Wolf Richter on This Week in Money, at HoweStreet.com
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Faster Quantitative Tightening (QT) is not possible to do.
Treasuries purchased (monetization of debt) and current funding of the deficits are more money than the entire planet has in spare cash or desire; we are broke and the foreigners have better things to do with money or fear of being “frozen.”
The Mortgaged Backed Securities (MBS) used to convert the housing industry into the housing market (or casino) are interest rates that would require discounting the face value; probably why the Federal Reserve pumped this pawn shop of the middle class for what they bailed out banks in the previous “great recession banking crisis,” purchased at full face value. This time they got smart, the elite selling housing and pumping it, Federal Reserve helping by buying MBS at any cost and no banks to bail out as they already bought it all.
Every single MBS that the Fed holds now is guaranteed by the Taxpayer. It didn’t buy them at “any” cost but in the To Be Announced (TBA) market, like everyone else, from the issuer (Fanny Mae, Freddie Mac, Ginnie Mae, etc.) when newly issued.
Faster QT? Dont tease me Wolf. I’m getting way too excited by the thought of a responsible Fed.
Getting rid of the balance sheet would really help to reduce asset bubbles which are propping up spending.
Force all asset markets to reprice based on normalized supply-demand, not this steroid-laced central bank bubble.
None of it really matters QE, QT neither matter. Look at the forest behind the trees. The country is bankrupt, plain and simple. There is no way out period any dang fool should be able to see that! The dollar is dead, the fat lady just hasn’t sung yet!
1. Countries that issue their own currency and borrow in their own currency cannot run out of money unless they want to, like Congress is now contemplating. But that’s a choice. They can however create a lot of inflation, which is how overspending is ultimately dealt with, whether anyone wants it or not.
2. There is no bankruptcy for countries. No country can file for bankruptcy. Not even US states can file for bankruptcy. Creditors can keep hounding them — see Argentina which borrowed in US dollars and then defaulted multiple times on its dollar debts, and the “holdouts” (hedge funds) kept hounding it for years.
Wolf’s technical riposte is accurate but technicalities don’t fly in the face of cold reality.There is no way US government and US household debt will ever be repaid.
That’s not how debt works. Not at all. It’s a silly concept.
1. There are only two types of capital: equity capital and debt capital.
2. Both equity capital and debt capital are ways for investors to fund something. But they have different characteristics, including that debt is safer than equity for investors, but this feature makes debt riskier for the issuer.
3. Both forms of capital are good and important for economic players — households, businesses, governments, and investors.
4. There are abuses and risks with both of them. Too much debt makes debt risky. There are other types of abuses with equity, for example, with businesses equity capital tends to go to zero over the long term and wipe out investors.
5. If you borrow (issue a bond, for example), at maturity you pay off the bond, and lenders/investors get their money back. You thereby REPAID that debt. This directly wipes out Hudson’s thingy.
6. Sometimes, an entity cannot repay the debt, or cannot even pay the interest on the debt, and then investors lose their shirts.
7. Equity capital is permanent capital, it never gets repaid.
8. Debt capital has a roll-over feature, instead of being permanent like equity. The business or government issues new debt to repay maturing debt. This is routine, it’s how it’s supposed to be. And so each debt issue gets REPAID when due (unless there’s a default, see #6, lose shirt).
9. It’s silly to think that somehow all debt would just vanish. Why should this form of capital vanish? Where would investors invest their money? Where/how would companies and governments get the capital to fund what they need to fund? What kind of BS is Hudson spreading around?
10. A government is different from a business. The government controls its own currency and will never run out of money (unless Congress is stupid enough to force it to). It can always create money to services its existing debts, and therefore, a government that controls its own currency cannot default on debt in its own currency (it can default on foreign currency debt, and that happens all the time, see Argentina).
11. But there is inflation, and it begins to rage eventually if governments borrow too much, and that lowers the burden of the debt on the government, and investors lose their shirts to the loss of purchasing power. And it messes up a lot of other things, but it lowers the burden of debt.
Well Fed hasn’t sold MBS outright despite not meeting their QT commitments till now!
Fed loves high inflation because then it can inflate away debt instead of causing bankruptcies to write it off.
It’s us who don’t like high inflation, but who cares!
I hear what you’re saying, but I’m not sure I’ve seen much evidence that the Fed gives much worry about debt, US government, or otherwise.
Once Inflation runs high, fed starts caring about debt. Because Zirp and printing money to fund government will cause Hyperinflation. Fed wants High Inflation, not Hyperinflation because the latter will destroy the system where “Fed is God”.
In my way of thinking, the problem with inflation is that it actually makes the entitlement spending problems worse because you either have to adjust up the Social Security payments and anticipated Medicare cost structures or else retirees will suffer.
I propose three things for a new economy. Dual structure tax system that forces corporations to re-shore (to the US, not mexico) their production. Deflationary monetary policy to reduce the cost of living for poor and middle class. Balanced budget amendment and then eventual budget surplus to eventually reduce the deficit.
This idea of inflating away the deficit will not work. At some point, it will lead to people moving their money out of the US dollar ( maybe into cryptos) and will create a bigger crisis. Making your currency instable and less valuable is a very poor solution to economic issues.
Retirees are already suffering. Most of them depend on social security whose “cost of living” increases are seriously behind the curve.
Severe deflationary events cause deep recessions or depression. The FED does not mind a mild recession but they panic if things get deflationary. Too much debt in the world for deflation to occur as it could get out of hand and then you have a deflationary spiral.
I am not sure if we well ever use the word depression again. They will probably call a server recession a XXX Financial Crisis or something similar.
Prior to the Great Depression, they used to call slow downs in the economy and stock market declines a “Panic”. It was to scary so they started using depression. Which is not to scarry now too. LOL
Other way around: the Great Depression caused deflation.
Interest rates will have to stay higher than the other major currencies to encourage foreigners to lend to the US and to support the dollar
Utter poppycock. As long as the US$ remains the reserve currency of the world in cross border trade, cross border loans, pledging treasuries as collateral for derivative trades, it will remain the cleanest shirt in the laundry.
QT doesn’t even come close to offsetting the deficit spending done by our congress. They’ll have to keep rates higher for a longer time. They’ll also have to entice more foreigners to hold dollars now that some of our *partners* are demanding payment in local currencies.
This is likely the start of a multi-year process.
True. But QT must speed up. Right now. The less delay the better.
I think you have it wrong. QT is what increases long-term interest rates and suppresses asset prices. It is the most effective weapon against inflation.
Why won’t the Fed use it? That’s the real question.
The Fed said QE was justified because it created a wealth effect. Well, now that we have inflation, it’s time to reverse that wealth effect through QT, before the 30% inflationary spike in the short 2021 to 2024 period becomes embedded.
The correct plan to attack inflation is obvious. The only unknowns out there involve the Fed’s motivations and conviction, nothing else.
I’ll add, inflation is like a cancer that adapts and proliferates.
You don’t slow walk that out of the body. You need to cut it out, or radiate it out, quickly.
The Fed enjoys and desires the inverted yield curve….one in which the longer end yields NEVER cover inflation.
When the reasoning behind that is discovered, revealed, understood, we will understand the manipulative machinations of the Federal Reserve and who they really serve.
Was there no question asked regarding the housing market?
Listen to it! You’ll find out.
Unless I missed it, there is a percentage of savers who don’t spend every dime of earned interest on consumption. There is a strong squirrel mentality among savers.
A dime is about what I receive in interest payments on my checking account over the course of a year.
Guilty as charged. Wife and I are really enjoying retirement and the interest now earned. Doubled our income and we still are saving $$$. Giving our children more $$$ and still feeling squirrelly if we do not save some of it. Old timers are silly I guess.
You and I can’t possibly be the only savers who are acutely aware that all this great money we’re now “making” every month merely keeps the purchasing power of our nest eggs from going down as fast as it would without the yield…can we?
I watched the two part PBS old special on the GFC. The thing that was a surprise was how much interconnected risk had built up that regulators didn’t have a clue about. The few individuals that saw the risk in advance were steam rolled as ignorant nutcases. If you were on mainstreet you saw that the poor were buying houses well above their income, but couldn’t tie it all together.
Here we are today. A lot of risk has been transferred to shadow banking system. Education industry is a debt fueled bubble with debt payments suspended. Government blowing out budget to fuel Green Energy industrial policy. Housing bubble 2.0. AI narrative mania. Fed behind the curve on interest rate policy. Got to be GFC 2.0 around the corner.
“If you were on mainstreet you saw that the poor were buying houses well above their income, but couldn’t tie it all together.”
But remember, PRIME borrowers were the majority of defaults. Bernanke’s “subprime is contained” was just another case of these elitist scvm blaming the poor, lying to present it as a case of the unsophisticated causing a small kerfuffle which didn’t pose a systemic threat when in fact the entire system was put into jeopardy with their reckless, anti-human policies.
There is one common theme to every one of these crises: The FED. They are THE CAUSE. The entity which is in charge of price stability and banking regulation has destroyed pricing and destabilized the banking system. WHERE is the accountability?
Jerome Powell and his FED should have been in handcuffs after their day trading scandal, yet he is still in power and paraded around like some sort of God where every politician, bureaucrat, banker and trader hang on his every word.
Music to my ears.
There are lots of financial acrobatics performed today, in an effort to keep the asset bubble inflated.
Rocket Mortgage just announced a loan program for mid and lower income folks, requiring only 1% down, with reduced mortgage insurance requirements. They say the loan writing standards will be solid.
How ridiculous is this?
A 1% down payment is way outside the realm of solid standards. It’s like claiming you have an excellent diet plan, based on donuts.
Even if the borrowers have the clear ability to pay, they are highly incentivized to walk from the mortgage if/when the home drops.
With 5% selling costs, you are immediately underwater 4% upon closing. Wow.
I think you meant to say, taxpayers are under water by 4%.
All debt repayments on student loans resume as of 06/30/2023.
First thought to me was QT first and rate hikes later. They needed some time to see how sticky inflation was going to be, without pushing rates too high too fast. Despite Sniders assertion that QE is a nothing burger, it did give them a multidecade repression of borrowing costs, which resulted in an expansion of the economy. The inflation problem is a growth problem, and all growth is organic. Monetary solutions are non sequitur they have to provide liquidity at all times, otherwise you are slowing the car down by slamming it into reverse. Was too much growth non-productive? A college drop out now owns most of Americas farmland.
The college dropout is considered the largest private owner of farmland in America at about 269,000 acres, but total farmland in America is nearly 900,000,000 acres. I’m glad he’s still a long way from owning most of it.
when the whole premise of QE was done on the basis of creating a “wealth effect” in Bernank’s words you know how far down the drain we are.
Wealth effect, what does that even mean? Pure CB alchemy.
How did we fall for this crap?
Because real power resides elsewhere not with the people.
“How did we fall for this crap?”
Nobody fell for anything. These are merely narratives they make up to cover up their theft. That’s how they play the game – they come up with a newfangled way to steal from the working class and the poor, then they “sell it” with a bullshit narrative that what they’re doing somehow benefits the economy and society.
The “wealth effect” is the same as “trickle-down economics” – a lie which asserts that if you give the wealthy a bunch of money, it trickles down to everybody else. This has been going on my entire lifetime, but they started doing it on steroids after the last housing bust. BOTH parties subscribe to it.
The FED is beyond reproach. They operate without any sort of real rules or regulations. They make shit up as they go. They change the rules mid-game. These guys were found to have been daytrading and frontrunning their own policies. That is the pinnacle of corruption – the very people who control the printing press are financially benefiting from their actions.
I really wish Jerome Powell would go to jail. This guy is a scam artist. The Fed no longer has any credibility.
Jerome Powell does not make any unilateral policy decisions whatsoever at the Federal Reserve and is simply Chairman of the 12 member FOMC (Federal Open Market Committee) which makes those decisions by consensus and which is comprised of the 7 members of the BOG (Board of Governors) and 5 of the 12 Federal Reserve Regional Bank Presidents.
Not just Powell, the last few FED chair are the same along with the govt from both the parties.
The ultimate game is to inflate away the debt and is happening for few decades.
I would sent him to Gitmo. Country club prisons are too good for someone like him. Bernanke ought to go with him.
Looking for the day when you quit holding back and tell everyone how you really feel. HEE HEE
Have felt your pain for decades.
yep, and the biggest laughter is that Bernanke basically got the Nobel Prize in Economics for this stupidity. Even the institutions that supposedly do the vetting of ideas and decide what’s worth awarding and recognizing are thoroughly corrupt. Thanks to the way the Fed and it’s counterparts have normalized trickle-up economics from the people who actually work to help the economy, and the rentier kleptocrats who steal and skim off what they produce. Don’t even need to be Karl Marx to realize how the Greenspan-Bernanke style of “capitalism” has ruined American productivity and siphoned wealth and capital away from the industries that actually do productive things.
At least Powell is making an attempt to correct this but it’s still too half-hearted to quell inflation, and it’s not only Americans who are waking up and getting angry. Just this month a whole bunch of countries in Asia lost patience and are rejecting US dollar payments, demanding it in their own currencies. (What Harrold is referring to above) And there’s no huge mystery about why they’re making the move, no big geopolitical chessboard going on–they’ve just lost patience with a “reserve currency and storehouse of value” that isn’t storing its value anymore with uncontrolled inflation. JPow needs to be a lot tougher and more aggressive to convince the world he’s serious about the USD maintaining its value, and he doesn’t have a lot of room left to make his case. It was indeed a huge, historic mistake to not be more aggressive with QT much earlier on–if anything that should have preceded the rate hikes, and by undoing the mess caused by QE, stronger QT would have probably been even better at reducing the housing bubble and other asset bubbles of the Everything Bubble, while not having quite as damaging an effect with jobs and layoffs like interest rate hikes. But Powell, at least perhaps until recently, was also schooled in the foolishness of Greenspan and Bernanke’s “wealth effect”–which esp after Citizen’s United, just means the working and middle classes are forced to give up even more wealth to the already outrageously wealthy. And now the US itself may be about to pay a massive price for it.
The epic rise in US sanctions over the past two decades along with recent seizures of foreign central bank reserves hasn’t been doing $USD any international favours recently, in case you hadn’t noticed.
Oh, and there is no real Nobel prize for economics, because it’s at best a pseudoscience. The official name of the prize is the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel” which is the “tell” — it would be more accurate to call it the Central Wankers Circle-Jerk Award for Service to the Neoclassical Orthodoxy.
Excellent call, Wolf. Rates are high enough. And although the Fed’s balance sheet has shrunken relative to recent highs, it’s still far bigger than it was at the beginning of 2020. The hand wringing over QT is based on recency bias. The overhang of that balance sheet explosion is still driving inflation.
Thanks again for understanding the REAL wealth effect. I felt it immediately in 2008. I had some savings but didn’t want to eat up the capital. Now that there’s some gain, I feel more free to spend without cutting into the base.
None of the other money talkers ever understood this point.
Mosler does — he’s been banging on about it now for years.
I’ll check him out. Always happy to find other sane sources.
Atlanta gDpNow’s latest R-gDp estimate: 2.9 percent — May 17, 2023
There’s just too much money in the economy. But there’s a steady deceleration in long-term money flows (proxy for inflation).
01/1/2023 ,,,,, 0.499
02/1/2023 ,,,,, 0.429
03/1/2023 ,,,,, 0.353
04/1/2023 ,,,,, 0.339
05/1/2023 ,,,,, 0.295
06/1/2023 ,,,,, 0.234
07/1/2023 ,,,,, 0.211
08/1/2023 ,,,,, 0.206
09/1/2023 ,,,,, 0.215
10/1/2023 ,,,,, 0.197
11/1/2023 ,,,,, 0.195
12/1/2023 ,,,,, 0.166
The deceleration is likely to be faster because I plugged in a steady increase in money.
Wolf…thanks for sharing these interviews. I catch a lot more especially when I hear the inflections in your voice as you answer his questions.
Speaking of questions, you mentioned we will see an increase in natural gas usage as the demand for electricity increases. What are your thoughts on nuclear energy?
Do you see it reviving?
When I was young, I was a big fan of nuclear power. Since then, the industry has lied to me about everything, about the costs (nuclear power is by far the most costly form of electricity), about safety, about how to deal with old nuclear power plants when they’re decommissioned, about how to deal with nuclear waste (we still don’t have a solution), about government subsidies (nothing is more subsidized than nuclear), etc. My in-laws live awfully close to Fukushima. The Pacific is now getting nuclear contamination swirling through it, and it has arrived on the California coast. I no longer believe ANYTHING this industry tells me. Now there is a new generation of liars at work, young liars, trying to start this all over again.
It sounds just like the EV industry, and their lithium strip mines.
“I no longer believe ANYTHING this (nuclear) industry tells me”
Ditto fossil fuels industry AND renewables industry.
“Nuclear power is by far the most costly form of electricity”
I am not convinced for two reasons:
1. Past analysis has focused on generation economics only and ignored the total network costs. Replace 20 coal-fired power stations with one thousand and 20 solar and wind farms, and you need tens of billions of dollars to upgrade the transmission and network infrastructure and further tens of billions of dollars for energy storage. Locate a new nuclear facility near the site of a decommissioned coal-fired power station, and you do so within the existing network infrastructure with little incremental cost.
2. Apparently, there are “about 100 power reactors with a total gross capacity of about 100,000 MWe on order or planned, and over 300 more are proposed” around the world. These are not being built to lose money.
2, now how many reactors are built by private companies as a pure private venture?
Most if not nuclear power plants are either state financed or backed. If they make money, the question is more do the country that have them at large get an economical gain from the power generated.
Your #2. They’re government subsidized, such as government-funded or come with government loan guarantees and rate guarantees, or they are government owned. The public (taxpayers, ratepayers) loses money, not the investors, if any. In the US, the investors didn’t lose money either, they got rich. The taxpayers and ratepayers got ripped off. And a big part of the costs of nuclear power plants come after they’re decommissioned, and you have to take them down and dispose of all the contaminated materials, and of the fuel rods that are stored in the pools on site, etc. This takes many years and is hugely expensive, and taxpayers and/or ratepayers are on the hook. Plus there are the catastrophic costs of a nuclear reactor meltdown, of which we have way too many. The whole entire industry is putrid.
What about 3 Mile Island? They made a movie about it.
President Joe Biden has announced three losers to fill the U.S. Federal Reserve vacancies, as the Central Bank tries to get inflation, and the economy, under control.
Loser #1 currently a Board of Governors member, is Philip Jefferson, 61. Jefferson has been nominated by Biden to serve the remaining four years of his term as vice chair. Jefferson is a former economist for the Board of Governors. He has also had positions at both Swarthmore College as well as Davidson College.
Jefferson was confirmed by the Senate in May 2022 to fill a term that ends in 2036. If he is confirmed to serve as vice chair, he would succeed Lael Brainard. Brainard stepped down from his role on the Board and as vice chair in order to serve as the head of Biden’s National Economic Council.
Loser #2 – also currently a Board of Governors member, is Lisa D. Cook, 58. Though she was confirmed by the Senate in May 2022 to a term that ends in 2024, Biden has nominated Cook to serve a new full term of 14 years. Cook previously taught at both Harvard’s Kennedy School of Government as well as Michigan State University. She previously worked at the National Bureau of Economic Research as a researcher. Cook is the first Black woman to be a member of the Board of Governors.
Loser # 3 is Adriana Kugler, 53, who is currently World Bank’s U.S. executive director. Kugler has been nominated to serve Brainard’s remaining three years on the Board. During the Obama administration, Kugler served as the chief economist for the Labor Department. She previously taught at Georgetown University.
If confirmed, two of three nominees would make history. Jefferson would be the second Black vice chairman of the U.S. Federal Reserve. Kugler, who is Colombian-American, would be the first Latino member of the Board of Governors.
All three stated that Climate Change will be their top priority.
Don’t sweat it. FOMC membership is traditionally an honorary appointment that is expected to rubber stamp the decision that has already been been made.
I think that they are all qualified. Perfect examples of incompetence selected on that very basis.
Why do members of the Fed Reserve Board need to have Climate Change as a Priority 😜😜 How about competent people working in the best interest of the American middle class😉😉
As your interview stated savers finally have some income from interest and I’m spending all of the interest I finally earn. My spending has gone up 3 fold
the venom and hate, the paranoid thinking….there’s longstreet with his/her…”find out who they (the fed) really serve”, and Powell and his fed should be in handcuffs, from Depth Charge,…music to Harry Houndstooth’s ears, And of course, Depth Charge again, the ‘elitist scum blaming the poor’.
All sounds way over the top to me…..fed has an impossible job from the getgo, is handled by mere humans, new chair is never handed a balanced well ordered system, always cracks and strains and problems, and then add politics on top of that…….and the impossibility of really knowing what tomorrow’s events are ( anyone here really anticipate a knock down drag out war with Russia, not directly involving the u.s, but certainly tangentially )……
I mean, get real, imperfect people doing an imperfect job. I criticize them, sometimes my ideas are right, sometimes not…just like them.
Just hope they keep the U.S. on an even financial keel…..some inflation, not too much, some unemployment, not too much….etc. Very tricky stuff, in a very unstable world……
Thank you Wolf for great info, great analysis…….and thank you all posters, some more than others….but it takes all of us…..no matter what I say about any of you…we’re all in the same boat, and we all have a say.
If the inflation problem is really a result of “too much money sloshing around” then the only reliable way to destroy it is via Federal taxation.
I’m guessing there’s not much of a constituency for that, though, so we’ll get yet more ineffective monetary policy as a distraction from the actual fiscal solution. Again.
More taxes would certainly, other things being equal, take money out of the economy, and aid in lowering inflation……..and if you place that tax on the wealthy, then you’re also taking that money back from those who gain the most from the fed using ‘the wealth affect’ to boost the economy, which, as others have pointed out correctly has often been their goto method.
Everything said in this podcast regarding the lack of any evidence of a recession is being repeated here in the Swamp. The economy is a long way from recession based on what I am seeing. On the other hand, Inflation is still out of control. The Feds interest rate increases have failed miserably to curb spending and inflation. In fact, as Swamp has posted previously, they are actually contributing to inflation. Maybe unloading the balance sheet at a faster rate my help, but right now these 25 basis points increases in the Federal Funds rate aren’t working
“Insanity is doing the same thing over and over, and failing, and then doing it again and expecting a different result”.