The Federal Reserve is the cause of the bubble in everything!

Discussion in 'Economics' started by schizo, Jan 25, 2020.

  1. schizo

    schizo

    ft.com
    The Federal Reserve is the cause of the bubble in everything
    Jan. 15th, 2020

    It’s liquidity, stupid. Rephrasing the words of Bill Clinton’s adviser James Carville helps explain why many stocks are hitting record highs, why gold is breaking higher and why economies look set to rebound sharply this year.

    About a year ago we described how modern financial systems have grown dependent on central bank balance sheets, and why another round of easing from the US Federal Reserve — a “QE4” — was vital for markets. Fed chair Jay Powell has so far proved sufficiently flexible to reverse the balance sheet shrinkage, to which his immediate two predecessors, Ben Bernanke and Janet Yellen, had been committed.

    The “Fed Listens”, as the name of its tour of US cities suggests and, true to form, recent worries in the repo market spurred the central bank to inject a further $400bn into the financial sector. It increased its balance sheet by about 10 per cent between last September and the year end.

    Yet, the Fed’s spin-doctors are trying to persuade us that this is not quantitative easing. Certainly, it has not involved direct buying of US Treasury notes and bonds, but it has still led to a sizeable uptake of short-term Treasury bills. The difference between QE and “not QE” is mysterious, then, because liquidity has expanded and, in the process, relieved funding pressures and reduced systemic risks. As a result, the prices of haven assets, such as the 10-year US Treasury note, have fallen, while risky assets such as equities have gone up.

    We measure liquidity through the funds that flow through both the traditional banking system, and through the repo and swap markets. The global credit system increasingly operates through these latter wholesale markets, and often with the active participation of central banks. For some years now, the wholesale money markets have been fuelled by vast inflows from corporate and institutional cash pools, such as those controlled by cash-rich companies, asset managers and hedge funds, the cash-collateral business of derivative traders, sovereign wealth funds and foreign exchange reserve managers.

    Today, these pools probably exceed $30tn and have outgrown the banking systems, as their unit sizes easily exceed the insurance thresholds for government deposit guarantees. This forces these pools to invest in alternative short-term secure liquid assets. In the absence of public sector instruments such as Treasury bills, the private sector has had to step in by creating short-term vehicles known as repurchase agreements, or repos, and asset-backed commercial paper. The repo mechanism bundles together “safe” assets such as government bonds, foreign exchange and high-grade corporate debt, and uses these as security against which to borrow. While credit risk is to some extent mitigated, the risk of not being able to roll over or refinance positions remains.

    At the same time, markets have remained fixated on policy interest rates, which are supposed to control the pace of real capital spending and, hence, the business cycle. That, at least, is what the textbooks tell us. But the world has moved on. We must think of western financial systems as essentially capital re-distribution mechanisms, dominated by these giant pools of money that are used to refinance existing positions, rather than raising new money. New capital spending has itself become eclipsed by the need to roll over huge debt burdens.

    If debts are not to be reneged upon, they must either be repaid or somehow refinanced. However, not only is much of the new debt taken on since the 2008 financial crisis unlikely to be paid back but, more worryingly, it is compounding ever higher. Our latest estimates suggest that world debt levels now exceed $250tn, equivalent to a whopping 320 per cent of world gross domestic product — and roughly double the $130tn pool of global liquidity.

    This refinancing role means that quantity (liquidity) matters more than quality (price, or interest rates). Central banks play a key role in determining liquidity, or this funding capacity, by expanding and shrinking their balance sheets, and in the US, of course, this is closely linked to the Fed’s QE operations. Consequently, more and more liquidity needs to be added to facilitate the re-financing of the world’s debt. QE is here to stay. We should expect QE5, QE6, QE7 and beyond.

    Take a step back, though. A rising tide of liquidity floats many boats, but we know from experience that liquidity-fuelled asset markets usually end badly, as they did in 1974, 1987, 2000 and in 1989 in Japan. In this regard, the scale of recent Fed interventions needs to be understood. Last year, US markets enjoyed their biggest effective inflow of liquidity in more than 50 years, by our measures. That liquidity is already spilling around the world, with our global indices registering their sixth best year on record.

    So remember what former Citigroup chief Chuck Prince said about “still dancing”, on the eve of the 2008 crash. Enjoy the party, yes. But dance near the door.

    The writer is managing director of CrossBorder Capital
     
  2. dozu888

    dozu888

    so boring
     
    jl1575 likes this.
  3. maxinger

    maxinger

    The Federal Reserve is the cause of the bubble in everything

    ---->

    The Federal Reserve is the cause of financial freedom in many professional traders.


    Stop complaining and look at things from opportunistic view point.
     
    Pekelo likes this.
  4. zdreg

    zdreg

    It is a game of musical chairs, when the government keeps a bubble going. Just remember you don't want to be the person without a chair to sit on, when the music stops for any reason.
     
  5. morganist

    morganist Guest

    In the United Kingdom we have found another way of dealing with the debt crisis. This is it. Use another mechanism to control inflation, namely pension saving, this way interest rates don't have to rise to control it or compensate for lost return. This has enabled the interest rate to remain low and prevent defaults. There is another way out of the problem. As the debt repayments are based on principal investment continual economic growth is required to pay the debt instalments, when economic growth is negative the debts start to default.

    If however economic growth is increased debt repayments become easier and the principal borrowing can start to be repaid. The other option is therefore to generate further growth. Pension saving contribution alterations offer many new ways of enabling growth, optimization can provide a year in year out boost to economic growth that can resolve the outstanding debt repayment issues. The book Economic Growth In a Highly Constrained Environment was written to put these techniques forward. See the two articles below.

    http://morganisteconomics.blogspot.com/2019/03/pension-pumping.html?q=pension+pumping

    http://morganisteconomics.blogspot.com/2019/03/optimal-pension-saving.html?q=optimal
     
  6. morganist

    morganist Guest

    It is more like Qualitative Easing similar to Operation Twist. I'm not sure be it seems to be something in that ball park.
     
  7. Deez

    Deez

    I would argue Uncle Don is the current bubble boy. He is busy building Trump Taj Mahal 2.0 aka Trump America. Enjoy the ride for now...;)
     
  8. piezoe

    piezoe

    Thanks for posting. The world now operates on a productivity standard. As a practical matter productivity is usually demand limited. What can't be sold will not for long be produced. This together with the amount of money, dollars in the case of the U.S., will be the ultimate factor in determining the real value of a unit of currency. This is tempered in the immediate economy by both the distribution of money, i.e., where is resides, and what form it appears in, e.g., how much is tied up in private sector Treasury issues, how much in bank reserves, etc.

    There are some similarities between the economy in the early-mid part of the Reagan Presidency and this period of the Trump Presidency* where in both cases the Treasury spent into the economy vastly more than it removed via taxes. The difference is that Reagan entered into a recession whereas Trump entered into an economy near full employment. When Reagan realized that supply side stimulus was not going to pay for itself -- he said that was his greatest disappointment -- he reversed course somewhat and partially undid some of the tax cuts he introduced early on. (He backed more tax increases than cuts by the end of his presidency, but the net result was still a major reduction overall.) Trump however has been pressing for easy money and gigantic spending from day one of his Presidency, all during an economy going full out. Thus it seems we are blazing new economic ground. The immediate results are in plain sight, but it will be interesting to see what the results are down the road.

    ______________
    *It can't be lost on serious observers of the political scene that there are a number of striking similarities between the Reagan and Trump campaigns and policies, including even slogans. It is as though Trump's people used the Reagan campaign as a blueprint. Both administrations were also caught up in illicit schemes, but Reagan successfully claimed ignorance of the Iran-Contra affair, whereas Mr. Trump is the happy ring leader on National T.V., all in plain sight.
     
    Last edited: Jan 27, 2020