One can dream, but you can imagine if the Fed really wanted to implement UBI, it could probably do something like:
- Give everyone in the U.S. a guaranteed loan for $2,001, 0% interest, payable at the end of the month
- Before you "default", enter in a "negotiation" where the Fed can buy back the security from you for $1, writing off "the losses"
- Do it all again the next month
Tada! Monetary policy as fiscal policy! If you don't want to write it off immediately, guarantee 0% interest and have the timeline for the loan be 200 years, then write off the debt as nonpayable after death.
But seriously, I'm not sure if there's a clear line between monetary policy and fiscal policy anymore.
There never really was. It was always a charade. The only real “benefit” of the current system is that seigniorage profits are accrued by primary dealers rather than Treasury.
The seigniorage profits are made by the fed, and mostly paid back to the Treasury. Only a tiny portion is paid out in dividends to member banks who are required by law to own non-voting shares of the regional reserve banks.
Usually when we talk about ownership we talk about who makes decision and who gets the profits. The profits from the Fed go to the treasury, and the head of the federal reserve,who is appointed by the president.
So for all intents and purposes the government owns the Fed.
> The Fed generates profits for its shareholders. (from the article)
I wish I had something more articulate to say; this truly boggles my mind how this would benefits the American people. It should benefit us as American's right?
We have the one of the most stable and globally valued currencies in the world. Our inflation rate is steady and well defined. That seems like a pretty enormous benefit to the American people.
That article doesn’t mention how the $100b in profit is distributed back to the Federal government. The profits are retained by the privately owned Federal Reserve and distributed to their secret list of individual owners.
Also, the article says that there is almost no inflation (2016) but there should be inflation. They are using the wrong definition of inflation. The term is actually supposed to refer to inflation of the money supply not inflation of prices. Usually a consequence of inflation of money supply is inflation of prices, but there are other factors which can counter this and reduce prices. But even in 2016 there was inflation of the money supply by definition due to the newly created money by The Federal Reserve. More money means existing money has less purchasing power, so more of it is required to buy the same stuff (Or higher prices).
But why could we have inflated money supply with steady prices? Perhaps because of technology. Tech creates efficiencies which make it cheaper to produce and sell goods and services. I’m sure there are other drivers, but that is a pretty powerful one.
That was true before 1907 as well. While the pound sterling was reserve currency back then, WWI ended that. The combination of massive production and consumption of the US caused it to warn reserve currency contention, and then WWII dominance at Breton Woods cemented it.
Also, inflation was lower before the Fed existed than after it.
In the EU at least, monetary policy is a property of the currency (which crosses borders), while fiscal policy is a property of the government (associated with a single administrative country).
If the world evolves further into currency consolidation (which seems to be the direction aspired to by many technologists hoping for Internet money), this distinction will grow in relevance.
I kinda don't think after all this people want to move towards currency consolidation. Isn't the E.U. the only union and non-country to have a singular currency? And isn't that singular monetary policy something that causes a great deal of friction between member states (e.g. Greece and Germany back in '08)? I think if you took another vote among E.U. members to ratify the Maastricht treaty today, you might get a different result.
What us technologists might aspire to is pretty different from the ground truth.
> Isn't the E.U. the only union and non-country to have a singular currency?
No, it isn't. In Africa, there is the West African CFA Franc issued by the West African Economic and Monetary Union, and the Central African CFA Franc issued by the Economic and Monetary Community of Central Africa – both are legacies of French colonialism, in which newly independent states decided to keep the common currency they had under the French colonial empire.
In the Caribbean, there is the East Caribbean Dollar, issued by the Organisation of Eastern Caribbean States. It is used by independent states that were former British colonies, and also by two British overseas territories. Like the CFA Francs, it is a case of newly independent states choosing to retain the common currency they had under British rule.
The idea of a common currency isn't that new. France, Belgium, Italy, Switzerland and Greece had a common currency between 1865 and 1927 (the Latin Monetary Union). Similarly, Sweden, Denmark and Norway had a common currency between 1873 and 1905 (the Scandinavian Monetary Union.)
This friction as you call it, is happening again during the current crisis, again between southern european countries and mostly Netherlands and Germany, specifically on the topic of coronabonds which has been widely debated and made lots of headlines. The way the euro works the main direct benefits go to the largest exporting economies, with the weaker ones pretty much losing out. Then the idea is that this is offset by the stronger economies helping the weaker ones in the form of EU grants but there's always a big push back as these direct funds are seen as handouts while the benefits of the common currency are dismissed. This pressure is seen clearly in demands for harsher and harsher austerity. It doesn't help that some officials from northern economies keep showing how they really feel about the situation, going as far as providing quotes like southern countries "spending all their money on women and wine" and the whole PIIGs designation. It's a tough thing to try and rationalise for someone who largely believes in the EU project but who is originally from one of these southern countries and has felt the direct effects of the whole post-2008 period.
I think the narrative has changed quite a bit since the initial austerity policies of the 2009 crisis. Arguably some of the enforced changes were long overdue, while others went far beyond the reasonable. But it's also how they were implemented that mattered.
Portugal was under the troika but efficiently implemented things and quickly got out of it. Greek and Cypriot governments tried to game the system again and again, e.g. the troika imposed on Greece (or rather agreed with Greece, there's some nuance) an obligation to reduce it's overblown public sector by reducing the number of public servants. They did make a mistake though as they did not specify which public servants.
What does the Greek government do? They massively reduce the number of teachers, then turn around and ask the European social fund for money to cover annual replacement teacher contracts.
But the overblown administration has not shrunk much (and each time the government changes they do as before and rehire their allies...). Instead everyone curses the EU/troika/Germany/... for 'imposing' these cuts when the cuts per se are often not the issue, but rather the implementation.
You can also see why countries like Germany are scared of mutualised debt: Since the introduction of the euro, Italian debt has increased massively because it was so cheap. Easier to loan money and serve a few favors when the government will anyway change in 2 years and the current one doesn't have to bear responsibility for the long-term damage. It's of course a much more complex story, but there's no denying that irresponsible government spending is part of it. Italy is desperately hoping for inflation to shrink the debt:GDP ratio as it's become pretty impossible to pay it back anyway...
I think the idea is more like something along the lines of Bitcoin or similar digital currency with well known and defined rules about supply that serves as the defacto reserve currency but each country or region still has a local currency. Gives the benefits of a single easy to transact in currency while avoiding the disagreements that arise like in the EU.
Why do you call the EU a non-country? They clearly share sovereignty with their member states in much the same way the federal government of the United States shares sovereignty with its member states.
I have a pretty good understanding of how the Fed and Treasury work together to implement both fiscal and monetary policy in the USA. Recent events have shown that the MMT claim that we can model them as a single entity has been observably proved beyond all doubt. However, my knowledge of the operational, rather than theoretical, realities of the Eurozone is threadbare at best. In my conceptual model the member states have theoretically given up monetary sovereignty, but in reality it appears that at least some are still able to browbeat the ECB into funding their deficits. I'd love it if someone who has a deep understanding of how monetary and fiscal policy are coordinated in the Eurozone could chime in, but I expect the answer is rather long since every member state has somewhat different circumstances.
Is the US effectively pushing their dept to other nations? Unlike any other currencies were it would just inflate it appears the rest of the world's central banks keep buying more and more dollars to keep the exchange rates stable enogh against their own.
At the enormous amount of money being created I would assume Simbabwe or German like inflation but I don't see it happening. Exchange rates are more or less the same as a year ago.
> Is the US effectively pushing their dept to other nations?
It's actually the exact opposite of this. Other nations, such as Germany, are hungry to run an export surplus. Since the USA is only willing to buy foreign goods with dollars, this means that Germany must accumulate dollars as a result of its export driven economy.
The whole notion that being a net exporter is virtuous and being a net importer is reproachable is obvious nonsense. Everyone can't be a net exporter after all, a counterparty is required. That said I find the notion that a nation could grow its GDP by "exporting" in the form of producing goods and then launching them into space comical, to say the least.
If inflation rises, there needs to be a mechanism to have it paid back. All the Fed QE at least theoretically goes back into the bank once markets recover and the assets purchased can be sold to make that so.
Who is going to buy individual loans which are never repaid if inflation starts to rise?
You've got the causality backwards. It's the writing-off that causes inflation (because now you have all that extra cash out in the economy that never comes back to the Fed in the form of loan repayment), not the other way around.
But the Fed QE from '08 didn't make it back if I understand it correctl...I think we managed to unwound about a quarter or a third (?) of the outstanding debt before this crisis hit and the Fed had to issue new QE all over again.
I'm not sure I understand what's stopping the Fed from buying back these loans that it issued? If it can't for some reason, what's stopping Congress or the states from creating "banks" to buy it back?
Didn't people say before '08 that inflation was caused by the money supply, and then we did QE, and inflation didn't happen? So now they're saying inflation is tied to velocity, or M1 vs. M2?
> But the Fed QE from '08 didn't make it back if I understand it correctl...I think we managed to unwound about a quarter or a third (?) of the outstanding debt before this crisis hit and the Fed had to issue new QE all over again.
I disagree. We never unwound and all that stimulus did come back, but only in things that people wanted: healthcare, education, real estate, and stock prices.
Things that were discretionary like air travel and electronics were stuck and have generally stayed there in nominal dollars.
We will see this again. The best lie the Fed ever created was to convince people that you have to see inflation everywhere for it to be real inflation. It would be very hard to achieve the sort of 1930s German inflation, or a Zimbawean scenario. What you'll see is that your food costs 50% of your income and rent is the other 50%. Social programs will either be cut or become ineffective, as more of the government's budget is devoted to servicing debt.
Given how little labour goes into making food (~3% of the population feeds the other 97%), and how low the margins on farming and food distribution are, inflation or not, your food will not start costing 50% of your income.
What's actually going to happen is that food, air travel, and cars will remain cheap, while investments, like stocks, houses, etc, will rise in price. That's the direct consequence of QE.
There is. When the Fed buys bonds they get the coupon payments for those bonds and they can wipe the money off the books then if they want. They can also sell the underlying bond if they want to remove the cash from the economy immediately. And--since they got a good deal by buying when the market was down--they can afford to sell a little below what the same bond would currently trade at and fixed income investors will line up around the block to buy
> since they got a good deal by buying when the market was down
Assuming the price goes back up later, you mean. But if that were guaranteed then the price wouldn't have been down much in the first place. It could stay down, or even go lower, in which case the Fed will lose money when they go to sell.
I would make the loan repayment conditional in a similar way to Lambda school: borrowers that go on to earn a high enough income have to make payments, but nobody else does. Then investors can make bets on who will make enough money to pay the loans back. They won't pay full price, but they'll pay something, and that will hold back inflation a bit.
You have a "virtual" unit of account which has an exchange rate to the local currency. The value is updated daily and is tied to the consumer price index, basically it gets inflation adjusted.
Whenever you take out a loan, at the moment of signing the contract the value is converted from the local currency to the unit of account. Loan payments are then made in the unit of account, every month this fixed value is converted back to the local currency according to the current exchange rate. This way loan payments get inflation adjusted.
The idea is that banks and foreign investors have no inflation risk, companies and consumers take all risk.
Thanks....Is this setup still actively used? I'd think that the Loan payments are then made in the unit of account aspect would make it fairly obvious to consumers that their payments could increase suddenly.
Yes, I live in a country were we have such a system but as far as I know there are some others with similar systems.
Loan payments increase every month, also some other services like insurances are charged this way. But of course your salary is paid in the local currency and doesn't get adjusted at all. The problem is that it is all we have access to, every loan in the country works this way. So there is not much the consumer can do, people want houses, people need to pay for college, people need a car.
In most countries inflation works in your favor, here it works in the banks favor.
The Federal Reserve operates like any other bank with the exception that there is no regulatory limit on how big it’s balance sheet can get relative to the capital invested. In this case the capital comes from the member banks which are required to deposit 1/2 of their investment and make the other half available in case it is called. The banks are guaranteed 8% return on the total amount.
The large balance sheet and small reserves means that the Federal Reserve is thinly capitalized relative to other banks. Forgiving or writing off a loan would result in a loss which should result in the member banks taking a loss. To many losses and Congress would need to chip in to cover losses.
In practice the Treasury will allow the Fed to take a bit of interest from other investment to offset losses. This doesn’t make congress happy because it is effectively redistribution of taxpayer money outside of Congress. Taken to an extreme the Treasury could direct billions of dollars of taxpayer money through bailouts to connected individuals by paying above market prices for assets.
In a pinch the Federal Reserve could also re-value its gold reserves to balance its books and make up for losses. Or it could simply never recognize the losses. For example making a 100 year loan with no interest to the state of Illinois.
Crossing some of these lines would quickly (if not already) trigger a collapse in the currency or a Congressional showdown.
Thanks for this clear explanation, I enjoyed reading it!
If UBI was to come into effect, and that's a separate discussion, I'd definitely prefer using government debt rather than revaluing the very notion of the U.S. dollar to do so. Much safer.
Very true and no one should be surprised that the Fed is stepping in as buyer of last resort. It is one of their roles.
I'd argue that the more important part of monetary policy is the rate setting and I think that is quite different than fiscal policy. In my opinion, fiscal policy should be employed if we can get a greater percentage of return on GDP than the yield on the treasury note. In this case, the government is getting free money.
There are smarter economists than can probably explain it better than me. Keep in mind that if we spend $500B on notes, the increase on GDP is much larger than on just this new spend. The hope is that we are spending this on projects that are economy enablers that have a compounding effect. Meaning that we just need to recover the say 3% of the $500B over a 10 year period. This spending is best spent on infrastructure and technology. Even if we don't get the full return, keep in mind that most notes get spent on non-GDP increasing projects making break even a good deal. (Sorry, I still don't have the best ways to explain this, I need to find some writing that is clearer.)
What stops the Fed from doing something like this and then subsidizing it with negative rates on traditional notes?
Disclaimer: not an economist. This could be a really, really stupid idea, and it would clearly only work with literally the strongest world economies that are capable of charging entities to hold their money for them. But it could work well as a crisis basic income solution when everyone else moves to park their cash.
I think that's yingw787's point. That as we get deeper into this crisis, the Fed's actions start to look more and more like "printing money", but with a veneer of fiscal^H^H^H^H^H^H monetary policy. The $2,001 notes at 0% is the absurd extreme of this path.
Sorry if I’m slow, but, if true, I wish that point had been make explicit. That’s actually a good argument.
As it stands now, that comment looks more like yet-another-pro-UBI post with a bizarre fantasy about the Fed breaking the law to make it happen, and I downvoted it on that basis.
Edit: And I think you meant "veneer of monetary policy"? The argument would be that it's being framed as monetary policy even though it's substantively a fiscal policy, something the Fed is supposed to stay away from.
> Edit: And I think you meant "veneer of monetary policy"? The argument would be that it's being framed as monetary policy even though it's substantively a fiscal policy, something the Fed is supposed to stay away from.
That's exactly what I meant. Fixed my comment, thanks.
No, downvote for disagree is within the guidelines [1].
Even so, I try to instead use the standard of "does not contribute to the discussion", which I think this qualifies as (under my earlier understanding of the comment) because it's off-topic hobby-horsing, made worse by proposing a bizarre mechanism without acknowledging the illegality.
If everyone's in on it...would it impact credit scores? My impression of credit scores is they're a metric for a bank or a financial institution to determine credibility for a loan. If everybody knows you'll default on said debt because it's "meant" to be defaulted on, how would that impact the bank's assessment for whether you need a mortgage?
No matter how much qe the fed does , there will be no inflation. The money goes to banks and financial institutions. They do not spend it on real goods and services. Rather they implement financial tools to get higher roi. Thus too many dollars chase too few financial tools resulting in equity inflation (a rising stock market) The real market of goods and services is unmoved and as a result wages and prices are stable (stagnant). The fed only helps banks because they use a system designed in the 1930s. Back then before credit cards, internet banking, before the repeal of Glass Steagall, banks drove the economy by lending to people. (See ‘It’s a Wonderful 𝐋𝐢𝐟𝐞’) To move the economy, the fed has to put money into the hands of people who will spend it. Each taxpayer should get a fed account with a monthly stipend of fed-coin. Fed-coin will have a half-life to encourage people to spend it. Once spent its value will be fixed as it gets converted to regular dollars
Printing money is, by definition inflation. Printing money in to the hands of people who spend it is stealing from savers. Effectively discouraging responsible financial decisions in favour of lending.
You are technically correct, but if the printed money doesn't cause a noticeable change in the price of household commodity goods, it's not what the average person calls "inflation" and it likely won't budge the Consumer Price Index (the official metric for inflation in the USA).
The CPI doesn't include the following items {large health care services, university tuition, stock prices, fine art, collector cars}, all of which have actually inflated quickly for at least 10 years, but were not captured in the CPI.
> Printing money in to the hands of people who spend it is stealing from savers
People spending is the foundation of our consumer economy. In times like this the type of spending that is being supported by direct emergency payment measures to people isn't profligate. Regular people aren't taking the money to go to the casino - they're using it to pay for basics like food and shelter. Even if they're using it to pay for video games or movie streaming, at least it keeps some money flowing through the economy. In contrast, a savings glut leads directly to underinvestment in the economy, contributing to economic stagnation and even income inequality in consumer based economies [1].
Printing money to buy bonds from corporations, however necessary in the short term, should come with serious strings attached, like a public stake in the ownership of these corporations. Sadly, that appears to be blocked at the moment on various political and legal fronts.
Also, your savings are indifferentiable from someone else's borrowing if they are in cash at a bank or invested in securities like stocks. If it is cash at the bank account, it's backed by the FDIC up to 250k. If it's invested in securities, you get to deduct losses from your taxes.
If you really want savings that cannot be used for lending at all, you need to buy land outright, sit on it, and be content with zero to negative returns.
I disagree. Increase in prices and decrease in purchasing power is inflation.
Classical models of economics argue that increasing the money supply (i.e. printing money) causes inflation. The modern day paradox is that it hasn't caused consumer price inflation in US and Japanese economies.
Why is that? Maybe all the money has flown into assets, causing asset inflation. Maybe the decrease in purchasing power is offset by the increased demand in US and Japanese reserve currencies. Maybe consumer good production (supply) has grown, offsetting inflation.
A recession causes deflation, which costs people jobs and quality of life. When the Fed prints money, it's counteracting the deflation. When the balance sheet is trillions or dollars, there is no worry of inflation. The Fed can easily vanish that money supply by selling assets and unwinding bonds.
As you've pointed out, savers lose. In a recession without money-printing, their savings would've been worth much more. As it turns out, preventing job loss and lower quality of life is more politically appealing to decision makers than helping responsible savers.
there will be no inflation because the money is not being spent. It is being invested. As for savings, no sane person would put their money into a savings account. Why lend your money to the bank (if you even have any to spare)?!
There might not be CPI inflation but there's definite asset inflation which trickles down to real estate which trickles down to rent which trickles down to money in everyday consumers' pockets.
> Fed-coin will have a half-life to encourage people to spend it.
You're absolutely right in everything you've said. And if you're looking at stimulating the economy your suggestion is certainly interesting. And I do see the importance of stimulating the economy to maintain peace and make sure the masses are placated and content. But, it's a bit concerning to think what that kind of consumerism will eventually do to the environment.
I'm curious; what do you think this will accomplish?
If the Federal Reserve thinks this is within their dual mandate and you scare them into doing less than their mandate... what do you expect will happen (to the Fed, the economy, monetary and fiscal policy)?
In a certain prism, the Federal Reserve is the only national institution in the USA (yes, I'm aware it's technically a private entity) which is still effective at doing its job.
The comments here confuse me. The Fed is buying bond ETFs so that it can provide support to the corporate debt market in a way that doesn't 1) require a ton of careful, time-consuming credit risk analysis and 2) doesn't favor individual issuers.
The goal is to improve credit conditions and provide financing that otherwise wouldn't be available to companies during this crisis. This isn't manipulation of the stock market, it's making sure credit markets don't dry up at the worst possible time and exacerbate the damage. The funding here is $75 Billion from the Treasury Department (authorized by Congress) and like other Fed facilities the money isn't disappearing into the void; the Fed will eventually unwind these positions or allow them to runoff its balance sheet.
As much as I love Matt Levine, maybe having an article with a higher information density would reduce the number of low-effort comments. Something like this article[0] maybe, dang?
The Fed buying bond ETFs is a small portion of the overall SMCCF. They are buying bond ETFs right now because the issuer certification process for buying individual bonds has been dragged out and right now it seems that not many issuers want to register because of backlash from PPP.
I agree with your two initial points in the context of the Fed ONLY buying ETFs but that's only a small portion of the overall facility. With secondary bond purchases, the Fed is absolutely going to be favoring individual issuers not willingly but through the design of the program and the form of individual issuers' capital structures. If the Fed wanted to rush a program out to only buy ETFs, they did not need to take almost two months to do so. The underlying corporate bonds were the main target of this program, they ran into some operational problems launching that portion of the facility, and decided to go ahead with the ETF portion.
Agreed on the Matt Levine. He's fine for certain things but it seems like he's the ultimate source for tech people who want to talk about finance and he's not always right/is only one side of the story.
Well, stupid question then: why would this prop up the debt market? They're just buying tokens redeemable[1] for a basket of bonds. How does that prop up (the underlying) bond prices? Or their liquidity?
ETF prices are pretty firmly anchored to the underlying bond basket prices, due to arbitrage, so prices only flow from the bonds to the ETF shares, never the other way around. Is there a dynamic I'm missing whereby the purchase of ETFs make the bonds more valuable on the market?
For an analogy, let's say there are coupons you can redeem for a 20-lb turkey at Trader Joe's (analogous to bond ETFs, which are redeemable for baskets of the underlying).
Let's say they trade on a secondary market (like those coupon selling sites) at a stable discount to the market price of the turkeys at TJ's. Let's say I go out and start buying up the coupons with reckless abandon.
I accept that they would then trade at a smaller discount to TJ turkeys. But why would that raise the market price of the turkeys themselves? Nothing about that makes the turkeys themselves more in-demand, does it?
[1] which is how I understand ETFs to work and maintain value parity
There's a few faulty assumptions that might apply to more liquid and efficient markets but do not apply to corporate bonds. Corporate bond liquidity is minuscule and many create/redeems are done with incomplete baskets vs actual underlying. One of the reasons why the Fed decided to include ETFs in this facility is because the ETFs were trading at a steep discount to NAV at some points earlier this year. For example, SPY's largest discount to NAV this year was around 80bps. For LQD (the largest and most liquid IG ETF), the largest discount was close to 5.1%. Discounts to NAV of that size are not academically arbed away with illiquid underlying assets because there's no liquidity or price discovery happening in those assets either.
I want to preface my statements with this, I'm not trying to get into an internet argument or attack your positions or anything I'm just trying to learn some stuff here because I find it all interesting.
In the case of such poor liquidity why should we assume the ETF value should rise to meet the NAV rather than the NAV lower to meet the ETF value? I understand the bonds are the underlying here, but if the ETF is more liquid wouldn't its value be closer to gospel?
Your thought pattern makes sense but a lot of dislocations in these markets are once again due to liquidity. I think the easiest way to summarize this is because of the liquidity transformation ETFs provide, the tail wags the dog until it doesn't. This gets a bit rambling but I am too lazy to edit right now.
Liquid hedges are extremely valuable when trading corporate bonds. With almost every sell-off/rally, you will see more liquid instruments be first movers and usually overshoot in either direction. If I wanted to buy/sell 100mm MV of bonds right now, I would have to pay through the nose and there's no dealer on earth (due to post-GFC regulations) that is warehousing 100mm MV of a single bond issue so then I'm probably buying 10-20 different bonds and that doesn't really fit what I'm trying to do. Instead, I can buy/sell 100mm of a bond ETF, pay close to equity-like bid/ask spreads, and do so without picking up the phone or having someone decline to trade with me. I'm a little braindead right now and I know this is a bad example but this makes intuitive sense: if I really need cash immediately for something, I'll go to the pawn shop first before going to the bank. The pawn shop will give me immediate liquidity while the bank might not be open, want me to open an account, fill out some documents, blah blah.
The same thing happens with SPY, if I want to hedge my up/downside and need to do it quickly and efficiently, buying/selling single name equities in a lot of cases is not the best way to proceed. Dislocations vs NAV rarely happen with SPY or anything with large liquid underlying assets because the create/redeem process for these is very efficient; I can do it through an API. There have been advances in the corporate bond market but for the most part bonds are traded via chat or phone.
So, let's say bonds sell off for whatever reason, everyone immediately reaches for an ETF rather than selling any bonds. The underlying market takes some time to react and there's a further cascade of price discovery that usually happens in order of liquidity. When you have several thousand bonds underlying an ETF and no efficient way to trade them, price discovery takes a while. ETF overshoots, bonds try to catch up, oh but wait now this bond looks cheap/rich vs that other bond, then maybe everyone starts taking their hedges off, and then the process restarts in a miniature fashion.
This tug of war can take days to shake out but in the meantime, the create and redeem process still exists so if I feel the ETF is way too rich (simple unreaslitic example but "wow, ETF dividend yield is 5% but the underlying bonds yield 10%") I can buy some shares and redeem them for the underlying bonds and also do the reverse.
The create/redeem process was broken during the recent sell-off because there was no consensus on where NAV actually was. Sure, the ETF provider publishes a NAV level but you had several ETFs trading at several percentage point discounts. In normal cases, I can buy the ETF and redeem it for the underlying theoretically pocketing the difference. I'm not going to do that if the underlying price should be much lower or I'm just uncertain as to where it really should be.
Long story short, ETFs track NAV closer in more efficient markets. In less efficient markets, ETFs or any liquidity transformation vehicle usually lead the underlying because it's easier/cheaper to transact in them. From there it's price discovery on the underlying which happens at varying speeds and the process goes back and forth.
>This gets a bit rambling but I am too lazy to edit right now.
No worries, as I said I'm interested so I appreciate the write up.
>Long story short, ETFs track NAV closer in more efficient markets. In less efficient markets, ETFs or any liquidity transformation vehicle usually lead the underlying because it's easier/cheaper to transact in them. From there it's price discovery on the underlying which happens at varying speeds and the process goes back and forth.
Totally get this relationship, that's not entirely where my question lies though.
>One of the reasons why the Fed decided to include ETFs in this facility is because the ETFs were trading at a steep discount to NAV at some points earlier this year.
So is the Fed just buying these ETFs in order to shore up this discount regardless of whatever they believe to be "true" NAV? Why would the Fed consider it important enough for intervention? Or are they really just at a point where they're truly raising the tide and this boat is getting more publicity?
There's a few reasons. The Fed's mandate to "promote maximum employment" has taken the form of ensuring properly functioning capital markets. ETFs not getting too dislocated from NAV is an important part of that because otherwise they become a useless hedging instrument. Lack of effective hedges increases volatility in markets and forces investors to reduce positions. Further reducing positions during a sell-off causes an even steeper sell-off, etc blah blah.
Additionally and more importantly, primary market transactions are priced off secondary market levels. During the sell-off and before the Fed intervened, corporate bond issuance completely vanished. A large portion of US companies are debt-financed and would be unable to finance operations or be forced to pay way higher rates without functioning debt markets. Ensuring both the primary and secondary market functions properly fulfills (in their theory) their mandate of promoting maximum employment because without either, a lot more companies would have gone under or laid off way more people.
>ETFs not getting too dislocated from NAV is an important part of that because otherwise they become a useless hedging instrument.
Sure, but that's only if we consider NAV to be "true" worth. To your point with the lack of liquidity in the underlying wouldn't logic dictate that the underlying needs to "catch up" so to speak?
In normal functioning markets, maybe? When stuff like the events of the past few months happen, markets just stop trading altogether. If there's thin trading in an already illiquid market, there's no mechanism that forces things to reprice. What you see as NAV did not reflect executable levels. That's why you saw bond ETFs trading at such a discount because those were the only things people were able to sell. In a lot of cases most people decided they'd rather short 25mm of an ETF at -x% discount and have it retrace to NAV par than sell 10mm bonds down -1.5x% and then the next 15mm at an even steeper discount. Crude example, not how bonds are quoted, and you probably would have to sell those bonds in way more trades than that but hope it serves as an example.
So, due to the liquidity issues the proxy market is essentially being used in place of the primary market and the Fed, understanding this better than I, opts to bolster this proxy market precisely because it is being used as a temporary primary market?
Okay but that doesn't address why buying up the ETF would bid up the underlying, it just shows that a discount against NAV exists and Fed intervention could shrink it (just as my intervention could in my turkey example).
Alternatively, the goal could be to do nothing about the 80 bps or whatever discount, but keep it the same while pushing up ETF share price and NAV together ... but I don't see why this intervention would do that, either.
They could just look at the etf holdings and buy paper based on that. If you’re buying billions of debt, you don’t buy an etf and pay management fees. Backlash is going to be huge when the public finds out how much these fund managers take home in bonuses with all this new capital flowing into their funds.
Blackrock is waiving ETF fees for this facility (don't know off the top of my head if other providers are as well) and overall fees for managing these facilities are not great. The Fed does not have the operational expertise to manage these facilities in-house. You could make an argument if all they were buying was ETFs but a majority of the facility is for corporate bonds and things can go real wrong if you don't know what you're doing there.
Hi,
I know this is not a common point of view but here is what I propose to stop being angry against those magician apprentices (they make money disappear from pockets of others to appear in theirs).
Just ignore them. Just ignore this circus.
Build resilient local communities, reconnect with your family, build yourself a sustainable future.
As another one said: "The game is rigged", so just play another game.
It's not worth being angry against this noise. They know what they are doing.
I wish I heard more people saying this. This really sums up my philosophy.
I pay very close attention to these markets because I feel that understanding them personally benefits me but while I strongly disagree with most of the policy I don't get moralistic about it. I either figure out how to profit off of it or get on with my own life.
There are more interesting and valuable things to do in life than to be angry at how unfair a bunch of things that are totally out of your control are.
US credit markets are not really working as "markets" anymore, properly speaking, because a single special buyer, the Fed, is setting both risk-free rates and credit spreads for all corporate borrowers. Just by announcing it is willing to buy corporate bond ETFs, the Fed has become the very visible hand of the bond market.
The "price" of a corporate bond no longer means what you think it means. It is now determined by the Fed's willingness to buy bond ETFs for reasons that may or may not have anything to do with the creditworthiness of individual companies.
This is both utterly shocking and completely predictable.
They don't really have to be American, just organized in the US and having "significant US operations." So American Honda, for example, can now be funded by the US government.
Since it's an indirect funding facility, these company bond issues can be used for stock buybacks, i.e. executive comp so the taxpayer doesn't just subsidize executive compensation via the capital gains rate, it now can fund it directly. The smart money never wastes a good crisis!
This is what bothers me about USA 2020. We thoroughly divided due to relatively small differences in political options, but the real division that no one seems to care about is the political elites stealing money from the poor and middle class. We draw political allegiances so arbitrarily, and totally ignore that it's BOTH parties renewing the PATRIOT Act (which is happening now), and both parties giving our tax dollars to their friends.
There is a growing divide because people can't help but cherry pick anything that fits their narrative. The government is spending hundreds of billions on unemployment, direct stimulus, and keeping people on payroll, but the only thing liberals have to say is that the money isn't enough and coming too slowly. I'm liberal myself and I can see why people feel frustrated, but I can also see why so many conservatives feel like progressives are being entitled.
Conservatives: we're printing $5300 per capita, $1200 of which goes to working people and $4100 goes to the market/rich and the working people still want more?! Such entitlement!
Also noteworthy is the corporations mostly get loans, but individuals get free cash. The a lot of the small business loans are really grants, but only if they spend it on payroll, which is another win for the "small guy."
People are starting to care. In 2016 Bernie almost got elected on this platform, Trump did get elected on this platform, and in 2020 the DNC had to throw an election just to keep Bernie at bay.
Of $23+ trillion of US government debt, the largest foreign government debtors are {Japan with $1.27 trillion, China with $1.09 trillion, UK with $0.40 trillion}.[1]
Ireland owns about 0.1% of US securities debt ($0.28 trillion)[1]. That's a _very_ low circular factor.
Japan is actually the largest, fwiw. These Fed programs are being financed by debt spending, not tax increases. So even if some of this debt is held by US tax payers, it's not at their expense. They're getting paid interest.
Yes, well actually if the economy grows at all, a constant tax rate brings in more revenue, while we tend to spend more too. But I agree it is theoretically possible.
Except that the Fed is buying bonds that pay a higher rate that they borrow at (U.S. Treasury rate). So unless there is a lot of defaulting, they should be fine.
It's like they are mortgaging the White House at 0.25% and buying bonds that pay 4%.
So it's US corporations moving their international earnings to Ireland and using the cash they keep there to buy US Treasurys, because they don't have that many things to invest in and they can't pay out dividends because they don't want to repatriate and pay taxes?
The largest holder of US debt is the US federal government. The debt is owed by us to ourselves. It is just numbers in accounts.
The conception of federal debt as some giant anvil hanging over our heads is not correct. Foreign holdings only account for about a third of all obligations, which the US could—but will never, for obvious reasons—unilaterally take off its books and ask anyone who has an issue with it to take it up with the DoD.
This is utter nonsense. Just because American national debt is held by American citizens and corporations doesn't mean its not real or that it could just be canceled out on paper and it wouldn't matter. Those debts are projected future incomes for those other people\companies and if they magically disappear some parties would end up very badly screwed.
This narrative, while often repeated, is nonsense.
- No one knows how much or what exactly they're buying but they're limited by the size of the overall facility and are primarily going to stick to investment grade with a carve out for fallen angel and HY ETFs. Blackrock needs to provide the Fed with a list of ETFs they may buy and disclosure on that is uncertain.
- They are not required to publish their holdings but will provide an aggregate number alongside the rest of the H.4.1 numbers published on Thursday.
- The main and other part of this secondary market facility is secondary market corporate bonds. There is a certification process that issuers need to complete in order for the Fed to buy their bonds. Given the backlash on PPP, issuers are reluctant to register and especially reluctant given that secondary markets are more or less functioning.
- Most of the impact of this and other facilities announced has been seen in the announcement; not through actual purchases. This is true for the Fed and has been true for the BoJ and ECB.
- With the announce impact/implicit backstop, a (current) cap on ETF purchases, and a reluctance for issuers to certify, if markets function properly, you may not see very many purchases by the Fed under this facility at all.
Nobody sees any issues with the Fed being saddled with private sector debt? The same Fed that decides how much money is printed? The same money that is the world reserve currency (functionally, the new gold)?
The Fed has participated in just about every financial bailout since it was founded in the 1910s. Even before the USA moved from gold-backed-bucks to fiat currency, there were rumors that there wasn't enough gold to back all of those promises.
> Nobody sees any issues
I'm sure lots of people are concerned, but that isn't the question. The question is what can be done and I think at this point everyone s paralyzed with indecision.
I wonder what the US going into a deflationary spiral would mean for real estate like rental houses? When economists say deflationary spiral do they mean prices of assets (like houses) would fall?
When economic priests invoke the deflationary spiral, they mean some ambiguous boogeyman that you're supposed to be scared of so they can keep printing money and handing it to the politically connected, as they're doing here. Deflation is the natural state of things, as we are continually figuring out how to be more efficient. We've had extreme deflation in the technology industry going on several decades, and the results have been fantastic. It is only a bad thing for the slavedrivers that want to keep everyone working full time doing fake jobs.
Underrated comment. Need a tech accelerator that is the inverse of the Fed, optimizing for minimum employment instead of maximum employment (one of the Fed's two mandates).
Every accelerator, VC firm, corporation, division, manager, line worker, and homemaker is already optimizing for minimum employment. Human ingenuity at work - seeing patterns for where improvements can be made to ultimately achieve more. Even a guy laying on a couch watching football is trying to figure out how he can get another beer without having to get up.
Then the Federal Reserve comes along, declares all of our progress problematic, and manipulates the currency we transact in to make our progress invisible to each other.
Ignoring the appeal to nature, the tech industry has been extremely volatile for several decades. We're in the middle of a dot-com bust equivalent for the entire economy, because of natural forces, and it's not beneficial.
The volatility is due to that cheap financial sector money, making nonsensical bets until the music stops. Big picture, we were definitely due to a correction. VCs were paying to litter the landscape with electric scooters, hoping to create some kind of recurring income stream from people renting inexpensive consumer goods.
Slowing down is never beneficial to the individuals getting laid off, which is why these destructive policies enjoy broad support. If 90% of the work is required, and everybody is still expected to work the same full time, then 10% of people are left without chairs. Focusing on the first condition is the path to make-work. Focusing on the second condition is what we need to do instead.
This is bordering on a no-true scotsman. See, the true tech industry doesn't have problems, that whole dot-com bust was because of the financial industry. Nevermind that the two are intertwined and that claiming one is provincial alone is misleading.
It's a valid distinction. The decades-long many orders-orders-of-magnitude drop in the price of computing hasn't been responsible for investment money periodically drying up, but it has put a 90's era supercomputer into everyone's pocket.
Theoretically, since "housing" is part of CPI prices could fall. But, real estate is difficult to predict:
- low interest rates boost home prices, as lower monthly payments increase "how much" house a buyer can afford
- as the post states, the Fed's actions are increasing income inequality. If rich people are getting richer, and they don't want to put their money in treasuries because the yield is zero, that money has to go somewhere. So stocks, bonds, real estate. So that may increase demand for real estate among the wealthy.
It's very annoying for someone who has been waiting to buy into shares at a reasonable price. Just like house prices they are inflated beyond reality by government support, pricing out many people.
Corporate bonds have actually been on a downward trend the past 30 days. Not sure why. But yes, they did recover from the panic days of mid-March. https://finance.yahoo.com/quote/LQD/
They continually accuse other countries of manipulating their currency, of creating fake stock markets, of all kinds of financial shenanigans.
And then, when crisis hits America, 3 times in the past 20 years! What does America do? The exact same thing that they accuse other countries of doing.
You should realize that by doing this, that America will never return to a normalized system, where homes are affordably priced for the average American.
What ever happened to the invisible hand of the free market? It was all just a lie. Welcome to the Ponzi scheme, called the American financial system.
Which is so ironic to leave the economy of a country up to the whims of a private entity, where the people running it indulge in parasitic and immoral practices (interest/usury) to always profit off of the backs of people.
It was. At some point the Treasury and the Fed "merged" for all practical intents and purposes. There is no longer a clear separation of banking and state. It's fuzzier by the day. But ultimately, this is what power does. It consolidates. It corrupts. Decentralization is the only counterweight to the corrosive effects of power. The power to print money at will...it will prove to be our economy's undoing.
My instinct tells me we are headed towards massive inflation, and if your investments aren't parked in the right place (or if you don't really have investments), you're in for a rude awakening. I don't see how it's in anyone's best interest (besides the bankers collecting fees) for the Federal Reserve to get in bed with ETF management companies.
It’s the Heisenberg uncertainty principle of modern monetary theory: Increasing tax lowers inflation. inflation via government spending is a negative tax.
I've been told by a professional it's unhealthy to tell someone else how to feel, so let me instead offer a suggestion: take a deep breath and think differently about the situation, and seek out opportunities to still profit from manipulations sanctioned by the economic system.
For example, those of us who knew this was coming bought certain ETFs to front run the Fed and BlackRock, knowing they were going to begin purchasing them. Continue to seek out such opportunities in the future. The game is "rigged", so play along.
"When you can't change the direction of the wind, adjust your sails."
Fun fact, long term us treasuries have crushed stocks over the last 25 years. 1.5x leveraged LTTs gained 1% more yearly that stocks since 1992, with the same volatility, but a maximum drop-down of 25% as compared to 50% for stocks. Thanks FED!
According to Professor Damodaran's data here : http://pages.stern.nyu.edu/~adamodar/
(See Historical Returns on Stocks, Bonds and Bills - United States ), Average returns from stocks from 1994 to 2019 was 11.36% and returns for T-Bonds were 5.51%, pretty close to their 1928-2019 average returns of 11.57% and 5.15% .
#1: LTTs are almost separate asset class from generic "T-bonds". They have a long duration, 20+ years to maturity. I get this data from the VUSTX fund, which tracks a long bond index.
#2: We used leverage to match volatility. This can realistically be done using futures. (and yes, I am claiming a leveraged bond portfolio is less risky than a 100% stock portfolio; the numbers back it!)
3x bull equity portfolios are not a good comparison, because their volatility is much much much higher. They are strictly worse portfolios, which take on great risk.
My point about bonds is that they take __less__ risk and still make more money.
Someone once said: “Bitcoin is the real OWS movement.”
The system is corrupt and unfixable. Exchange your dollars for an engineered money which can be confiscated via inflation or freely printed to funds endless wars.
Consume relevant data from reliable sources. The Fed was very clear they intended to provide "unlimited support" to "maintain liquidity" when they made their March statements.
> When asked if the Fed would run out of ammunition to support the economy, Powell said no.
> “When it comes to this lending, we're not going to run out of ammunition. That doesn't happen," he said.
TLDR "Okay, so you're going to buy everything you can without any discrimination about price to hack around fiscal policy failure, good to know."
The issue is that those "in the know" will just rig it in some other way as soon as the peasants start to try to mimic them. Its a cat and mouse game and we are not all that sophisticated to play it.
I do expect that at some point this pumping of economies (by increasing money supply) will fail miserably. I am not really that confident of how to position myself to profit or at least not loose my wealth when it happens.
My position is in mostly in real estate that I purchased during the last housing bust period. Hopefully that turns out.
Yeah so assets that are outside of the system altogether are a good hedge. This is why gold & Bitcoin are good hedges against the Great Monetary Experiment of 2020. Own the physical gold and hold your own keys.
>>The Fed was very clear they intended to provide "unlimited support" to "maintain liquidity" when they made their March statements.
Yes, but it's not reasonable to expect them to say anything else. The moment they even seemingly waver in their commitment to back the markets, stocks would take a very deep dive. So they need to maintain the illusion.
That's not proof. But considering the markets have largely "recovered," I think it's safe to say that it was semi-public knowledge that this was in the works.
As far as I'm aware, the arbitrage mechanism works both ways. Continuing your analogy, authorized participants are able to trade the underlying turkeys for new tokens, or redeem the tokens for turkeys. When the price of a token is bidded up, its price becomes attractive relative to the turkeys. Authorized participants buy the underlying turkeys, create new tokens and then sell those tokens to take a risk free profit. This continues as long as there is a price mismatch, and ensures that ETF prices are in sync with the underlying assets.
Anyone have a graph of the capital injections (or capital equivalent valuation at the time of actions) that the US and other countries have taken since 2020 started?
Now that the "audit the Fed" members of Congress have been effectively neutered by "crying wolf" too often, the Fed is content to just wander around eating villagers, knowing that nobody has any interest in enforcing the Fed's charter or imposing any restraints on their behavior.
As someone who have a very basic understanding of economy and the Fed's role in managing it, does this mean the federal government is owning more and more share of private companies (at least their debt portion)? Does that mean, the US, which is supposed to be a very capitalistic nation, is now trending toward the economy operated by quasi-government-owned companies?
Is it imaginable that eventually, the US government owns the majority stake in these quasi-government-backed companies, moving the US economy further away from market-based capitalism?
> does this mean the federal government is owning more and more share of private companies (at least their debt portion)?
Of their debt portion, yes.
> is now trending toward the economy operated by quasi-government-owned companies?
No, as debt is not usually ownership (there are structures that allow it to become that). Companies just increasingly owe the government money, but that would happen under any traditional bailout scheme anyway.
> Is it imaginable that eventually, the US government owns the majority stake in these quasi-government-backed companies, moving the US economy further away from market-based capitalism?
Majority? That is a long long ways away. Top shareholder? It is true in Japan, so it is plausible. The Fed is not buying stocks at the moment.
I can't agree more with your last sentence. Why Blackrock? I really want to read their reasoning of using Blackrock as a broker other than it being the biggest fund manager. The Fed is big enough and why can't it buy the bonds directly. Maybe their weak excuse is that they can execute it via Blackrock ETFs quickly. But still...then why not spread it evenly over other institutions like Vanguard, Fidelity, etc.?
The Fed is not set up to execute this hence ETFs, Black Rock. The Fed also wants to eliminate the perception the government owns securities in these private companies. Use an etf and you don’t have the same control or voting rights.
Depends on the capitalist. I know several that intensely hate these sorts of bailouts. Some think everything should crash, others think the government should take the companies over to oversee an orderly dismantling of them.
Ultimately sarcastic comments like this aren't useful except to vent into an echo chamber, because you can't actually bucket a real person's views this easily.
Not really. It means that federal government is backstopping certain types of debt. This ensures that market liquidity happens such that mid-tier companies without ease of access to capital can access capital at lower interest rates.
With the fed backstopping debt, they're effectively the debtholder for these smaller companies - so yet it's a bailout. However, unlike when the fed took actual stakes in GM and Chrysler they don't hold shares. They merely receive the interest payments and coupons on the associated debt.
It's pretty hard to argue that there's EVER been market based capitalism. Much like communism, it's a bogey that has never actually existing - instead we have systems similar to them.
> the US, which is supposed to be a very capitalistic nation
1) large corporations write laws and engage in monopolies to prevent competition. They have no desire for any sort of capitalism as the average person would think of. This is crony capitalism.
2) corona is destroying the capital that smaller companies had to engage in authentic competition. This is the problem we really need to address in May, 2020 before we flush 200 years of progress down the toilet.
(When you see articles about billionaire investors crying in public this month, this is why. They look at the economic numbers and know what our country is throwing away over the flu.)
Broke: Describing capitalism as it historically developed through a materialist theory that seeks to uncover the mechanisms of its reproduction, like a fucking moron.
Woke: Describing capitalism as an ideal concept that does not refer to its material basis so any time anyone wants to describe how it works in reality they have to resort to qualifying it with adjectives like so many Ptolemaic epicycles.
This is not news. It was priced in when the S&P500 rose from 2300 to 2900. Now the market is starting to (already has?) priced in the Fed straight up buying equities.
"priced in" does not mean the market is perfectly valuing these assets. They can still be overvalued or undervalued. What it means is these assets have had a price movement in line with investor sentiment: meaning buying on this news isn't going to be a "play" anymore. It doesn't mean you should avoid these assets, just that you should be aware that there were already movements in these assets because of expected Fed action. Meaning this was "priced in."
So will smart investors now just follow the FED and invest in whomever they are propping up? If so they will pick the winners and the losers in every market.
No, because it's possible some assets are now overvalued because of this news. This news is possibly positive for the market in general, but if you go buy corporate bond ETFs right now it doesn't mean you'll make money, and it definitely does not mean you'll make money compared to buying a total market ETF or something similar.
Ignoring the awful attempt at conversational writing, this is bad news for Americans in the long term.
Short term we add liquidity, allow hedge funds to delever, and prop up a market everyone wants to crash. Longer term the taxpayers (individuals and American businesses) are going to be eating the cost.
This bailout makes 2008 a blip on the radar. It's going to take decades to play out.
Well, I'm sorry if you don't like Matt Levine's style, but he's been at his attempts for many years now and it's what distinguishes him from the rest of the regular columns. I think to the point where if anyone else at Bloomberg tried it, they'd be accused of a game stab at Money Stuff. So maybe he's doing you a service...
- Give everyone in the U.S. a guaranteed loan for $2,001, 0% interest, payable at the end of the month
- Before you "default", enter in a "negotiation" where the Fed can buy back the security from you for $1, writing off "the losses"
- Do it all again the next month
Tada! Monetary policy as fiscal policy! If you don't want to write it off immediately, guarantee 0% interest and have the timeline for the loan be 200 years, then write off the debt as nonpayable after death.
But seriously, I'm not sure if there's a clear line between monetary policy and fiscal policy anymore.