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| The money printers meet. |
The Federal Reserve’s recent decision to purchase trillions in corporate debt went underreported on Main Street, but shocked credit markets. The move will cushion losses for investors in risky assets, yet it’s a dubious step for American capitalism as a whole—one that will accelerate some of the most dangerous trends in the U.S. economy.It needs to be emphasized that what the Fed is doing now versus what it did during the Great Recession is pumping money into the economy this time. Much of the Great Recession bailout was a swapping of paper between banks and the Fed. Not this time. It is the big money pump this time.
Altogether the Fed will deploy more than $1.45 trillion in support of investors in leveraged assets—more than double the size of the 2008 Troubled Asset Relief Program, and over $7,000 for each working-age American. That includes $750 billion to purchase recently downgraded junk bonds and bond exchange-traded funds—an unprecedented intervention in the private credit markets.
Pumping trillions of dollars into corporate credit and even high-yield debt will further distort markets already shaped by a decade of easy-money policies. This is no abstract concern. The result will be an acceleration of two economywide transfers of wealth: from the middle class to the affluent and from the cautious to the reckless.
The money supply is going to continue to soar putting very strong upward pressure on prices. It will especially hurt those on fixed earnings and dollar cash savings.
-RW
I think there are serious questions whether prices will actually increase, for several reasons:
ReplyDelete1. Aside from the massive 20 - 40% decrease in GDP for several quarters or longer, there will be tens of thousands of bankruptcies, wold-wide. In short, massive waste / liquidation of prior "productive" assets.
2. Not only will entire industries, have to write-down / dismantle, etc., assets, including air planes, cruise ships, hotels, but those & many other businesses will be far less productive. Still not clear how restaurants, and many other businesses can survive if social distancing results in 1/2 occupancy.
3. Basically, most individuals, & businesses will place a much higher preference for holding cash balances. With 70% of U.S. economy due to consumer buyer, I would expect such buying to be reduced sharply. The savings rate will skyrocket from the current small percentage. The working story that many Americans don't have $400 for an emergency, will change. This attitude will likely continue for at least several years.
4. I suspect the above factors will be far greater than the say 10+ Trillion created by central banks, much of which is being wasted anyway.
5. Austrian theory does NOT say that money printing will result in higher prices. It says prices will be higher than they would have been, without the printing. Conditions re capital closing / destruction, & unemployment will likely approach depression event, so the deflation tendencies may overwhelm the money printing.
6. Not being much considered yet, is the November election. Not only have Trump numbers been dropping dramatically, but story floated that Michelle Obama may be Biden VP running mate, could put White House & House & Senate in Democratic hands. That will likely bring higher taxes, more restrictions, etc., etc.
7. The game changer will be a vaccine, or at least vastly improved care, that might change much of above.
"Austrian theory does NOT say that money printing will result in higher prices. It says prices will be higher than they would have been, without the printing."
ReplyDeleteIndeed, the correct way to put it is that prices will be higher "everything else equal". But as QED points out above, everything else cannot be equal. Just take one thing that is not equal: Oil prices and the oil market. Demand has fallen off of the cliff and the supply overhang will last for months if not years. Inflation in the U.S. has almost always been associated with rising oil prices...notice I said "associated" and not caused by higher oil prices. Can the Fed overcome the deflationary bias in this market (and other markets since oil is an input cost in hundreds and hundreds of products) by passing out free money? In theory, yes, but it is by no means a sure thing. When the real estate shoe drop is finally recognized and reported, we will have an entire series of major markets that have busted: Financial markets, oil markets, real estate, auto sales, general retail, travel, dining, etc. Will they near-term turn inflationary? Not at all likely.
“Austrian theory does NOT say that money printing will result in higher prices. It says prices will be higher than they would have been, without the printing.”
ReplyDeleteWhat’s the difference?
The difference is that observing money printing at the time of falling prices will not disprove Austrian theory.
DeleteAs an example, prices --without money printing -- assuming possible depression-like conditions, might fall 10%, but with money printing, maybe prices would be unchanged.
DeleteI appreciate your responses.
DeleteSame as 911, C-19, whatever it is, it is a crisis used to implement planned for major changes in society. What central banks and other central planning organizations do may not be part of a plan detailed to the Nth degree but the few at the top of these agencies have had some plan of attack in place ready to be implemented when the appropriate crisis occurs.
ReplyDeleteWe know, no matter how good the central planners plan they will not get everything per plan. There are many factions of the PTSNB that both work together and against each other. Whether we end up in some kind of flation or not we are in for some interesting times.