buy now vs then. I think you’ll find that you’re in command of much greater real wealth than someone living back then would have been.

    Of course my original question was narrow and technical and asked in the context of the system we actually have … but if you want to take it broad and philosophical and discuss the system you think we ought to have …. that’s fine.

  24. Why is that important to you?

    You don’t know why it would be important to me to spend 5 cents on a loaf of bread instead of three dollars?

    I’m sure you don’t hold cash as a store of value over that long of a time horizon.

    I don’t because, unfortunately, I’ve had to spend hundreds of hours researching these topics, but a hell of a lot of other people do. The typical saver who does save over a long time horizon doesn’t do this and gets completely fucked by your system. It’s theft and it’s wrong.

    we no longer have to deal with the sort of bank runs and panics which were once common

    I know you won’t be able to understand this, but that’s exactly part of the problem. Failures like that are critical to a thriving, capitalist system. I want these occasional failures, I want occasional recessions. These things regularly clean the morons and corrupt assholes out of the system, and force new companies (and new banks!) to be much more careful in the future so as to avoid them. It fair and enforces improvement. Your system keeps the morons and corrupt assholes running the system forever, constantly getting rewarded for their failures and theft, screwing all of us.

    We’re getting way off-topic though. If you want a strong central bank that keeps these horribly corrupt thieves enriched and in power over you, that’s great, good luck with that. I don’t. But let’s agree to disagree.

  25. You don’t know why it would be important to me to spend 5 cents on a loaf of bread instead of three dollars?

    I really don’t.  If my income is $1000K and bread is 5 cents if I live in 1919, vs my income is $60,000 and bread is 3 dollars if I live in 2019, it’s the same thing as far as my quality of life.

  26.  Failures like that are critical to a thriving, capitalist system. I want these occasional failures, I want occasional recessions.

    We have recessions.  What we don’t have is bank panics.  People don’t need to worry about their deposits or stuff money into a mattress.  Again, I think that’s a good thing.

  27. The typical saver who does save over a long time horizon doesn’t do this and gets completely fucked by your system.

    The typical saver with a long time horizon doesn’t usually hold large amounts of cash … more likely mutual funds in IRAs and 401Ks.  The fund managers do the research for them.  People who don’t have access to these things are usually too low income to save anyway and are living paycheck to paycheck.

  28. It’s theft and it’s wrong.

    So in the pre-central bank error, when banks could fail at any time and most people would lose their deposits …. that’s not theft?

  29. Haha, wow, everything you just said is inaccurate, but like I said, we’re way off-topic so I’m done discussing this here. The next time I ask for volunteers to debate me publicly on any topic (which I will be doing soon), I expect you to be first in line to debate me on this topic so you can show the world how wrong I am.

  30. The next time I ask for volunteers to debate me publicly on any topic (which I will be doing soon), I expect you to be first in line to debate me on this topic so you can show the world how wrong I am.

    Maybe.  I’d be more likely to take you up on that on a neutral forum where you don’t unilaterally set the ROE.  But I won’t rule it out.

    Haha, wow, everything you just said is inaccurate

    Haha to your haha.  It isn’t, but if I were to take the time to unpack everything you said here that is either inaccurate or shows a complete lack of understanding of the current system, we’d be here for a year!  Which is a problem …. if we can’t even agree on the baseline facts and functionality of the current setup, not sure where we’d even begin on debating its merits or what might work better.

  31. It isn’t, but if I were to take the time to unpack everything you said here that is either inaccurate or shows a complete lack of understanding of the current system, we’d be here for a year!

    I am guessing its probably an exaggeration / joke on your part but if it would really need to take that long to explain it you are either extremely bad at explaining or don’t have any understanding yourself. You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

  32.  You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

    Well, I tried.  Read the thread.

  33. but if it would really need to take that long to explain it you are either extremely bad at explaining or don’t have any understanding yourself. You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

    No. This gets told a lot but in many cases it’s BS.

  34. No. This gets told a lot but in many cases it’s BS.

    Yeah you’re right.  On complex topics the background knowledge needs to be there first.

  35. The typical saver with a long time horizon doesn’t usually hold large amounts of cash … more likely mutual funds in IRAs and 401Ks. The fund managers do the research for them. People who don’t have access to these things are usually too low income to save anyway and are living paycheck to paycheck.

    @Ken Based on your knowledge and understanding of the financial systems and markets, what are some ideas that you think make sense for mitigating risk, in regards to individual investors (at almost all levels of savvy and wealth), over the next 5-30 years?

    I would appreciate it if you would put dates on your web pages

    @Stephen Also just a heads up, you can just check the date of the first comment to get a general idea when the article was posted.

    Thanks!

  36. @Ken Based on your knowledge and understanding of the financial systems and markets, what are some ideas that you think make sense for mitigating risk, in regards to individual investors (at almost all levels of savvy and wealth), over the next 5-30 years?

    Well, as I said earlier, my interest in this is academic … I’m interested in understanding the economy.  I don’t trade these markets and I’m not qualified to offer that kind of advice.  I think everything I’ve said here is understood at least intuitively, if not explicitly, by the people who are in the bond or forex markets and that all of this knowledge is already baked into current prices.  So I wouldn’t know which way or what to bet on any better than anyone else.

    I would say be wary of conspiracy theories …. don’t, for example, bet again the dollar just because Caleb says that “the dam is breaking”.  Do the research, figure out how the system really works, and then make your best judgement.

    For mitigating risk, all I can offer is the conventional wisdom, which is diversify, and don’t put all of your eggs in one asset class.  Sorry I can’t be of more help.

     

  37. For mitigating risk, all I can offer is the conventional wisdom, which is diversify, and don’t put all of your eggs in one asset class. Sorry I can’t be of more help.

    Thanks for the response, and solid investment knowledge, thanks!

    While I am certainly interested in practical applications, I also am interested in an “intellectual” manner as well. For example, how would a 17th-century blacksmith best diversify an their investment portfolio?

    I do like to hear different viewpoints to challenge what I hold to be true, to learn more, to be exposed to different ideas, etc. It doesn’t mean I agree with a framework/conclusion, but intellectually (as an amateur) I willing to entertain the possibility.

    Beyond traditional diversification (stocks/bonds/international) scenarios, I haven’t stumbled upon much research/whitepapers/analysis of other diversification strategies.  I’m sure it’s out there, but I’m still looking to fill in the gaps in my spare time 🙂 And it seems to me there’s really only 50-100 years of data to pull from, which isn’t really that long, depending on your point of view.

    And, diversification doesn’t always change the risk/reward ratios, either.  Plus, what falls within the 1st/2nd standard deviations doesn’t always cover some more extreme possibilities, which may magnify over over a longer period of time, right?

    Also, as an aside, while I’m not an expert, this is an interesting book for people who might like a longer-term look at economics, etc.  I feel like many people overlook this view point when talking about macro-trends about wealth, etc.

    https://en.wikipedia.org/wiki/The_Great_Wave_(book)

  38. Thank you for the article.

    I don’t see how anybody could look at $128 billion dollars of bailout and not recognize it as a symptom of a much larger problem.

    -John

  39. I don’t see how anybody could look at $128 billion dollars of bailout and not recognize it as a symptom of a much larger problem.

    Of course it is and anyone implying it isn’t is defending political bias.

    Caleb is biased too but at least he admits it.

    Guys like Ken are just dancing around. He said bonds aren’t money then he turns around and says they are. He said he doesn’t mind if bread goes up in price as long as his income does but wages have been flat since the early 70s and prices have still increased. I bet he knows that but it undermines his entire view so he doesn’t mention it. He equates bank failures to theft. Comical.

    It’s so crazy to watch intelligent people try to justify this bullshit.

    And no Antekirtt, you’re wrong, if you can’t explain your point in a paragraph or two it says something about your point. Or your ability to make one.

  40. I don’t see how anybody could look at $128 billion dollars of bailout and not recognize it as a symptom of a much larger problem.

    Easily, if you understand that it wasn’t a “bailout”.

  41. but if it would really need to take that long to explain it you are either extremely bad at explaining or don’t have any understanding yourself. You know you understand a topic if you can explain it shortly in a few short sentences in simple language.

    No. This gets told a lot but in many cases it’s BS.

    Actually, no, your point is BS. It always reminds me of that Alex Jones conspiracy theorist guy who, when I asked him to back up an insane point he made here, told me to go read a 400+ page book. I asked him to summarize his point instead, and he was welcome to take several paragraphs to do it if needed. No, he said, he couldn’t do that, his amazing, high-minded “point” was too complicated, and I had to read a 400+ page book to understand his “point.” Which, of course, meant he didn’t have one.

    Imagine the (warranted) backlash I’d get if I ever said something to one of my readers like, “I can’t summarize it; it’s to complicated, go read the 440 page book The Unchained Man, then you’ll understand what I’m saying.”

    I’ve noticed the view of “sorry, my point is way too complicated so I can’t explain it in a few paragraphs” is always made by academic geek types; high-IQ college-educated guys who live in a world of book learning.

    It’s bullshit. Even high-end quantum physicists with a modicum of communication skills can summarize a very complicated or controversial point in a paragraph or two. It really isn’t that hard… provided you have a real point to make.

  42. It really isn’t that hard… provided you have a real point to make.

    Conspiracy theory points are very easy to make, so you have the advantage here … your points pretty much rely on your reader’s ignorance of the more complex reality.

  43. Actually, no, your point is BS

    It’s very hard for you to argue without strawmanning and false dichotomies, eh? I never said the alternative is to ask someone to read 400 pages. But no, “a few simple sentences” is sometimes not enough. If Ken can’t back his point with a few relatively lengthy comments, then yes that’s a problem. I have already done debates on this blog or the other with pretty insanely long comments, when I felt it was warranted. There is no problem with your refusing to answer them if your time management rules dictate it, but it changes nothing.

    Nope, that idea is BS. In fact you yourself have resorted to recommending reading books, eg Henry Hazlitt’s ‘economics in three lessons’. Sometimes brevity doesn’t work well, doesn’t provide the background necessary to fully understand the impact of a short argument, etc. I never said a brief comment never works, I said ‘in many cases’. And when someone actually takes the time to develop a point and you have trouble refuting it, your copout is to call it nitpicking. If it’s too nerdy for you to discern superfluous nuance from highly impactful nuance, it’s not my problem. A complex idea that one forces into a very small format easily ends up being two or three arguments by assertion that can’t by themselves establish anything.

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