Posted on 04/01/2020 10:41:08 PM PDT by aquila48
How can the Fed launch an “unlimited” monetary stimulus with congress approving a $2 trillion package and the dollar index remain strong? The answer lies in the rising global dollar shortage, and should be a lesson for monetary alchemists around the world.
The $2 trillion stimulus package agreed by Congress is around 10% of GDP and, if we include the Fed borrowing facilities for working capital, it means $6 trillion in liquidity for consumers and firms over the next nine months.
The stimulus package approved by Congress is made up of the next key items: Permanent fiscal transfers to households and firms of almost $5 trillion. Individuals will receive a $1,200 cash payment ($300 billion in total). The loans for small businesses, which become grants if jobs are maintained ($367 billion). Increase in unemployment insurance payments which now cover 100% of lost wages for four months ($200 billion). $100 billion for the healthcare system, as well as $150bn for state and local governments. The remainder of the package comes from temporary liquidity support to households and firms, including tax delays and waivers. Finally, the use of the Treasury’s Exchange Stabilization Fund for $500bn of loans for non-financial firms.
To this, we must add the massive quantitative easing program announced by the Fed.
First, we must understand that the word “unlimited” is only a communication tool. It is not unlimited. It is limited by the confidence and demand of US dollars.
I have had the pleasure of working with several members of the Federal Reserve, and the truth is that they know it is not unlimited. But they know that communication matters.
The Federal Reserve has identified the Achilles heel of the world economy: the enormous global shortage of dollars. The global dollar shortage is estimated to be $13 trillion now...
(Excerpt) Read more at mises.org ...
Need I say -— It’s on my to do list!
“So my question is, where is the black hole that has sucked all the capital from the last 10 years of qualitative easing?
Someone, or some group is sitting on a humongous pile of cash somewhere.
Where is all this cash going?”
It’s going back to the Fed.
When the economy is in trouble and the Fed decides to “print” money, it doesn’t just throw it out the window for people to catch. It uses that money to buy assets in the open market - treasuries, Mortgage instruments, etc and that money then gets spread out in the economy. In doing so it helps prop up asset prices, lowers interest rates and helps businesses.
When the economy starts to improve, the fed sells those assets it bought in the open market and in doing so gets back most of the cash it “printed”.
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Sounds good but in over 10 years (and only in late 2018) the Fed only reduced/sold about $700 billion of their $5.8 trillion balance sheet. They are going to have a real fun time now trying to reduce it w/o crashing the stock or bond markets. And didn't Bernanke say that the Fed wouldn't/didn't "monetize the debt"??
“Sounds good but in over 10 years (and only in late 2018) the Fed only reduced/sold about $700 billion of their $5.8 trillion balance sheet.”
True. I imagine they monitor the economy and they buy and sell assets based on how they think the economy is doing. Given that there was little inflation and the economy has been humming right along, they figured they didn’t need to buy or sell much, though they had started selling some assets over the past couple of years, until this disaster hit.
“They are going to have a real fun time now trying to reduce it w/o crashing the stock or bond markets.”
I don’t know why they should be in a hurry to do so, no real inflation in sight, and especially with the havoc that this virus is causing.
“And didn’t Bernanke say that the Fed wouldn’t/didn’t “monetize the debt”??”
In principle I agree, and I don’t think it should become a habit, but in situations like 2008 and today, what is the least of the two evils, some monetization of debt or letting the economy crash and burn with unspeakable human suffering?
I know which “evil” I would pick. What about you?
And I’m cognizant of the “moral hazard” (danger of rewarding irresponsible behavior) involved in this, but hopefully there are enough wise men at the Fed to keep this from getting out of hand. If not, eventually we would become Zimbabwe or the Weimar republic.
Yeah I understand your take and I don’t necessarily disagree RE: “best for the economy/best for the country”...but I also worry about “at what $XXX trillion will we hit the point of no return”. Also the normal “main street” people/savers/businesses always seem to get the shaft (historical inflation vs wages/income/interest rates chart) and the largest banks/investors always seem to get ahead on “cheap Fed money”. Current interest rates don’t cover inflation, and now the low-rate equity market bubble has had the “COVID pin” applied, so no where to go.
You seem like someone with a "handle" on these matters. How would you explain the Law of Supply and Demand not leading to an increase in the Prime Interest Rate, due to the scarcity of U.S. dollars?
Regards,
“.but I also worry about “at what $XXX trillion will we hit the point of no return”
I think we’ll see it coming and then it will depend on how many “moral hazards” we’ve given in to. The real danger is in how many people we’ve “trained” to be dependent and irresponsible. This is where politics comes in, and the RATS are more than eager to get us there.
“Also the normal “main street” people/savers/businesses always seem to get the shaft (historical inflation vs wages/income/interest rates chart) and the largest banks/investors always seem to get ahead on “cheap Fed money”.”
I’m not sure I agree with that. There are plenty of “main street” people and businesses that do quite well with lots of upward mobility. Look at WalMart, Apple, and most other high tech companies that came out of nowhere. As for the bank getting cheap money, well they pass it on to the rest of the economy, they’re the financial “retailers”.
“Current interest rates don’t cover inflation, and now the low-rate equity market bubble has had the “COVID pin” applied, so no where to go.”
I disagree. This may be one of the best investment opportunity of a lifetime. I bet by this time next year the market will have mostly recovered. Remember Buffet - get greedy when there’s blood in the street. You don’t even have to be a stock picker, just buy the whole market, or better yet buy one year out calls on the S&P or the Q’s.
If fate gives you lemons, make lemonade!
I like an “optimist” nowadays! Thanks! Don’t forget Real Estate...”they aren’t making more”. Several “main street” friends of mine have “made it” for their retirement with rental properties...they can be a hassle sometimes...but over the long term hard to lose. Don’t have any friends that have “made it” on Wall Street (doing “OK” in a 401k excluded)...so my opinion is probably skewed. YMMV.
“If there is a shortage of U.S. dollars, then shouldn’t - according to the Law of Supply and Demand - interest rates be much higher?”
Yes, it’s a bit of a conundrum.
What the article was referring to is the international currency market and the fact that so many national debts of foreign countries are denominated in dollars and are maturing.
This virus has weakened many economies and not many investor want to buy debt of weak economies. So the yield on these dollar denominated bonds has gone up. If you want to get a high return buy some of those international bonds.
Our Fed is supplying dollars to these countries by swapping dollars for their currencies.
Here’s an article that describes what’s going on better than me.
No, won't work for me. (The only banking institution I - as an ex-pat thrown to the curb in 2016 by Merrill-Lynch, etc. afraid of "claw-back" if it turned out I was a terrorist or arms dealer or money-launderer or drug lord - am willing / able to do business with is a Credit Union in my brother's hometown. They don't offer anything except the most-boring U.S. savings certificates you can imagine.)
But even so:
Somewhere, U.S. dollars are in high demand. Even if I can't directly present myself with fistfuls of $$ to those poor souls (hah!), and demand high interest rates, those persons / entities capable of doing so will be indirectly lessening the supply elsewhere.
Think "hydraulics."
So even if I can't directly cater to the increasing demand, I should experience an advantage from it, right?
But I'm not.
How do you explain that?
Regards,
“Somewhere, U.S. dollars are in high demand. Even if I can’t directly present myself with fistfuls of $$ to those poor souls (hah!), and demand high interest rates, those persons / entities capable of doing so will be indirectly lessening the supply elsewhere.”
Obviously there aren’t enough of them to make much of a difference. Whatever difference it makes is reflected in the market place.
Would you invest in Mexican or Brazilian bonds right now at a higher interest rate than you get here? Even though it’s denominated in dollars, the risk of default is substantially higher than the US defaulting.
But in case you are interested in doing so, you can invest in them from the comfort of your home.
Here’s a fund listed on the NYSE that yields almost 12% that you can buy from any broker.
https://www.cnbc.com/quotes/?symbol=EMD
But you may want to read this first...
https://seekingalpha.com/article/4335598-perfect-storm-for-emerging-markets
Still interested? 12% is pretty juicy!
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