Hey Bear, an extremely balanced approach as always.
Something that is hard to prove or quantify in any way is whether the Fed has a third mandate, that of using its incredible ability to exert substantial influence over the global economy and use the USD as a means of applying pressure on other countries to align on its geopolitical goals.
During a period of liquidity withdrawal, with lots of EM in a tough spot I can imagine that swap lines can be a powerful negotiating argument.
I'm meandering here, but am concerned. I tend to refer back to Richardo's Principles of Political Economy and Taxation (1817) when I need some clarity. We have three factors of production (distribution) capital, labor and, in his day, land, in ours resources. Adding capital changes the relationship between capital and labor, and capital and resources, but doesn't necessarily create more production (distribution). It clearly creates a disequilibrium whose consequences increase demand due to sudden appearance of 'free money' which effectively parasites off of prior value created in the economy. The value of the stock of capital is decreased due to value-less capital being created out of thin air. I worry about the erosion of belief in capital as a store of value, not to the degree of Weimar or Zimbabwe but the same underlying process. Will productive assets and productive labor move out of the capital economy to shield value, reducing liquidity? How long before the disequilibrium finds a new equilibrium, and how will that new equilibrium be different, perhaps support a different economy? I also wonder and perhaps worry that some of the numbers are being fudged with references to the changes 'after the fact' in employment numbers for, if I remember correctly, at least two quarters. Transactional economies operate on belief and faith in fairness and redress as much as on the conversion of value in hard assets into exchangeable capital assets. In the short run, it appears to have worked without the hard work of balanced fiscal management of government. Will this incent the Treasury and the Fed to overplay its hand? Government cannot lower the marginal rate for labor to withdraw from production, increase deficits and debt, increase taxes and expect a functioning economy. The greatest salve for political polarization is growth and prosperity. The policies I see being emplaced seem diametrically opposed.
I've been following you on Twitter for quite a while and just saw your substack! I just read your article from Feb 10 and have a comment on the microstructure of BTC and ETH. Per on chain sleuths, bitcoin's current surge is fueled by BUSD getting cashed out--eg exit pump and not necessarily true speculative demand
Do you believe that the feds decision making is purely economy based? As much as i want to agree with all those who are criticising the Fed for their actions, i am curious what other influences there are from governments and other powerful figures to leverage the economy in their favor.
Ultimately i believe the powers of the fed had been used to prevent a depression, but high rate of inflation is the nightmare that is being faced. The ensuing currency wars with rate hikes is like a wildfire that is going to clear out the weak shrubs with a lot of excess dept. As a world reserve, I am not so worried about the American dollar, but as a Canadian, i fear for whats coming to our bloated economy. Canadian GDP tops with the real estate and is complemented with having one of, if not, the biggest bubble in the world for this non-productive asset. As Americas hat, Canadian policy must follow, and i am both excited and scared for the future.
I'm at that stage of still forgetting that I'm subscribed and being pleasantly surprised on Friday morn to find a new essay.
I very much appreciate the calm tone backed with confident familiarity with the topics.
As a layman, I mostly react to what is right before my eyes. Though your point that outcomes/evaluations are still in flux is unassailable, what I see is concerning:
1) Dozens, hundreds, thousands of small businesses in my locale are gone. Others, esp restaurants, are still in big trouble due to rising costs of good, rising mandated wages, with customers who are more careful in their spending. My eyes tell me that small business has taken a huge hit, while Amazon has largely replaced them with its army of trucks everywhere.
Is this expected because Amazon is so much more efficient? Or did Amazon use their power during the shutdowns to grow explosively while Mom and Pop were forcibly closed? Will things swing back or is this a permanent new reality?
2) Building, quite a lot of new tall buildings everywhere. A couple of friends report the same in their states. I'm seeing many, many huge projects. So many new apartments, so much new office space. With the difficulty we see for employers to get butts back in chairs ... who will use the vast new amount of space being created? Where is the money coming from?
3) Not a new trend but dipping into the news will often provide more examples of gov't policies driving the economy while markets are interfered with. Will we someday reach equilibrium or are we destined to reach a centrally planned economy?
Thanks again for your careful and thoughtful insights.
I don't think it's so clear how much the Fed helped the recovery, which was mainly due to relaxation of the lockdown restrictions (just as the sharp downturn was because of those restrictions, as you point out). It seems even more clear that the 2021 measures did little other than to fuel inflation--spending had recovered, as your chart shows. The 2020 Fed intervention probably did moderate the severity of the downturn. But it should have been temporary, modeled on the 9/11 example, rather than needlessly prolonged, as with QE 2 and 3.
Great article. At least for me, the collateral damage is my faith in free markets. The best research or edge in the world doesn't seem to matter anymore and it feels like the best way to generate returns is just to swim in the same direction of the Feds interest rate policy. Bubble stocks with low rates / low inflation & boomer stocks / commodities when high rates / high inflation.
Hey Bear, an extremely balanced approach as always.
Something that is hard to prove or quantify in any way is whether the Fed has a third mandate, that of using its incredible ability to exert substantial influence over the global economy and use the USD as a means of applying pressure on other countries to align on its geopolitical goals.
During a period of liquidity withdrawal, with lots of EM in a tough spot I can imagine that swap lines can be a powerful negotiating argument.
I hope you get your Central Park penthouse one day. Thanks for another great piece!
Those 11 points at the end really help in understanding, do keep them. Thanks!
I'm meandering here, but am concerned. I tend to refer back to Richardo's Principles of Political Economy and Taxation (1817) when I need some clarity. We have three factors of production (distribution) capital, labor and, in his day, land, in ours resources. Adding capital changes the relationship between capital and labor, and capital and resources, but doesn't necessarily create more production (distribution). It clearly creates a disequilibrium whose consequences increase demand due to sudden appearance of 'free money' which effectively parasites off of prior value created in the economy. The value of the stock of capital is decreased due to value-less capital being created out of thin air. I worry about the erosion of belief in capital as a store of value, not to the degree of Weimar or Zimbabwe but the same underlying process. Will productive assets and productive labor move out of the capital economy to shield value, reducing liquidity? How long before the disequilibrium finds a new equilibrium, and how will that new equilibrium be different, perhaps support a different economy? I also wonder and perhaps worry that some of the numbers are being fudged with references to the changes 'after the fact' in employment numbers for, if I remember correctly, at least two quarters. Transactional economies operate on belief and faith in fairness and redress as much as on the conversion of value in hard assets into exchangeable capital assets. In the short run, it appears to have worked without the hard work of balanced fiscal management of government. Will this incent the Treasury and the Fed to overplay its hand? Government cannot lower the marginal rate for labor to withdraw from production, increase deficits and debt, increase taxes and expect a functioning economy. The greatest salve for political polarization is growth and prosperity. The policies I see being emplaced seem diametrically opposed.
I've been following you on Twitter for quite a while and just saw your substack! I just read your article from Feb 10 and have a comment on the microstructure of BTC and ETH. Per on chain sleuths, bitcoin's current surge is fueled by BUSD getting cashed out--eg exit pump and not necessarily true speculative demand
Do you believe that the feds decision making is purely economy based? As much as i want to agree with all those who are criticising the Fed for their actions, i am curious what other influences there are from governments and other powerful figures to leverage the economy in their favor.
Ultimately i believe the powers of the fed had been used to prevent a depression, but high rate of inflation is the nightmare that is being faced. The ensuing currency wars with rate hikes is like a wildfire that is going to clear out the weak shrubs with a lot of excess dept. As a world reserve, I am not so worried about the American dollar, but as a Canadian, i fear for whats coming to our bloated economy. Canadian GDP tops with the real estate and is complemented with having one of, if not, the biggest bubble in the world for this non-productive asset. As Americas hat, Canadian policy must follow, and i am both excited and scared for the future.
I'm at that stage of still forgetting that I'm subscribed and being pleasantly surprised on Friday morn to find a new essay.
I very much appreciate the calm tone backed with confident familiarity with the topics.
As a layman, I mostly react to what is right before my eyes. Though your point that outcomes/evaluations are still in flux is unassailable, what I see is concerning:
1) Dozens, hundreds, thousands of small businesses in my locale are gone. Others, esp restaurants, are still in big trouble due to rising costs of good, rising mandated wages, with customers who are more careful in their spending. My eyes tell me that small business has taken a huge hit, while Amazon has largely replaced them with its army of trucks everywhere.
Is this expected because Amazon is so much more efficient? Or did Amazon use their power during the shutdowns to grow explosively while Mom and Pop were forcibly closed? Will things swing back or is this a permanent new reality?
2) Building, quite a lot of new tall buildings everywhere. A couple of friends report the same in their states. I'm seeing many, many huge projects. So many new apartments, so much new office space. With the difficulty we see for employers to get butts back in chairs ... who will use the vast new amount of space being created? Where is the money coming from?
3) Not a new trend but dipping into the news will often provide more examples of gov't policies driving the economy while markets are interfered with. Will we someday reach equilibrium or are we destined to reach a centrally planned economy?
Thanks again for your careful and thoughtful insights.
I don't think it's so clear how much the Fed helped the recovery, which was mainly due to relaxation of the lockdown restrictions (just as the sharp downturn was because of those restrictions, as you point out). It seems even more clear that the 2021 measures did little other than to fuel inflation--spending had recovered, as your chart shows. The 2020 Fed intervention probably did moderate the severity of the downturn. But it should have been temporary, modeled on the 9/11 example, rather than needlessly prolonged, as with QE 2 and 3.
20 degrees outside, taking a sunbath at the balcony with an article of TLBS… life’s good! Oh…and a coffe!!
Great read! My takeaway line
Once inflation began to show up in the data in early 2021, it was outright ignored.
Great article. At least for me, the collateral damage is my faith in free markets. The best research or edge in the world doesn't seem to matter anymore and it feels like the best way to generate returns is just to swim in the same direction of the Feds interest rate policy. Bubble stocks with low rates / low inflation & boomer stocks / commodities when high rates / high inflation.