The Federal Reserve and US Treasury have been busy this year creating
US dollars out of thin air. Trillions of them.
More money, less stuff to buy because of the pandemic should equal
higher prices as those dollars chase stuff to buy, right?
Well... that is exactly what the Fed hopes will happen. It hasn't
happened yet because the "velocity of money" (how quickly money gets
spent again after it is received) fell off a cliff, as people went into
lockdown, lost their jobs, and try to make whatever money they have last
until things get back to normal. Money is being shoveled into the
system... and is piling up as bank
reserves:
That trillion dollar spike at the end is
March and April.
Can dollars pile up someplace other than bank accounts? I dunno– if
you know, please leave a comment. I'm writing this blog post to organize
my thoughts and so you can tell me what I'm getting wrong.
Here is my incomplete mental model of how the money creation machine
works; for example, for a ‘helicopter drop' :
Congress decides everybody gets $1,200. The US Treasury gets the
dollars by trading promises to pay the money back in the future
(treasury bonds). Who is lending their hard-earned dollars to the US
government in exchange for a really low interest rate? Mostly it is
the Federal
Reserve, "lending" brand new dollars created out of thin air:
4 trillion in March, April,
May
So, the Fed creates dollars, exchanges them for Treasury bonds, the
Treasury sends dollars to people in lockdown, and they "save them in
their bank accounts" – which really means they exchange the dollars for
a promise from the bank that they can withdraw them later.
Normally the bank turns around and lends out most of those dollars so
they can be spent again (increasing monetary velocity) but right now
they are piling up as ‘excess reserves'. The Fed pays
0.1% interest on reserves; I dunno why, I guess to make bankers even
richer than they already are? (That's a cheap shot on my part; if
inflation is 0.3%, they're actually losing 0.2% a year on those
reserves). Banks could lend it all out; the reserve requirement
was dropped to zero percent, which seems insane to me but I'm a
programmer and not a monetary expert.
So inflation is low right now. Probably. It is hard to measure
accurately in normal times, but really hard right now because everything
changed in mid-March. People suddenly stopped buying bowling shoes and
started buying a lot more face masks, so the typical ‘basket of goods'
economists use to measure price inflation suddenly isn't actually what
the typical person is buying.
But what happens when we conquer (or learn to live with) the virus
and people spend more and banks go back to lending? Will we get super
high inflation then?
I dunno. The Fed can slow down bank lending by requiring them to hold
more reserves. Although I gather a lot of lending is happening in the
"shadow banking system" which doesn't have reserve requirements, so
maybe that would just move a lot of activity out of traditional
banks.
If inflation ramps up the Fed could directly drain trillions of
dollars out of the system by selling the "securities
held outright"– mostly Treasury bonds, with some mortgage-backed
securities leftover from the 2008 financial crisis. That is 6 trillion
dollars at current market prices.
Higher inflation means the price of those low-interest-rate
securities has to go down, and selling them will even further depress
the price. Somebody smarter than me has probably estimated how many
dollars the Fed can actually destroy by trading all that stuff (and
making the dollars they get disappear), but maybe those trillions won't
be enough to keep inflation in check.
Higher inflation, plus the Fed selling all those old Treasury Bonds
at a discount should mean the Treasury will have to offer higher
interest rates on new bonds, meaning more of the budget goes to paying
interest on the debt.
Which politicians won't like. Maybe the Feds lose their minds, bow to
political pressure and keep buying bonds, "sterilizing" the debt,
leading to more inflation (and eventually hyperinflation if the cycle
isn't broken). I don't think that is likely to happen in the US, but I'm
a programmer, not a monetary expert. I'm hedging my bets and keeping my
wealth mostly in inflation-immune assets, like bowling shoes and hand
sanitizer.
Gavin Andresen: Big Picture Fed-onomics
2020 Jun 1 See all postsGavin Andresen
satoshinakamotonetwork@proton.me
https://satoshinakamoto.network
The Federal Reserve and US Treasury have been busy this year creating US dollars out of thin air. Trillions of them.
More money, less stuff to buy because of the pandemic should equal higher prices as those dollars chase stuff to buy, right?
Well... that is exactly what the Fed hopes will happen. It hasn't happened yet because the "velocity of money" (how quickly money gets spent again after it is received) fell off a cliff, as people went into lockdown, lost their jobs, and try to make whatever money they have last until things get back to normal. Money is being shoveled into the system... and is piling up as bank reserves:
Can dollars pile up someplace other than bank accounts? I dunno– if you know, please leave a comment. I'm writing this blog post to organize my thoughts and so you can tell me what I'm getting wrong.
Here is my incomplete mental model of how the money creation machine works; for example, for a ‘helicopter drop' :
Congress decides everybody gets $1,200. The US Treasury gets the dollars by trading promises to pay the money back in the future (treasury bonds). Who is lending their hard-earned dollars to the US government in exchange for a really low interest rate? Mostly it is the Federal Reserve, "lending" brand new dollars created out of thin air:
So, the Fed creates dollars, exchanges them for Treasury bonds, the Treasury sends dollars to people in lockdown, and they "save them in their bank accounts" – which really means they exchange the dollars for a promise from the bank that they can withdraw them later.
Normally the bank turns around and lends out most of those dollars so they can be spent again (increasing monetary velocity) but right now they are piling up as ‘excess reserves'. The Fed pays 0.1% interest on reserves; I dunno why, I guess to make bankers even richer than they already are? (That's a cheap shot on my part; if inflation is 0.3%, they're actually losing 0.2% a year on those reserves). Banks could lend it all out; the reserve requirement was dropped to zero percent, which seems insane to me but I'm a programmer and not a monetary expert.
So inflation is low right now. Probably. It is hard to measure accurately in normal times, but really hard right now because everything changed in mid-March. People suddenly stopped buying bowling shoes and started buying a lot more face masks, so the typical ‘basket of goods' economists use to measure price inflation suddenly isn't actually what the typical person is buying.
But what happens when we conquer (or learn to live with) the virus and people spend more and banks go back to lending? Will we get super high inflation then?
I dunno. The Fed can slow down bank lending by requiring them to hold more reserves. Although I gather a lot of lending is happening in the "shadow banking system" which doesn't have reserve requirements, so maybe that would just move a lot of activity out of traditional banks.
If inflation ramps up the Fed could directly drain trillions of dollars out of the system by selling the "securities held outright"– mostly Treasury bonds, with some mortgage-backed securities leftover from the 2008 financial crisis. That is 6 trillion dollars at current market prices.
Higher inflation means the price of those low-interest-rate securities has to go down, and selling them will even further depress the price. Somebody smarter than me has probably estimated how many dollars the Fed can actually destroy by trading all that stuff (and making the dollars they get disappear), but maybe those trillions won't be enough to keep inflation in check.
Higher inflation, plus the Fed selling all those old Treasury Bonds at a discount should mean the Treasury will have to offer higher interest rates on new bonds, meaning more of the budget goes to paying interest on the debt.
Which politicians won't like. Maybe the Feds lose their minds, bow to political pressure and keep buying bonds, "sterilizing" the debt, leading to more inflation (and eventually hyperinflation if the cycle isn't broken). I don't think that is likely to happen in the US, but I'm a programmer, not a monetary expert. I'm hedging my bets and keeping my wealth mostly in inflation-immune assets, like bowling shoes and hand sanitizer.