Monetary and Fiscal Policies in Times of Large Debt:

[frankfurter + 562]

https://www.chicagofed.org/publications/working-papers/2020/2020-13

The authors assert clearly the monetary and fiscal policies of the US are not working. Their solution is to inflate away the debt.  If this study becomes policy, the USA may well be doomed by the hyperinflation to follow.  Readers need only to study the policy of Volker, the fed's chief, during the '80s, when he raised interest rates to 22% to fight inflation. And that was when the debt was well below GDP. Today and forwards, the debt will increase and GDP decrease, thus Debt/GDP may be 1,5. To inflate away $10tn or more debt, inflation will be hyper. Are the authors forewarning? 

 

[Douglas Buckland + 6,308]

So...you suggest that no ‘stimulus’, or aid, at all should have been provided during this economy destroying lockdown with unemployment numbers approaching that of the Great Depression?

I agree that the financial burden will be staggering, but what would YOU have done differently?

[Marcin2 + 724]

2 hours ago, Douglas Buckland said:

So...you suggest that no ‘stimulus’, or aid, at all should have been provided during this economy destroying lockdown with unemployment numbers approaching that of the Great Depression?

I agree that the financial burden will be staggering, but what would YOU have done differently?

The issue are long-term policies. Stimulus in times of hardship is a usual practice , typical Keynesian tool to achieve full employment.

What is done After hardship is gone is important. For example US interest rates should be increased faster After the global financial crisis of 2008 ended. This  is not only about US, the same problem is in EUrozone or in... Poland.

Negative real interest rates are simply bad for economy cause bad enterprises do not bankrupt, there is too much financialization of economy.

Long term we all lose to countries that have more prudent policies ( here in G20 only China).

Current moral hazard i observe in Japan, US and EUrozone ( starting with the most abusing country) is similar to Greece in 1990-2000 decade.

But Japan is still safe cause they have enormous domestic savings.

In US and Eurozone we still have reserve currencies so it can prolong like this for the next 5 years.

But later we are in uncharted territories, it has to end badly but we do nit know when.

I understand that because frankfurter introduced the subject you think it is anti American bias.

But I am not biased against US or pro China or anybody and you can also check , there is a lot of literaturę on the subject.

 

[Douglas Buckland + 6,308]

I asked what YOU would have done differently! Answer the damn question for once in your life!

PS: frankfurter IS anti-American, haven’t you been reading his posts!

[Marcin2 + 724]

21 minutes ago, Douglas Buckland said:

I asked what YOU would have done differently! Answer the damn question for once in your life!

PS: frankfurter IS anti-American, haven’t you been reading his posts!

I would also put stimulus but more targeted and would open economy with tight distancing/masks measures at the same time.

 said frankfurrter is anti American but he has a lot of good thoughts, like this one , behind his attitude.

And he is totally justified, if I would be Chinese I would be anti-American it is obvious.

I was calculating what is the relative cost of the lockdown, closing the economy and the result was for every 1 year of saved life of old person there is about 20-40 years of Lost quality of life in society.

0.1% of old and ill persons die. They could live about 10 more years. So it is 10 times 0.001 equals 0.01 societal years, new  intermediary measure.

Lockdown causes high Increase in unemployment by about 15-20%.

Part of it would be No matter if the  imposed lockdown is done or not cause people change part of their habits.

So I take only 12% of workforce, plus need to add persons that are dependent on this workforce times % of workforce in general population.

Lets say this gives 8%.

Decreased level of life for the unemployed would be prolonged for at least 2-3 years. Often years After they get the job again cause they would be indebted, lose their houses, lise Health etc.

Again I simplify it to 2.5 years times 8% of society.

0.08 times 2.5 years equals to 0.2 societal years.

So 0.01 societal years In longer life are gained but 0.2 societal years are Lost in subsistant life of unemployed people.

So 1 year for 20 years.

This is probably not fair ?

Old persons that would otherwise die had the chance to live on average 70 good years.

Why they should prevent decent life for much younger people ?

We are humans so life has theoretically No price but here it is life against life.

Edited May 22, 2020 by Marcin2
Typo

[Meredith Poor + 883]

Rhetorical question: The RBOC and BOJ each have $1 trillion in US T-Bills. When will we 'pay these off', and how would that be done? This is pretty much the reverse is 'how did they get them in the first place?'.

[Marcin2 + 724]

17 minutes ago, Meredith Poor said:

Rhetorical question: The RBOC and BOJ each have $1 trillion in US T-Bills. When will we 'pay these off', and how would that be done? This is pretty much the reverse is 'how did they get them in the first place?'.

The question is not rhetorical.

Government debt denominated in the domestic currency of this country can always be paid.

In this particular example, lets say BOJ needs to do it tomorrow.

FED buys this 1 trillion and adds to balance sheet, in short term nothing happens.

Whereas if you have small amount, lets say below 100 billion dollars you sell it gradually in billateral transactions, you can get rid of it in 1-2 months in order to not cause disruption. If disruption do occurs, FED buys the surplus .

[specinho + 440]

6 hours ago, frankfurter said:

https://www.chicagofed.org/publications/working-papers/2020/2020-13

The authors assert clearly the monetary and fiscal policies of the US are not working. Their solution is to inflate away the debt.  If this study becomes policy, the USA may well be doomed by the hyperinflation to follow.  Readers need only to study the policy of Volker, the fed's chief, during the '80s, when he raised interest rates to 22% to fight inflation. And that was when the debt was well below GDP. Today and forwards, the debt will increase and GDP decrease, thus Debt/GDP may be 1,5. To inflate away $10tn or more debt, inflation will be hyper. Are the authors forewarning? 

 

Eerrr.......... Shall the basal concepts are seasonal, and subjected to conditional variations, ......................................

56 minutes ago, Marcin2 said:

FED buys this 1 trillion and adds to balance sheet, in short term nothing happens.

Whereas if you have small amount, lets say below 100 billion dollars you sell it gradually in billateral transactions, you can get rid of it in 1-2 months in order to not cause disruption. If disruption do occurs, FED buys the surplus .

FED has been so kind..... This department has not gotten any award yet or praised??

[Meredith Poor + 883]

1 hour ago, Marcin2 said:

The question is not rhetorical.

Government debt denominated in the domestic currency of this country can always be paid.

In this particular example, lets say BOJ needs to do it tomorrow.

FED buys this 1 trillion and adds to balance sheet, in short term nothing happens.

Whereas if you have small amount, lets say below 100 billion dollars you sell it gradually in billateral transactions, you can get rid of it in 1-2 months in order to not cause disruption. If disruption do occurs, FED buys the surplus .

So, how did those T-Bills end up in China and Japan in the first place?

[Marcin2 + 724]

2 hours ago, Meredith Poor said:

So, how did those T-Bills end up in China and Japan in the first place?

There are auctions and there is also secondary liquid market for US debt.

So if you keep about 1.5-2 trillion dollars in dollar denominated assets like China you spent more than half on treasuries.

FED can and will have to buy a lot more of US debt in the future, but it is always better to have „real” buyers like China or Japan than just indulge in money printing.

[Marcin2 + 724]

3 hours ago, specinho said:

Eerrr.......... Shall the basal concepts are seasonal, and subjected to conditional variations, ......................................

FED has been so kind..... This department has not gotten any award yet or praised??

Do not understand this pizza example ?

As for FED the award is for chairman and the rest to be elected to the board of governors.

Please analyze how bad governors are at their duties, they abandon the job After 2-5 years out of 14 years of the term.

if it were not the lobbyists-own-us-all US the FED Human Resources policies would be changed long time ago.

You know when I analyze any aspect of US economy or politics that does not work, finally go to the core of the ineffciency, Usually the conclusion is bad lobbyist influence that sells this fantastic country to the interest groups.

[waltz + 140]

4 hours ago, Marcin2 said:

The question is not rhetorical.

Government debt denominated in the domestic currency of this country can always be paid.

Which country is “this country”?  Do you believe that any country can just print money on a never ending cycle?  What was it Milton Friedman said about inflation?

 

waltz

[Meredith Poor + 883]

1 hour ago, Marcin2 said:

There are auctions and there is also secondary liquid market for US debt.

So if you keep about 1.5-2 trillion dollars in dollar denominated assets like China you spent more than half on treasuries.

FED can and will have to buy a lot more of US debt in the future, but it is always better to have „real” buyers like China or Japan than just indulge in money printing.

If the US buys goods from China, where do the dollars go?

[frankfurter + 562]

11 hours ago, Douglas Buckland said:

I asked what YOU would have done differently! Answer the damn question for once in your life!

PS: frankfurter IS anti-American, haven’t you been reading his posts!

PS: frankfurter Buckland IS anti-American Chinese .  h Haven’t you been reading his posts ! ? 

mutual assertions. so, what this resolves? 

Your question is off topic. Why should anybody reply? By your command? 

 

[Douglas Buckland + 6,308]

3 minutes ago, frankfurter said:

PS: frankfurter Buckland IS anti-American Chinese .  h Haven’t you been reading his posts ! ? 

mutual assertions. so, what this resolves? 

Your question is off topic. Why should anybody reply? By your command? 

 

My, that was creative hotdog!

[0R0 + 6,251]

12 hours ago, Marcin2 said:

The issue are long-term policies. Stimulus in times of hardship is a usual practice , typical Keynesian tool to achieve full employment.

What is done After hardship is gone is important. For example US interest rates should be increased faster After the global financial crisis of 2008 ended. This  is not only about US, the same problem is in EUrozone or in... Poland.

Negative real interest rates are simply bad for economy cause bad enterprises do not bankrupt, there is too much financialization of economy.

Long term we all lose to countries that have more prudent policies ( here in G20 only China).

Current moral hazard i observe in Japan, US and EUrozone ( starting with the most abusing country) is similar to Greece in 1990-2000 decade.

But Japan is still safe cause they have enormous domestic savings.

In US and Eurozone we still have reserve currencies so it can prolong like this for the next 5 years.

But later we are in uncharted territories, it has to end badly but we do nit know when.

I understand that because frankfurter introduced the subject you think it is anti American bias.

But I am not biased against US or pro China or anybody and you can also check , there is a lot of literaturę on the subject.

 

Low and negative real interest rates are the result of excess savings in the economy. It is to a large extent demographic. As the higher proportion of older high productivity savers vs. young consumers getting started in life that drive consumption.Delivering that consumption requires investment which drives interest rate bidss along with mortgage and consumer debt. The savings get invested at the highest bid available to take up all the amounts saved. When savings overwhelm profitable investment opportunities in real terms, they may still find nominal payoff at negative real yield.

Bank savings  accounts are actually investments in the bank and are the bank's liabilities. Only commodity savings (gold, bitcoin perhaps) are nobody's liabilities. Excess savings that can not be invested profitably under the gold standard (and to an extent in fiat money as well) go into gold, or near money assets and cause prices of goods and services to fall.

Once issued, debt causes demand for money of its denomination to repay it, it is intrinsically inflationary as a money substitute when issued, and intrinsically deflationary once issued and through the life of the loan. Fiat currencies obtain the bulk of their demand (and therefore their value) from the need of debtors to pay off their debt on schedule. Defaulted debt that is turned into equity is inflationary in that it reduces outstanding debt and the demand for money to repay it.

Thus the "liquidity" injections that convert existing debt from and asset into cash are actually maintaining long term demand for the currency at the cost of incremental short term inflation of the money supplies or reserves. Only by prolonged over issuance of currency in excess of what is needed to satisfy money balance requirements for meeting debt repayment schedules of existing debt will eventually cause a price inflation.

Thus the ECB and BOJ money printing substituting for missing economic generation of incomes to repay outstanding debt keep that debt "alive" (out of bankruptcy) and sucking cash out of the economy into the hands of people who are not spending it - or in the case of bank debt, causing a monetary deflation as the money is erased as the debt is extinguished. On the other hand, bankruptcy of a bank debtor causes no change in bank liabilities, i.e. the bank customer's money balances, but reduces the demand for the money.

That is also why to the extent the current bout of money printing for the Wuhan coronavirus crisis prevents bankruptcy and conversion of existing debt into equity (capture of pledged collateral is equity conversion) it is not an inflationary event in itself.

The appropriate ratio to look at is total non financial debt to money supply in the domestic context, and total debt vs. reserves of the denominating currency in the global market.

The US Fed actions to print up liquidity and keep outstanding debt in good standing via its refinancing etc. and via swap lines to foreign central banks is inflationary in the short term and causes a rise in prices of assets (first) or goods (later) in the short term and maintains that debt as future long term demand for the currency.

Thus short term inflationary and long term deflationary. That is why you get zombie finance - the monetary and credit side of zombie companies and economies. .

 

[Dan Warnick + 6,100]

11 hours ago, Meredith Poor said:

Rhetorical question: The RBOC and BOJ each have $1 trillion in US T-Bills. When will we 'pay these off', and how would that be done? This is pretty much the reverse is 'how did they get them in the first place?'.

The majority of debt the Chinese and the Japanese have purchased is in bonds, which are quite different from T-Bills which are short term.  It's complicated, buy here is a pretty good article to break it down:

Is it a risk for America that China holds over $1 trillion in U.S. debt?

Many worry that China’s ownership of American debt affords the Chinese economic leverage over the United States. This apprehension, however, stems from a misunderstanding of sovereign debt and of how states derive power from their economic relations. The purchasing of sovereign debt by foreign countries is a normal transaction that helps maintain openness in the global economy. Consequently, China’s stake in America’s debt has more of a binding than dividing effect on bilateral relations between the two countries.

Even if China wished to “call in” its loans, the use of credit as a coercive measure is complicated and often heavily constrained. A creditor can only dictate terms for the debtor country if that debtor has no other options. In the case of the United States, American debt is a widely-held and extremely desirable asset in the global economy. Whatever debt China does sell is simply purchased by other countries. For instance, in August 2015 China reduced its holdings of U.S. Treasuries by approximately $180 billion. Despite the scale, this selloff did not significantly affect the U.S. economy, thereby limiting the impact that such an action may have on U.S. decision-making.

(more at the link)

[waltz + 140]

Dan, with respect, as I see it your comment/quote is off base because of the timeline.  I know you were responding to MP’s question but is not the more relevant issue the rolling over of current debt and future financing? I am not a fan of President Trump nor did I vote for Hillary, current concerns are President Trump alienating those who finance US debt buy going unilateral on nearly every issue and Pelosi going all AOC with UBI policy.  In my mind this could end the dominance of the petrodollar and cost the US “bigly” for future financing costs, with the Democrats in charge of the house and Presidential elections this fall I fear we, the US, are about to full on test MMT, with foreseeable disastrous results in the medium term (five years).

 

Hope that all made sense, been drinking for more hours than I care to admit.

 

waltz

[Dan Warnick + 6,100]

57 minutes ago, waltz said:

Dan, with respect, as I see it your comment/quote is off base because of the timeline.  I know you were responding to MP’s question but is not the more relevant issue the rolling over of current debt and future financing? I am not a fan of President Trump nor did I vote for Hillary, current concerns are President Trump alienating those who finance US debt buy going unilateral on nearly every issue and Pelosi going all AOC with UBI policy.  In my mind this could end the dominance of the petrodollar and cost the US “bigly” for future financing costs, with the Democrats in charge of the house and Presidential elections this fall I fear we, the US, are about to full on test MMT, with foreseeable disastrous results in the medium term (five years).

 

Hope that all made sense, been drinking for more hours than I care to admit.

 

waltz

Heh-heh, Cheers!  I will be honest and tell you I don't know what to tell you about your concerns.

[waltz + 140]

23 minutes ago, Dan Warnick said:

Heh-heh, Cheers!  I will be honest and tell you I don't know what to tell you about your concerns.

I am just a trim carpenter with a minor in economics and on my 17,000 steps a day all I have come up with is that used cars may become cheap.  Human nature, my observation, seems to say many will over extend themselves with the cheap financing and no payments policy for X-months, the opposite of cash for clunkers.  I really am having a hard time determining if we are heading for a period of deflation or if all the money being pumped into the system will lead to inflation.  Going by recent history the amount of money in the economy seems to matter little, based on inflation over the last decade, there has been no velocity.
 

 Be well.  Waiting for the clock to hit Eight so I can mow.

 

waltz

[0R0 + 6,251]

16 hours ago, Marcin2 said:

There are auctions and there is also secondary liquid market for US debt.

So if you keep about 1.5-2 trillion dollars in dollar denominated assets like China you spent more than half on treasuries.

FED can and will have to buy a lot more of US debt in the future, but it is always better to have „real” buyers like China or Japan than just indulge in money printing.

China has mystery dollar and other assets. The BRI debt is apparently part of the reserves. The free reserves are just $1.1 Trillion held at the Fed. Other treasuries are used as collateral for commodity (oil) contracts.

[0R0 + 6,251]

23 hours ago, Marcin2 said:

And he is totally justified, if I would be Chinese I would be anti-American it is obvious.

If you were Chinese you would be pro American because that is the only power standing against the CCP that has been misdirecting the economy for the better part of a century while increasingly suppressing their lives since the hardliners returned to the fore. The CCP is a parasite on the Chinese, and they would much appreciate having it gone. They just are not allowed to say so.

[0R0 + 6,251]

23 hours ago, Marcin2 said:

I would also put stimulus but more targeted and would open economy with tight distancing/masks measures at the same time.

 said frankfurrter is anti American but he has a lot of good thoughts, like this one , behind his attitude.

And he is totally justified, if I would be Chinese I would be anti-American it is obvious.

I was calculating what is the relative cost of the lockdown, closing the economy and the result was for every 1 year of saved life of old person there is about 20-40 years of Lost quality of life in society.

0.1% of old and ill persons die. They could live about 10 more years. So it is 10 times 0.001 equals 0.01 societal years, new  intermediary measure.

Lockdown causes high Increase in unemployment by about 15-20%.

Part of it would be No matter if the  imposed lockdown is done or not cause people change part of their habits.

So I take only 12% of workforce, plus need to add persons that are dependent on this workforce times % of workforce in general population.

Lets say this gives 8%.

Decreased level of life for the unemployed would be prolonged for at least 2-3 years. Often years After they get the job again cause they would be indebted, lose their houses, lise Health etc.

Again I simplify it to 2.5 years times 8% of society.

0.08 times 2.5 years equals to 0.2 societal years.

So 0.01 societal years In longer life are gained but 0.2 societal years are Lost in subsistant life of unemployed people.

So 1 year for 20 years.

This is probably not fair ?

Old persons that would otherwise die had the chance to live on average 70 good years.

Why they should prevent decent life for much younger people ?

We are humans so life has theoretically No price but here it is life against life.

Very much agree with your math. The entire approach to the lockdowns was absurd. You don't quarantine the healthy, you quarantine the sick and the susceptible. The response was entirely driven by a political agenda. The selection of alarmist "experts" and the media frenzy of fanning the flames of panic. 

But in the West, particularly in NYC and Italy, the infected were forced on nursing homes. Thus increasing deaths by an order of magnitude. Half of Western deaths were at nursing homes. Only Norway and a few others managed to protect their nursing home populations.

While the infected were given separate quarters till recovered in S. Korea, in the West they were just sent home where they infected the rest of the household.

 

[canadas canadas + 136]

Isn't the Chicago economic school known for its support of neoliberal economics called neoliberalism?

 

[0R0 + 6,251]

On 5/22/2020 at 7:45 AM, frankfurter said:

https://www.chicagofed.org/publications/working-papers/2020/2020-13

The authors assert clearly the monetary and fiscal policies of the US are not working. Their solution is to inflate away the debt.  If this study becomes policy, the USA may well be doomed by the hyperinflation to follow.  Readers need only to study the policy of Volker, the fed's chief, during the '80s, when he raised interest rates to 22% to fight inflation. And that was when the debt was well below GDP. Today and forwards, the debt will increase and GDP decrease, thus Debt/GDP may be 1,5. To inflate away $10tn or more debt, inflation will be hyper. Are the authors forewarning? 

 

This policy analysis is only useful for circumstances where global demand can respond to higher monetary inflation with rising prices of broad goods and services. However, due to perpetual policy error by the CCP, there is a large swath of industries where excess capacity precludes a substantial rise in prices. The monetary inflation has already occurred in China and was externalized into the Eurodollar financial system via the inflation of dollar credit markets by accumulation of reserves.

Unlike the US solution to the debt overhang by FDR, which decidedly did not work, it was the monetization of the war debt when the soldiers returned home that caused a rapid increase in prices as they came with years of accumulated paychecks and an enormous pent up demand. In two separate inflationary bouts the War debt was wiped out by half and the private market debt overhang from its origin of the late 1920s - which unlike what this analysis claims - remained overhanging the economy into the early 1940s, was finally wiped out by those dual inflationary impulses at the end of the war. The demand simply wasn't there in the 1930s. There were too few people having new families because of the results of the Spanish Flu of 1918 and WW1 wiping out a large minority of a generation of young people, and the urbanization of the country and the world at large following the introduction of large scale agricultural equipment increased farm productivity 5-10 fold. .

Thus the suggested prescription is not applicable unless a major demand potential is available for the funds to be spent. The circumstance of a huge swath of society''s young adults loaded up with cash and ready for a GI bill to get them retrained for industry and an industrial and infrastructure expansion being necessary to circumvent supply chain pinch points that are mostly in China can serve that purpose as Millennials are such a group and have delayed starting families because of student debt and the lack of affordable housing where jobs were available. The Wuhan Coronavirus crisis has created precisely the kind of circumstance to apply this in the context of the mass migration out of the cities due to a transition to work from home and the reindustrialization needs to build robust supply chains. That means an enormous demand for new housing stock across the country.

The necessary policy support requires

A wipeout of regulatory impediments to construction and industry locations.

A wipeout of the China bid via aggressive tariff and other impediments to the Chinese retaining their monopolies and pricing edge.

Re-empowerment of small local and regional banks and private lending networks to lend for industry and housing at the small scale without the burdens imposed on the money center banks and the large financial behemoths. Remove the capital constraints on them to allow their rapid expansion on the micro level where large banks can't operate. Exclude them entirely from Dodd Frank.

 

It is significantly important that China exports be curtailed as they are the major impediment to any emergence of inflation in the real economy. China has a large and growing excess capacity as their internal demand is constrained by a rapidly shrinking young adult cohort and unwillingness to have children. Even if no marginal increases in production capacity in China were made, the existing domestic demand trend would make sure that utilization is falling persistently and can only be substituted for by exports sold at a loss to keep the capital and labor employed. The persistently negative total factor productivity (TFP) figures for China since 2013 have been exacerbated in the post CV19 world where the output prices keep falling against the input prices except in agriculture. The roughly 25% unemployment in China is not the marker of a bottom from which only improvement is possible, It marks the start of a manifestation of a trend long masked by policy induced expansions of infrastructure and industrial capacity and expansion of the housing stock due to unrealistic investment expectations for speculative returns. That demand is falling and will continue to do so. At the same time, the savings flows are shrinking due to retirements of the large boomer population.