r/Economics • u/JustARandomPerson902 • 19d ago
The pressure is on for Powell and the Federal Reserve to manage the exit from ultra-easy policies News
https://www.cnbc.com/2021/08/26/the-pressure-is-on-for-powell-and-the-federal-reserve-to-manage-the-exit-from-ultra-easy-policies.html44
u/xcsler_returns 19d ago
They can't exit. They tried once before when the balance sheet was under 4 trillion and it failed. Now the balance sheet is in the 8 trillion range. There's too much debt in the system. If the Fed tapers or raises rates the stock, bond, and housing market bubbles will burst and a good portion of the businesses carrying huge amounts of debt will go bankrupt. The Fed is trapped.
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u/joy_of_division 19d ago
If the Fed tapers or raises rates the stock, bond, and housing market bubbles will burst
It literally has to happen eventually. The question is, would you rather do it now, or when the balance sheet is 12 trillion, 15 trillion, when?
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u/immibis 19d ago
What happens if it's never done? The conversion rate between stocks and flows just gets higher and higher, leading to neo-feudalism? By that I mean: imagine that bread is still $2 and rent is still $500 but land is now $2,000,000,000,000,000,000,000,000 - then nobody can ever buy land except by selling different land, and nobody without land can ever buy any.
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u/Paul_Ostert 19d ago
But bread and rent would not stay fixed. With so much debt money floating around, and interest rates near 0, you are right property would sky rocket because everyone is just buying using almost free money. And therefore rent would increase and workers would need to get paid more to be attracted to the high cost area, which would increase the cost of bread, because the grocery store worker needs to pay more rent. Inflation. Which is what we are seeing now.
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u/immibis 19d ago
Depends where the money actually goes. If someone sells their land to buy bread, they can buy massive amounts of bread causing massive bread inflation, buttttt (a) how much bread can one person buy, and (b) why would someone sell their land without buying more land, knowing there'd be no way they'd ever own land again?
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u/maybesomaybenot92 19d ago
Look into the post World War 1 German hyperinflation for a possible answer to this question.
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u/InvestingBig 19d ago
The big thing you are missing is capital outflows. If that happened, then people would start trading out of the USD and enter foreign markets. Because why buy 1 acre of land in the US for 30 trillion dollars when 1 acre can be bought in africa for $30k dollars. Thus the USD exchange rate would suffer and bread would suddenly cost $50, etc.
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u/nostrademons 19d ago
The everything-bubble is happening worldwide. Europe, China, Taiwan, Australia, New Zealand, anywhere desirable with reasonable property rights - they all have massive asset prices relative to labor & consumer prices, and correspondingly low interest rates. Arguably these rates are low because of competitive devaluation; any country that maintains high central bank rates will see their currency appreciate because of the carry trade, which then raises their export prices on the world market and makes exports uncompetitive, putting large sectors of their economy out of work. That threatens the political stability of the country, so countries simply maintain zero interest rate policies.
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u/InvestingBig 19d ago
You would be wrong if you think this bubble is world wide. You can see this here by looking at various countries valuations: https://indices.barclays/IM/21/en/indices/static/historic-cape.app
This bubble is primarily in the USA forming a super bubble similar to the 1989 japanese bubble. Other countries are not participating in this bubble. Sure, some countries (not all) have "rich" valuations, but nowhere near bubble levels.
Now, it is true some countries have bubbles but not everything bubbles. For example, every country has a bubble in bonds if there are 0% interest rates. And, some countries have a real estate bubble even if the stock market is well priced. The thing with the USA is that it is truly an everything bubble just like Japan was in 1989.
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u/nostrademons 19d ago
Well, when you put it like that chart, the USA is not in a bubble at all. The CAPE is significantly below the dot-com bubble, or foreign peaks like China & India in 2007 or Germany and Sweden in 2000, and far, far below Japan in 1989 or 2000-2010. We look like the US of 1997 or Japan in the mid-90s, which I'd read as "low interest rates".
If you're looking at slopes rather than absolute values, most countries match the U.S's post-COVID trajectory. So far I see India, France, Canada, Italy, the Netherlands (actually higher than us!), Sweden, and Taiwan all basically tracking us, and China and Korea would be included if not for a recent leveling off.
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u/InvestingBig 19d ago
I think we are looking at different charts. While the CAPE is below the dot-com bubble that does not mean this is not a bubble. It is also far above the GFC bubble.
And no, the slopes are not the same at all. The spread between PE ratios of US / Europe was 3 in 2010. It now sits at 15. Regarding the slopes since covid, that does not really matter as every other country was starting at lower valuations. But even in that, the US is outpacing the rest. Europe went up 10% since pre-covid whereas the US went up 30%.
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u/PaidByPutinBot123 19d ago
Actually it doesn't, but it has to happen IF there is secular inflation. If we continue secular disinflation or deflation then the Fed can print as much as they want.
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u/fromks 19d ago
If we continue secular disinflation or deflation
You think that's where we're at?
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u/PaidByPutinBot123 19d ago
yes i think we are in a 40 year trend of disinflation due to rising debt levels, with occasional inflationary cyclical cycles. 1 year doesn't make a trend.
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u/fromks 19d ago
You think we've had net deflation from 1980s to 2020s? By what measure?
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u/PaidByPutinBot123 19d ago
You're on r/economics and don't know what disinflation vs deflation is?
The CPI is my measure.
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u/huyvitran 19d ago
Agreed. 2018 unemployment rate ©3.5% economy running red hot. They managed to raise rate few times before back off. Interest rate will never normalize. The end to the good old business cycle. STONKS ONLY GO UP. APPL to 10trillions. Why not
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u/zUdio 19d ago
If the Fed tapers or raises rates the stock, bond, and housing market bubbles will burst and a good portion of the businesses carrying huge amounts of debt will go bankrupt
Why is this bad?? An economy is supposed to ebb and flow. If you prevent the ebb, you just have cancer.
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u/fromks 19d ago edited 19d ago
I've always likened it to forest fires.
For the longest time, the US tried a "no burn" policy. The end result was a buildup of fuel, leading to larger and larger fires.
Turns out fires are a healthy part of the ecosystem, and preventing any damage merely builds up risk. After the old trees burn, new trees take their place.
Look at the rates of zombie companies that exist. The Fed would rather prevent damage to the existing companies on the stock market than focus on banks lending to new companies.
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u/xcsler_returns 19d ago
I agree with your sentiment but believe the Fed won't allow for any ebbing. I don't think they have the intestinal fortitude to allow for a wave of bankruptcies. The political path of least resistance is to keep rates low and use other monetary tools to keep the debt cycle going as long as possible. If inflation gets out of control though that would be really problematic for the Fed. We may be approaching that point.
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u/iKickdaBass 19d ago
They don't have to exit all at once. The Fed can taper, then let the debt sit on it's books and mature. This could take a decade or more to unwind. I can guarantee you that tapering and rate increases are priced into assets. No one thinks that QE will go on forever. The timeline the market expects is tapering to begin later this year and end this time next year, then rate increases beginning at the end of 2022 or beginning of 2023. Asset prices may be overvalued, but they could still go higher. And most likely stocks will continue to grow earnings into their valuations. And any hiccup in the economy over the next 12 months delays the entire process.
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u/xcsler_returns 19d ago
Of course they don't have to do it all at once. Yellen said that paring the balance sheet would be like watching paint dry. Their plan was a slow gradual tapering. It didn't work last time and it almost certainly won't work this time.
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u/iKickdaBass 19d ago
Just to clarify, I think maybe you are confusing tapering with unwinding. Tapering is the reduction in the amount of bonds purchased through quantitative easing. Unwinding is the selling or maturing of those bonds on the Fed's balance sheet.
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u/CrushHazard 19d ago
So a lost decade? Or two?
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u/iKickdaBass 19d ago
You mean like 2011-2020? That was an awful decade for assets wasn’t it? Darn QE and the inability to unwind it. I would say it’s the exact opposite of a lost decade. Excess liquidity, low interest rates, and an inability to unwind a significant bond portfolio are all ingredients for excess long term economic growth, earnings growth and high asset multiples.
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u/InvestingBig 19d ago
excess long term economic growth, earnings growth and high asset multiples.
Except the last decade only got 1 of these things: high asset multiples. Once those compress (bubble burst), then we will be left with 0 of these things. What did the QE do for us again?
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u/iKickdaBass 19d ago
The S&P 500 earned $60 in EPS in 2009; It's expected to earn over $200 this year.
GDP has increased 57% since 2009. That's a 3.5% CAGR
The S&P 500 PE ratio has averaged 16.2x in the last 10 years and 18.5x in the last 5.
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u/iKickdaBass 19d ago
Just think how much lower growth would have been in a restrictive monetary environment
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u/CrushHazard 19d ago
You’re essentially arguing that if you do heroin for a few years, and it’s great with few side effects, then you’re okay just increasing the dose indefinitely. What could go wrong?
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u/iKickdaBass 19d ago edited 19d ago
Any ramifications of QE come on the flip side when the Fed unwinds. If they don’t unwind, how do consequences manifest?
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u/CrushHazard 19d ago
Yes: inflation. You can’t get away from it by hiding it all in major asset prices. It eventually leaks out into the rest of the economy.
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u/iKickdaBass 19d ago edited 19d ago
The US expanded the money supply pretty significantly from 2009 all the way up to 2020 and averaged less than 2% inflation.
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u/CrushHazard 19d ago
In 2009, they were replacing “money” that had disappeared. That’s different than just injecting more and more and more into an already humming economy.
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u/iKickdaBass 19d ago
Well didn’t money disappear during the pandemic? The entire economy was shut down for three months.
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u/waltwhitman83 19d ago
don’t the businesses carrying huge amounts of debt deserve to go bankrupt to some degree?
i think it’s over simplified to assume every c-suite executive is a greedy moron with no long term planning
what kind of board of directors would sign off on “let’s make our company fragile, teetering on the brink of despair given the slightest change in economic policy”
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u/xcsler_returns 18d ago
Yes they do deserve to go bankrupt. Don't hate the player hate the game. Fed policy has allowed for huge amounts of resources to be wasted by these inefficient companies and governments. If rates were set by markets there'd be a lot more accountability and rational use of resources.
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u/waltwhitman83 18d ago edited 18d ago
I agree with you. I keep reading this excuse that... "oh my god, the sky will fall for so many businesses if the federal reserve changes this wildly unrealistic dream-level monetary policy back to some degree of normalcy"...
it's probably extremely true and would result in loss of jobs and homes for a lot of people but at the end of the day... it's up to businesses to try to at least pretend to be able to survive and not be leveraged to the gills all in name of stock buybacks and corporate greed, right?
maybe the government needs to incentivize company to save at least some money for a rainy day so that a 0.25% change in interest rates for future debt doesn't destroy your businesses ability to be profitable and not bankrupt overnight...
and honestly... why are we assuming an increased cost in debt can't be/won't be just passed along to the consumer as a cost of doing business?
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u/Noodleface00 19d ago
The fed will start to taper before the end of this year.
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u/xcsler_returns 19d ago
They'll taper until there's a crisis and then there will be more QE just like last time. Don't do the same thing expecting a different result.
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u/Noodleface00 19d ago
Is that a bad thing?
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u/xcsler_returns 19d ago
No, it's a good thing. More people will come to the realization that the system is broken and irreparable.
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u/Noodleface00 19d ago
May I ask when was the first time they did this and fail?
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u/xcsler_returns 19d ago
2013 and 2018.
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u/Noodleface00 18d ago
I look at the fed interest rate chart and it look like 2013 is less than 0.10% while 2016-2018 it went up from 0.40% to 2.50%. I think from 2016-2018 they raise rate way too fast that is why there a crash. If they do it slow over a long period of time I think it be better yes?
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u/btc_has_no_king 19d ago
For the insane amount of debt, their only option is to continue devaluing the currency.
Cash and bond holders will be the bagholders of the decade while Bitcoin and hard assets will thrive.
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u/waltwhitman83 19d ago
devaluing the currency against who though? who is doing better than the US?
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u/xcsler_returns 18d ago
Devaluing against and scarce and useful assets like gold, cryptocurrency, real estate and commodities.
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u/goodsam2 19d ago
I really feel like "pressure" is such a silly word when we have so many uncertainties. I mean Delta and unemployment being 5.4% but also labor force participation rate jumped so unemployment is probably closer to 8%.
I really feel like we are doing a much better recovery this time around than after 2008 and we shouldn't let the fact that some prices have risen dissuade of us of that. We have an unemployment rate closer to 2014 now than we had before.
We do need to reduce the balance sheet but first we needed to get to something like real inflation instead of undershooting our targets again for a decade.
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u/RPF1945 19d ago
We have real inflation. Housing/rent costs are fucked and it will have long term implications for economic activity.
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u/goodsam2 19d ago
I feel like the inflation there is more that there is not enough supply and we keep slowing down the economy because housing prices rise too quickly.
Cape Schiller housing prices were flat from 1890-1980. The problem is excessive zoning stopping supply from keeping the market stable.
Inflation is broad based and when for most of the summer a plurality of inflation was from used cars I don't get why people aren't in a wait and see environment.
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u/RPF1945 19d ago
I agree with you, but the cause of housing cost increases doesn’t really change the impact it has on the economy. Home price hikes are far stickier than used auto prices, they’re just not as catchy to talk about because the price changes aren’t as insane.
The cause of home price inflation matters for the solution, but we can just add zoning/building restrictions to the enormous pile of things that the Fed is supposed to fix somehow because congress refuses to do their job. IMO stunting the economy to temper housing costs is preferable to deep-seated stagnation caused by huge swaths of the population not being able to live/spend.
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u/goodsam2 19d ago
Part of me feel likes we are holding the economy back because if we don't housing will go up too quickly...
I really feel like the 2010s we had an understimulated economy for most of it.
It's not congress that's holding up housing it's regular people (mostly homeowners) voting against new housing.
I think the Fed has failed by not saying this explicitly in meetings.
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u/RPF1945 19d ago
It is congress - congress could gut municipalitys’ ability to enact too-restrictive zoning. I don’t think there’s any other way to fix it as the town hall demographic will always be against change. The Fed has begged congress to get off its ass for half a dozen other things. I don’t think that this specific issue would get different results unfortunately.
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u/goodsam2 19d ago
States have the power here. Unless the state had a law but that's just not passing.
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u/RPF1945 19d ago
Congress could pass a law though. Even if they can’t outright ban certain zoning laws they are able to give funding to states that pass xyz rules - that’s how the 21 drinking age came about nationwide.
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u/goodsam2 18d ago
I mean but the states got them to change the drinking age to 21 by offering highway funding.
What funding are you thinking of that has a similar scope?
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u/RPF1945 18d ago
Not sure to be honest. I’d normally say infrastructure or healthcare funding, or something else that would be a huge benefit to state economies, but it seems like half the country would reject funding for that stuff even if there weren’t any strings attached.
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u/GhostReddit 19d ago
Cape Schiller housing prices were flat from 1890-1980.
US currency was tied to gold in some way until about 1970. Most prices were flat.
Also some of the hottest real estate markets today were basically suburbs in 1980 and haven't grown in housing stock nearly as much as their popularity.
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u/goodsam2 19d ago
Also some of the hottest real estate markets today were basically suburbs in 1980 and haven't grown in housing stock nearly as much as their popularity.
That's my point, look at homebuilding since the 70s and you can see the answer is a lack of supply.
The most houses built in the US in a single year was in the 1970s.
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u/waltwhitman83 19d ago
housing/rent prices are fucked due to demand. what long term implications will it have? poor people will have to move to shittier neighborhoods (which they’ll probably gentrify lol) or make more money to avoid the more expensive stuff. boo hoo…
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u/RPF1945 19d ago
Tell me you know nothing about a topic without saying it directly….
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u/waltwhitman83 18d ago
Tell me you're poor and can't afford a house (and want to blame it all on some boogeyman like it isn't your fault you don't have enough economic worth) without saying it directly...
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u/Adult_Reasoning 19d ago
I don't understand the hesitancy and the obsessive concern of "scaring the markets."
Injecting money into it to prop them up is welcomed, but God forbid there is any amount of decline. We can't have this house of cards collapse!
It is ridiculous that our"economy" is so fragile that we fear any decline or lack of growth. Babysitting an economy only makes it weaker. QE never really went away after 2008. What makes us think we'll be able to completely rid ourselves of it now? In fact, I bet people in power don't want to get rid of it and would prefer to have the economy handheld from here on out for eternity.