Is the economy doomed?

Yes. Pushing the button to pay the interest. The interest is like any other non-discretionary government expenditure. To the extent it is not set off against revenue it will represent deficits covered by pushing the button, and then latter paired with Treasury issuance. None of this makes a lot of sense until one delves into what the real purposes for bond issuance are and why we need them. They have nothing to do with raising money to spend. We have the button for that. Many countries can not do this to the exclusion of real borrowing. Any Country whose currency is used to a significant extent as a reserve currency can do it. Those countries that run substantial Current Account Balances (Exports >Imports) can run a private sector surplus at the same time they run a government sector surplus. This is something the U.S. can not do. We absolutely must run net deficits! Or said another way, run private sector surpluses to facilitate savings.

 

Soros' quaint explanation was developed long before the massive QE1, QE2 QE3 & QEInfinity were put into play.

As for your previous Dalio post TLDR.

But do yourself a favor and pickup a copy of "The Rise of Carry" by Tim Lee, Jamie Lee and Kevin Coldiron which explains how all things financial worldwide have become one ginormous Carry Trade

Here is just one of the many business and academic (wink, wink) recommendations that I know you will really love:

The Rise of Carry poses a fundamental challenge to both conventional Keynesian and monetarist approaches to analyzing financial and economic cycles. With clear arguments and detailed supporting statistics, the authors show that the combination of "carry bubbles" - which create liquidity and inflate asset prices - and central bank socialization of losses in the wake of "carry crashes" - which do the reverse - requires a radically different analysis of the business cycle. The prevalence of "carry" in virtually all markets has resulted in the evolution of a global monetary system that is perched on a knife-edge between deflation and high inflation, unless a new monetary regime less friendly to "carry" can be introduced. This is essential reading for central bankers, investors, academics and politicians.

John Greenwood, Chief Economist, Invesco.

 

That sounds like something that i would be keenly interested in reading. Hope it is not so far out of my lane that i can't understand it. If it is written in Carry Trade/Wall Street/Finance Guru Lingo I probably won't be able to understand it. We have some of those lingo slingers here, particularly the options forum. I don't understand them either. But thanks. I will take a look at it.

 

A sharpie like you won't have a reading problem with it at all.

From the Preface:

"In the book we explain in some detail the mechanics of carry, or volatility-selling, trades, but our purpose is to explain how these trades fit into and help create the bigger picture: a picture of decaying economic growth, recurring crisis, rising inequality, and fraying of the social fabric. Although some of the finance material may be difficult for non-specialist readers, it is simplified relative to the treatments on derivatives or foreign exchange markets. The book is not intended to be an alternative to such textbooks, nor any kind of manual on options or currency trading. A detailed technical understanding is not necessary to grasp our basic conclusions."

 

you wouldn't of course go through that nonsense if you had the button. You'd just push the button and buy the car. So this example of the guy who foolishly attempts to "borrow" his own money when there is no reason to is a bit nuts; yet there is a parallel to this crazy example and what the government does. There is no true borrowing going on in the example, and there is also no true borrowing going on when the government first prints and then appears to borrow. The government, however, has very important reasons for auctioning Treasuries, and thus appearing to borrow when it isn't, whereas the guy with the button has no good reason not to just print the money and buy the car. Regardless, neither the government nor the guy who buys a car can borrow their own money. That's always impossible, because it can not satisfy a fundamental requirement to qualify as borrowing.

Recall that day to day government/private sector bank transactions clear through the banks' reserve accounts. In days gone by, deficit spending would have resulted typically in hundreds of billions in excess reserves had the excess not been drained via the Treasuries auction of Securities. Today that could be trillions of dollars. Under the former fixed reserve requirement, large deficit spending could have caused the fed funds rate to plummet toward zero, if the excess reserves that resulted from the governments deficit spending were not drained from banks' reserve accounts.. This happened during the financial crisis when the government wrote checks for trillions to the private sector and Treasury bond sales could not drain reserve accounts fast enough to prevent the Funds rate from going to virtually zero. Bernanke stepped in and started paying interest on excess reserves. This put a floor under the funds rate.The Powell Fed has removed the reserve requirement and is controlling the funds rate by paying interest on reserves. No bank will loan below that rate.

So this is one of the uses of Treasury securities, viz., to drain excess reserves caused by deficit spending, but beyond that Treasuries are an important tool of the Fed, in general, and especially for managing bank reserves. In addition they are hugely important as a risk free, highly liquid, interest paying store of money. Since the dollar is the reserve currency, Central Banks must maintain stores of dollars in their foreign exchange reserve accounts at the Fed. This creates a huge demand for Treasuries as no bank wants their store of dollars sitting idly by not earning interest. A Country that pegs its currency to the dollar must maintain an especially large store of dollar denominated assets. And then there are the pension funds with billions in assets that need part of these assets to be kept in a highly liquid, interest paying form.

So, even though we have no need for Treasuries as a means of raising money to spend, we, and the rest of the world too, do very much need them. The Treasury routinely auctions Treasury Securities in the Amount of the deficit. This indeed makes the operation look like borrowing. However, rather than thinking of Treasury Securities as representing money loaned to the United States, which they are not!, we should think of Treasuries as just an interest paying form that dollars can take.

 

that's true. and what does QE matter in that regard?. Soros's reflexivity hypothesis is timeless, universal, and holds regardless of QE. The only thing that can change it is a substantial change in human nature. If we believe something is true, though it isn't, we can, because of our false belief, make it true. Or perhaps more accurately said, "...make it seem even more true." This is the essence of Soros's reflexivity, and there are many examples of reflexivity affecting financial markets. . A simple example of reflexivity that Soros has used: "If you believe government is bad, you will create bad government." I would modify this to say instead, "If enough of us believe,,,"

We can not change the immutable natural laws of course, no matter how firmly we hold to our false beliefs and how resolutely we act on them. At least we have no examples of that happening, though the folks that wrote the Dead Sea Scrolls have succeeded in absolutely convincing some of us that all it takes is faith to up-end the natural laws.

 

......... null and void because QEeeeeeeeee means the markets ... are not the markets plain and simple.

 

Whatever.

 

Is the economy doomed?

Naa, everythings peachy!