Become a part of one of the fastest growing adult communities online. We have something for you, whether you’re a male member seeking out new friends or a new lady on the scene looking to take advantage of our many opportunities to network, make new friends, or connect with people. Join today & take part in lively discussions, take advantage of all the great features that attract hundreds of new daily members!
Really? No inflation since 1980? Bullshit. Here's an inflation calculator. It tells me I would need $3.16 today to buy what $1.00 could purchase 40 years ago. That's a lot of inflation.
If you read the article, you will notice that over the past 58 years the yield on 10-year US Treasury obligations has averaged 6.1%.
Let's do the math.
If rates just returned to their historical average of 6.1%, we would be paying $1.65 trillion a year just to service our current national debt. That's almost triple the $593 billion (gross) we actually paid out in interest during fiscal year 2019.
Since you cavalierly shrug all this off as just "an accounting entry", maybe you can tell us which parts of the federal budget you want to slash in order to continue servicing our current debt once rates go back up to their long-term historical norm.
The current federal budget is $4.8 trillion, so you need to come up with over $1 trillion in spending cuts.
Really? No inflation since 1980? Bullshit. Here's an inflation calculator. It tells me I would need $3.16 today to buy what $1.00 could purchase 40 years ago. That's a lot of inflation.
According to the Bureau of Labor Statistics consumer price index, today's prices in 2020 are 570.82% higher than average prices since 1970. The U.S. dollar experienced an average inflation rate of 3.88% per year during this period, causing the real value of a dollar to decrease.
In other words, $1 in 1970 is equivalent in purchasing power to about $6.71 in 2020, a difference of $5.71 over 50 years.
The 1970 inflation rate was 5.72%. The current year-over-year inflation rate (2019 to 2020) is now 1.37%1. If this number holds, $1 today will be equivalent in buying power to $1.01 next year.
This is probably an incredibly stupid question, but where does the Fed get the money to buy government securities? I've read that banks have to hold reserves on deposit with the Fed... Does the Fed have to unwind the QE at some point? And if so what do you think might happen?
Not a stupid question. The Fed creates money when it buys US Treasury debt, MBS or other marketable securities. Each time it buys such debt from private banks, it credits their reserve accounts at the Fed. "Reserves at the Fed" are an asset to the banks and a liability to the Fed. As a result of QE, the level of reserves greatly exceeds what banks are required to hold... The Fed doesn't have to "unwind" QE. It has been reluctant to do so, since this would drive up interest rates. Better to just hold the QE debt to maturity. This would allow the Fed's balance sheet to shrink gradually over time, assuming it refrained from new bouts of QE.
Quote:
Originally Posted by Tiny
OK, so say foreigners lose confidence in the dollar. The Chinese and the Saudis and other foreigners lose their appetite for U.S. government debt. How does this end? Do we end up with inflation? Massive devaluation of the currency? We can't repay our debt so default like Argentina? Or is something like that even plausible in the USA, given that we're so huge compared to other countries and given that the dollar is the world's reserve currency?
I would never dismiss the possibility of a global erosion of confidence/run on the dollar. If it started, the Fed would be intervening like crazy to prop up the dollar's exchange rates, or at least slow its decline in value against other currencies. The question is - into what currency or store of value would the global dollar sellers be fleeing? I think we had this discussion before.
A weakening dollar exchange rate does fuel domestic US inflation by driving up the cost of imports. However, the US can't "default" on its debts since it can always just create more dollars to service them. Here's a breakdown of international monetary reserves held by the world's central banks. Over 61% of allocated reserved were still held in US$ as of mid-2020. This compares to 20% in Euros. All other currencies were far behind.
I worked for a multinational in Indonesia during the Asian economic crisis of 1998/1999. So I observed up front and close what happens to a currency and inflation when you combine a current account deficit with large foreign debt (in this case in the private sector) and a crisis of confidence. The Indonesian currency went from 2500 per dollar to 14000 in less than a year, and inflation shot up to over 50%...
...it never occurred to me, until I read your post, that this would work the opposite way when you've got a current account surplus, and when you own a ton of U.S. dollar and European debt, and the Gaijins (white devils) hold relatively little of your debt. OK, yeah, I've thought about that with respect to forex movements, but not with respect to inflationary pressures.
Large current account surpluses go hand in hand with strong currencies and low inflation. Large current account deficits (such as Indonesia incurred back when you worked there, until it ran out of FX reserves and borrowing capacity) are usually accompanied by weak currencies and high inflation.
Countries can slip into either in a positive "virtuous" circle or a negative "vicious" circle due to the feedback loops involved. A strong currency makes imports cheaper, thereby reducing inflation and making the currency even more attractive so it keeps going up in value. The Swiss franc is a classic example of this phenomenon.
On the other hand, a weak currency drives up the (local-currency) cost of all imports, thereby boosting domestic inflation and making people want to dump the currency. The Indonesian rupiah in the late '90s was an example of such a vicious cycle.
Over time, currency adjustments are supposed to correct all of this. Countries with trade surpluses/strong currencies are supposed to find their exports overpriced in world markets, whereas those with trade deficits/weak currencies see their exports become more competitive. In the real world, for a variety of reasons the adjustments often fail to occur.
Around that time, I posted this in the "Diamonds and Tuxedos" section, which was where such discussions took place, since the Political Forum hadn't been created yet:
The point is that the mechanism by which QE2 works, and how the other interventions we have seen work, were not inflationary then (with respect to consumer price inflation), and aren't now.
Just because something shows up on a Fed chart as a big spike in M2, M3, MZM, or any other monetary aggregate you might be able to think up, doesn't mean it is going to be lent or spent into the system in such fashion that inflation will necessarily arise.
If "money" just sits there in reserves somewhere in the financial system or at the Fed, it isn't going to drive inflation if it isn't active. I have sometimes spoken in terms of "demanded money" -- that is, "money" that has been borrowed or pulled from less liquid accounts in order to hold "at the ready" with an expectation of spending it soon.
As you no doubt have seen in numerous graphs put out by the Fed and others, the velocity of money has fallen precipitously since the financial crisis, and there's nothing on the horizon to suggest that it's going to significantly increase anytime soon.
Hey Cap'n, that was 10 years ago, what have you done for us lately lol?
We're not only ten years into this QE experiment, we're now doubling down on it due to the pandemic. I agree that a lot of the monetary base expansion has wound up sitting idly in reserves at the Fed, but hasn't some of it seeped into the real economy and driven up the prices of assets that aren't heavily weighted, if at all, in official inflation indices such as the Consumer Price Index?
The CPI may be telling us inflation is tame at only 2% a year (or less), but in many cases the prices of stocks, real estate and collectibles have doubled, tripled, or more over the past decade!
In other words, $1 in 1970 is equivalent in purchasing power to about $6.71 in 2020, a difference of $5.71 over 50 years.
Sounds about right after 50 years. Wages and overhead have gone up exponentially so consumers have to pay. Makes sense to me. That's just how it works. It's not like companies are in business to just break even and the technology they have to pay for in overhead is obviously hardly the same. When they pay, you pay. That's called business.
I see that Lustylady has posted three times above me but I don't read that old broke hag's posts. I'd rather listen to my dog bark that makes no sense to me. At least she is awesome and can catch a frisbee with her mouth and bring it back to me.
I see that Lustylad has posted three times above me but... I'd rather listen to my dog bark than respond and reveal the depths of my ignorance of economics despite my laughable claims to hold 3 Ivy League degrees and a job in finance.
FTFY, mucus. It's ok, don't fret.
No one on this board expects any intelligent comments from you.
Agreed. Pelosi and McConnell could not agree on a final number. That is why a second stimulus bill has not been passed so far. One may get passed before congress goes on their break. There are some republicans who want to get something done. Pelosi is not going to get everything she wants.
Because Pelosi 1) Wanted Trump out of office and 2) needed bailouts of CA, NY and other states who have lockdowns and long term state govt mismanagemnt.
If you read the article, you will notice that over the past 58 years the yield on 10-year US Treasury obligations has averaged 6.1%.
Let's do the math.
If rates just returned to their historical average of 6.1%, we would be paying $1.65 trillion a year just to service our current national debt. That's almost triple the $593 billion (gross) we actually paid out in interest during fiscal year 2019.
For comparison, total federal revenues in 2019 were 3.5 trillion, and 1.75 trillion of that came from personal income tax. If we paid for an additional $1 trillion increase in interest expense entirely through a boost in the personal income tax, we'd be looking at forking over 50%+ more in taxes.
Not a stupid question. The Fed creates money when it buys US Treasury debt, MBS or other marketable securities. Each time it buys such debt from private banks, it credits their reserve accounts at the Fed. "Reserves at the Fed" are an asset to the banks and a liability to the Fed. As a result of QE, the level of reserves greatly exceeds what banks are required to hold... The Fed doesn't have to "unwind" QE. It has been reluctant to do so, since this would drive up interest rates. Better to just hold the QE debt to maturity. This would allow the Fed's balance sheet to shrink gradually over time, assuming it refrained from new bouts of QE.
Interesting. I just looked at a graph of "Federal Excess Reserves," and they shot up from around 1.5 trillion at year end to 3.25 trillion a couple of months ago. This would have to be much larger than what the banks are required to keep. I see the Fed's interest rate it pays on excess reserves is about the same as the interest rate it pays on required reserves, and both are pretty close to the 3 month T-Bill rate. Currently these are around 0.10%. I'm wondering what would entice banks to hold a lot more money at the Fed than they have to when the Fed's rates are much lower than what they can get for loans. Maybe there's just not demand for loans? So the Fed could theoretically set the interest rate on excess reserves at a higher level than what the banks can get for Treasuries and entice them into selling their government debt?
Quote:
Originally Posted by lustylad
I would never dismiss the possibility of a global erosion of confidence/run on the dollar. If it started, the Fed would be intervening like crazy to prop up the dollar's exchange rates, or at least slow its decline in value against other currencies. The question is - into what currency or store of value would the global dollar sellers be fleeing? I think we had this discussion before.
A weakening dollar exchange rate does fuel domestic US inflation by driving up the cost of imports. However, the US can't "default" on its debts since it can always just create more dollars to service them. Here's a breakdown of international monetary reserves held by the world's central banks. Over 61% of allocated reserved were still held in US$ as of mid-2020. This compares to 20% in Euros. All other currencies were far behind.
Well, you don't see any dollar flight by the central banks based on that. On that subject, do you have any idea how the USA has been able to perennially keep very low foreign exchange reserves as a % of GDP compared to other countries? I mean Turkey, which admittedly cooks its books, has had a run on their currency and depleted its reserves defending the Lira. They had to do this because their president thought the way to lower inflation and prosperity was through negative real interest rates during a currency crisis. Anyway, Turkey's official foreign reserves are 46 billion USD. The U.S.'s are smaller, $44 billion! Compare also to tiny Singapore, which has huge current account surpluses, at 335 billion USD.
Well, in at least one key respect, my record is better than that of the Dallas Cowboys!
.
Quote:
Originally Posted by lustylad
Hey Cap'n, that was 10 years ago, what have you done for us lately lol?
We're not only ten years into this QE experiment, we're now doubling down on it due to the pandemic. I agree that a lot of the monetary base expansion has wound up sitting idly in reserves at the Fed, but hasn't some of it seeped into the real economy and driven up the prices of assets that aren't heavily weighted, if at all, in official inflation indices such as the Consumer Price Index?
The CPI may be telling us inflation is tame at only 2% a year (or less), but in many cases the prices of stocks, real estate and collectibles have doubled, tripled, or more over the past decade!
LOL ... well, I guess I'm just trying to follow the example of our iconic local NFL franchise, the Dallas Cowboys. Actually, they haven't done much for us in TWENTY-FIVE years -- so I'll argue that I'm doing much better than they are!
I believe you are indeed correct in stating that Fed policy has driven up the prices of a number of asset classes, although not consumer inflation as measured by the CPI.
For instance, Robert Shiller (of CAPE fame) has been writing recently about what he refers to as "excess cape yield" (ECY). It's a bit of a twist on the old idea of the "Fed model," essentially a somewhat simplistic metric for judging whether equity markets are fairly valued by taking into account trend 10-year T-note rates.
Shiller notes that the current CAPE ratio is about 33, making the CAPE yield about 3%. To get "ECY," you subtract the real 10-year T-note rate from the nominal CAPE yield to get approximately 4%, which is in his view bolsters arguments that the S&P 500 is fairly valued.
(Note: The real 10-year rate is about 1% negative, arrived at by subtracting the current CPI trend run rate of 2% from the nominal 10-year UST rate of just below 1%.)
Of course, valuations of all classes of risk assets are likely to take a heavy hit if Treasury yields even remotely begin to "normalize."
