Author Topic: How Long Can Fed Buy Everything?  (Read 3509 times)

wescobrk

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Re: How Long Can Fed Buy Everything?
« Reply #10 on: May 21, 2020, 05:43:41 AM »
The BOJís balance sheet is already above 100% of Japanese GDP and their economy/markets are not blowing up, so I imagine the Fed can keep going for a while if they want to (and Congress supports them). I donít know how far they can go though. I would certainly keep an eye on Japan for clues if this interests you.

yeah, was going to say to just look at Japan. The test will be if the Fed is able to take the foot off the gas with the market not throwing another taper tantrum that kept QE going on seemingly indefinitely.

Que the 80's song "we are turning Japanese now"


rb

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Re: How Long Can Fed Buy Everything?
« Reply #11 on: May 21, 2020, 06:00:26 AM »
And here it is. Unemployment claims came in and futures spike up. I guess they expect Jay to come on later today and throw a couple more trillion to the market.

DooDiligence

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Re: How Long Can Fed Buy Everything?
« Reply #12 on: May 21, 2020, 06:22:58 AM »
Anecdote ALERT:

My neighbor owns a paint & body shop.

He told me this morning, that he was GIVEN 10 weeks worth of payroll with no strings attached.

On another note, the boat launch down the street from me was barren yesterday for the 1st time in months.
Everyone must be back at work.
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wabuffo

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Re: How Long Can Fed Buy Everything?
« Reply #13 on: May 21, 2020, 06:43:56 AM »
The size of the Fed balance sheet is irrelevant - we're already at zero rates. 

The Fed typically owns ~10-20% of the net debt issued to the public by the US Treasury (BTW this is a normal range for the Fed).  Per the May 6th Fed H.4.1 report, the Fed owns $4t of US Treasury debt out of $19.2t total US Treasury debt o/s. (you can find this number on the US Treasury Daily Report for May 6th).

But even if it bought 100% of all the US Treasury debt outstanding that it didn't already own (19.3t - 4.0t = $15.2t), the only impact would be to increase the size of reserves held by the banking sector.  Essentially the Fed would buy $15.2t of Treasury debt in exchange for $15.2t of new bank reserves via the US banks as intermediaries (as it must - since only federally-chartered banks, a few other financial companies and the US Treasury have accounts at the Fed).   Those bank reserves are deposits in accounts at F.R banks and can't circulate outside the Federal inter-bank clearing system.  They are really check and e-payment clearing accounts.

So the net effect would be to consume the balance sheets of US banks with reserves and drive all interest rates to whatever the Fed pays on excess reserves (currently zero).  US bank reserves on May 6th were $3.2t which corresponds to "Cash Assets" of $3.2t in the Fed's H8 report - "Assets and Liabilities of Commercial Banks in the United States".   

US banks total assets on May 6th were $20.3t.  Thus the Fed would force US banking sector cash balances to go to $3.T + $15.3t = $18.3t  This would essentially liquidate the entire US banking sector and turn it into a huge cash box ($18.3t/20.3t = 90% of bank assets would turn into cash on deposit at F.R. banks).   

I think in this hypothetical environment, what would the economy look like with a zombified banking sector and no available US Treasuries for anyone, anywhere?  It basically demonstrates that the Fed can buy anything it wants, but its only currency is a very specific one that you and I can't access. Therefore, it is taking out liquid assets (Treasuries, IG bonds, stocks?, baseball cards?) and replacing them with illiquid assets that must sit as a cash asset in the banking sector via a contra-liability account at the Fed.  The more the Fed balance sheet grows, the less safe, liquid assets exist for the rest of us.  I don't see how that helps the private sector and I think it actually hurts it.

The reality is that the Fed isn't the major factor in money creation since it can only lend via swapping assets for bank reserves.  It is the US treasury and its deficit spending that is the major money creator.  All of the attention on the Federal Reserve is misdirected. 

It also shows how disjointed monetary operations are when you have two players (the Fed and the US Treasury) that often work at cross-purposes and neutralize each other.

wabuffo
« Last Edit: May 21, 2020, 06:52:39 AM by wabuffo »

Jurgis

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Re: How Long Can Fed Buy Everything?
« Reply #14 on: May 21, 2020, 07:52:34 AM »
Fed cannot buy everything. Where would they put it?
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bci23

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Re: How Long Can Fed Buy Everything?
« Reply #15 on: May 21, 2020, 09:08:16 AM »
The BOJís balance sheet is already above 100% of Japanese GDP and their economy/markets are not blowing up, so I imagine the Fed can keep going for a while if they want to (and Congress supports them). I donít know how far they can go though. I would certainly keep an eye on Japan for clues if this interests you.

Theres an argument that since the US Dollar is the reserve/strongest currency that we should be able to go higher than anyone else and not blowup. 100% didn't kill Japan, so could the US go to 150 or 200%? If so the Fed still has lots of "ammo" and we might have 5+ years or until the next recession in 2030 before we have to push the envelope again. 

Theres also an argument that because we are perceived as  the reserve/safest/risk free currency we don't have as much leash before people start questioning our reserve status. In that case we are going to run into problems in the next 15 months at current Fed runrates as the fed balance sheet will approach 100% by that time.

Spekulatius

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Re: How Long Can Fed Buy Everything?
« Reply #16 on: May 21, 2020, 09:36:19 AM »
How did you go bankrupt?
Two ways. Gradually, then suddenly.

( Ernest Hemingway)
Life is too short for cheap beer and wine.

wabuffo

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Re: How Long Can Fed Buy Everything?
« Reply #17 on: May 21, 2020, 09:47:59 AM »
The whole operation makes no sense to me.

Here's an example -- everyone is saying the US Treasury should issue long-term bonds (20-year, 30-year) while interest rates are so low (and, hey! - lock in those low rates!).

But then the Fed comes in and buys those long-term bonds under QE and replaces them with reserves on which it pays interest at SHORT-TERM variable rates
Thus, the rates are no longer locked and will fluctuate (possibly a lot higher over the next 20-30 years).

They are sucking and blowing at the same time.... 

Fed and US Treasury monetary needs a major re-think.   The Bank of Canada runs the entire monetary operations of Canada with basically ZERO bank reserves (though even the BoC is starting to do a minor version of QE, ...ugh!).

wabuffo
« Last Edit: May 21, 2020, 09:51:11 AM by wabuffo »

bci23

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Re: How Long Can Fed Buy Everything?
« Reply #18 on: May 21, 2020, 10:00:23 AM »
How did you go bankrupt?
Two ways. Gradually, then suddenly.

( Ernest Hemingway)

Yep, hard to predict the timing of when the fed hits major problems but no doubt it will happen very suddenly and the sentiment will flip on a dime!

wabuffo

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Re: How Long Can Fed Buy Everything?
« Reply #19 on: May 21, 2020, 10:18:18 AM »
Yep, hard to predict the timing of when the fed hits major problems

I'm not sure what this means exactly?  What "problems" will the Fed "hit"?  Nothing it does affects anything except interest rates. It doesn't affect the supply of money at all.

wabuffo