Sunday, June 13, 2021

The Feds Vs. The Fed

As I understand it, the Federal Reserve is printing about $120B per month and using it to buy government debt. That comes out to $100 per week for every man, woman and child in the US. At the same time, there's no real increase in goods and services to buy. More money chasing the same number of things leads, eventually, to inflation. The Grumpy Economist has more.

The Fed seems to think that "anchoring" expectations comes from soothing speeches about how anchored expectations are. At worst they may say they have "the tools" to contain inflation should it break out, but they seldom say just what those tools are. I believe that expectations come from expected actions, not speeches, and better from robust institutional rules and commitments that force necessary but unpleasant actions when needed. At least, people must believe that the Fed is willing to repeat 1980 if it comes to that.  And raising interest rates will be much harder now, with a) 100% debt / GDP not 25%, so higher interest rates immediately hurt the budget b) huge reserves so the Fed will be seen to pay a windfall to big banks not to lend out money c) the too-big-to-fail banks will all lose a bundle if interest rates rise d) the current emphasis on inequality, as a recession will hurt the most vulnerable the most. 

2) In today's economy, in the end, inflation comes when people do not believe the government will repay debt. Beyond interest rates, the Fed changes the composition of government debt -- reserves vs. treasurys -- but not the amount of debt. Whether we hold treasurys via the world's largest money market fund (that's what the Fed is) or directly really does not matter. 

In simpler terms, the Fed is promoting inflation to cover for the incompetence of our political leaders. They can't balance the budget, so the Fed prints money to buy their debt. The Fed's mission, however, is not to bail out Trump or Biden, it's to maintain a sound currency. It's all well and good to backstop the Ivy League geniuses running the government when there's no inflation, but when it starts kicking up, there's bound to be some conflict.

If inflation hits 7%, does the Fed raise rates? How about 10%? When does it stop printing money to buy debt? In another Grumpy Economist blog post, we learn the Fed is... 

"...dedicated to understanding and finding solutions to the numerous forms of inequality that communities of color experience and working with communities in our District to address deep-seated inequities," 

Again, that's fine as long as there's no inflation, but when it comes, there must be a point at which all the fairyland feelgood stops and the Fed has got to rescue the dollar at the expense of the super-duper compassionate types. 

Really, inflation is all about overspending by the government. At least that's how it looks to me. Absent that, the Fed would be free to manage the value of the dollar.

Bonus Take: I've seen new talk about a wealth tax. My guess is that some of the Ivy Leaguers are starting to figure out that they'll need a new source of coin in the future when the Fed stops giving them an allowance.

A waterfall on the road to Hana. It has nothing to do with the post, but I like it.

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