Tuesday, March 31, 2020

Fed's Cure Risks Being Worse Than the Disease - Trump Socialism, Mal investment

Dear Professor Kaufman,

I agree with what you say.
Monetarism a key tool in understanding the crisis.
I am slowly trying to figure it out and add some opinions.

Money Supply times Velocity equals Prices times Quantity.

Looks like a tug of war: money versus velocity.
Money supply going up and up from QE1 QE2 ...
Velocity probably going down, but by how much?

On the right hand side of the equation another tug of war:
Prices probably headed up, price gouging already reported.
Quantity going down as stores and shopping centers completely shut down scared shoppers stay home.

It does look like inflation ahead, finally.
Can Trump do the Nixon price controls again?
Can Trump stop hyperinflation?
Hyperinflation vs price gouging — how to tell the difference?
Some prices falling such as oil and gasoline confusing the issue.

A big problem with massive borrowing and massive spending,
helicopter money flying over dropping money into the economy.
With all that money comes increasing prices,
With more inflation, that will drive interest rates higher.
It seems inevitable at some point hard to sell bonds,
so bond prices will fall and interest rates will skyrocket making the federal budget deficit worse.

Worse than stagflation of the 1970s - stagnation + inflation.
This is a catastrophe, uncontrollable depression and increasing prices on many items.

One possible savior is agricultural production, and oil production.
Oil, beef, corn, soy, wheat prices are all collapsing.
People are staying at home and cooking at home.
The corn, soy, wheat and other plants will continue to grow and farmers will continue to farm, with cheaper oil machinery.
Food prices will fall and that is a big part of CPI.

So people will eat well, maybe too much,
and people will have lights, heat, electricity, and water, and TV.
Rent prices will fall as students move home with parents and colleges shut down.
People flee the sanctuary cities and ghettos when they can.
People move in with family for economy and safety.
Causing rents to collapse everywhere.
Gun prices skyrocket.

People stuck at home and not working, and no jobs, no money except for government checks.
They will not be able to buy much, even online.
Amazon Post Office delivery worker strikes may cripple home delivery.
China new cheap stuff will not be available either.

Used cheap junk prices will skyrocket.
$100 for used sox, used shovels, used spark plugs….
Construction and maintenance may not happen
(many projects continue around here).
No financing on new construction or even fixing up old
No illegal drugs from Mexico with the border shut, no money laundering, no transactions.
Massive insanity addicts cannot get drugs.

Looks like the economy is disappearing and we will be back at 1900 living standards or worse.
Cities may riot, crime, steal stuff, massive insanity.

Without jobs, and pay money supply may collapse,
except for the few checks given by Trump government.
No velocity except for food and prescription drugs and home delivery items.

This gets into money laundering and derivatives trading and overseas dollars.
Much money is used for corruption, drug dealing, money laundering, derivatives trading.
Some of that will decrease.

Many big changes hard to figure out.
The New Economy.


From: "Kaufman


Milton Friedman would roll over in his grave if he could see what is happening at this moment.

Powell is a sign post of coming disaster and Bernanke not far behind.

Perhaps the only more recent Fed Chairman who saw the writing on the wall was Greenspan,
and perhaps some of the Paul Volker initiatives.
Janet Yellen deviating from the Greenspan philosophy was rare.
She was status quo and ended up that way.

Greenspan warned of entitlements in fiscal policy as the culprit in debt control,
not ever realizing that they could do what they did today,
and possibly again in a couple of months.

The debt recovery is out of reach,
and the Treasury is an open bucket.

According to Monetarist thought
the direction of debt at this point is to see a flood of money into the system
that will effect price structure in about eighteen months.

Prices will rise causing interest rates to rise.

The Fed caught in the trap of buying securities to bring it down,
simply adds to an accelerating problem;
i.e. Inflation.

Soon government receipts will not be enough to pay the interest on the debt.

This latter is the key that will lead to disaster,
because the Fed will have to continue to increase holdings on Treasury securities,
thereby buying more Treasuries and printing more money to just pay interest.

It will accelerate out of control, just like it did in the Weimar Republic of Germany in 1921.

There will be no way to control it without default.

A lesson that it seems we have not learned.


From: joe

Dear Professor Kaufman,

I avoid people, but can still watch TV, read online, and think.
Hard to figure out the news nowadays,
Hard to know what is even going on,
but it seems quite big,
and Trump and the Fed are big players.

The Fed is taking over the whole economy.
Banks are bankrupt
Banks have given out loans that cannot be repaid by
bankrupt companies,
bankrupt people,
bankrupt governments,
and bankrupt foreigners.

The Fed is "lender of last resort" as stated in all textbooks.
So the Fed will buy up those loans with printed money and un-printed money electronic accounts.

Bankrupt entities will get trillions.
You may get $1200 if you are lucky.
May have to get more to prevent riots.

All because of a virus that forces social distancing so much less communicable diseases than normal,
and many more babies being born,
and families learning to cook again, sleep more, take care of their own children,…
Blessing in disguise? as I said in 1974 OPEC oil embargo gas lines, no gas.

Obama Bernanke proved that rich 1% banker rulers can get trillion $$$ bailouts
and the sheeple will not protest much or even know what is going on,
if you give the sheeple $10 minimum wage jobs ($20 or $30 if you got a degree)
to pay interest on large growing debts
and buy phones, TV, games, wine, song, drugs,…

Wait to see if
house arrest
constant electronic disinformation
will force sheeple to gladly accept their new rulers rich 1% elites.
Welcome to the new world order.

Trump fighting to keep Hotels, Casinos, Airplanes burning fossil fuels,
to spread disease, multiculturalism, globalism, conspiracies among rich 1% elites around the world…
When they should stop operating.

"A backdoor to socialism"
as I called the 2009 Obama bailout of GM auto industry Government Motors fossil fuel global warming, etc. etc.
Capitalism is designed to let bankrupt ideas go bankrupt,
whereas socialism and communism allow rich corrupt politically connected to keep operating and get richer
while the economy and sheeple suffer.
Will the sheeple just sit there and take it?


From: Lothar


whether the cure of an economic shutdown is worse than the virus.

we need to ask if the cure is worse than the disease seizing financial markets
of the Federal Reserve getting so deeply into
corporate bonds,
asset-backed securities,
commercial paper, and
exchange-traded funds.

the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook.

That wasn't enough to calm markets, though
— so the central bank also announced
$1 trillion a day in repurchase agreements and
unlimited quantitative easing,
which includes a hard-to-understand $625 billion of bond buying a week going forward.
At this rate,
the Fed will own two-thirds of the Treasury market in a year.

But it's the alphabet soup of new programs that deserve special consideration,
as they could have profound long-term consequences for the functioning of the Fed
and the allocation of capital in financial markets.

Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.

PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.

TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.

SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.

MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn't allowed to do any of this.
The central bank is only allowed to purchase or lend against securities that have government guarantee.
This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac.

An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations.
The Treasury, using the Exchange Stabilization Fund,
will make an equity investment in each SPV and be in a "first loss" position.
What does this mean?
In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans;
the Fed is acting as banker and providing financing.
The Fed hired BlackRock Inc. to purchase these securities
and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words,
the federal government is nationalizing large swaths of the financial markets.
The Fed is providing the money to do it.
BlackRock will be doing the trades.

This scheme essentially merges the Fed and Treasury into one organization.
So, meet your new Fed chairman,
Donald J. Trump.

In 2008 when something similar was done, it was on a smaller scale.
Since few understood it,
the Bush and Obama administrations ceded total control of those acronym programs to then-Fed Chairman Ben Bernanke.
He unwound them at the first available opportunity.

But now, 12 years later, we have a much better understanding of how they work.
And we have a president who has made it very clear how displeased he is
that central bankers haven't used their considerable power to force the Dow Jones Industrial Average at least 10,000 points higher,
something he has complained about many times before the pandemic hit.

When the Fed was rightly alarmed by the current dysfunction in the fixed-income markets, they felt they needed to act.
But, to get the authority to stabilize these "private" markets,
central bankers needed the Treasury to agree to nationalize (own) them
so they could provide the funds to do it.

In effect, the Fed is giving the Treasury access to its printing press.
This means that, in the extreme,
the administration would be free to use its control,
not the Fed's control,
of these SPVs to instruct the Fed to print more money
so it could buy securities
and hand out loans
in an effort to ramp financial markets higher going into the election.

No comments:

Post a Comment