What the Fed is doing will work very well, at some modest real cost later on (likely to the dollar, represented in the cost of things we import and commodities), if we are able to somewhat restart the economy in the coming months (and we will). The worst of the NY region's situation (which is overwhelmingly the primary problem in the US) will end in the coming weeks (it's ending now, represented in the plunge in hospital and ICU admissions; the deaths will lag though). The Spring and Summer heat will dramatically reduce the virus transmission, combined with practical ongoing measures like heightened rapid testing, distancing and quarantining (along with occasional lockdowns that will spring up due to burst outbreaks; we will likely get far more aggressive with tracking people regarding outbreaks). There's a decent chance we'll combat the virus short term with a serum therapy (might be able to considerably reduce the per case mortality rate over the coming year), and then a vaccine is definite later on.
The tangible cost to what the Fed is doing, is that they will effectively destroy low single digit trillions of dollars in wealth held in US dollars (picture household wealth at $100 trillion for this purpose, and then picture the Fed lighting $1-3 trillion of that on fire as a means to prop up the economy; they're debasing our national wealth in this process, drawing on it via their control of the dollar, to point it as a firehose at the fire; not exact figures, merely a conceptual representation). That damage is likely to be anywhere from one to a few trillion dollars in real losses that they'll see from their programs (only a portion of what they do will result in losses of real value, as in the actions taken by the Fed during the great recession; % losses will be higher in this case, as they're doing some wider, riskier things). They're trading that hit as a cost to prop the whole thing up until the economy can find its legs again.
It's absolutely the right approach. It's the only serious option, other than doing nothing (which isn't reasonable, but it's another option). It will not be without a cost. It will prevent a far, far worse catastrophic outcome. If unemployment peaks at ~14-18% (it's almost guaranteed to hit at least the 15% area somewhere, and soon), without the Fed's actions you could easily double that figure.
The US is incredibly fortunate in this case. The many choices of our ancestors, which made the USD the global reserve currency post WW2, we're cashing in that rainy day benefit right now. We've been irresponsible with our fiscal condition the past 20 years, so our primary fiscal back-stop is the US dollar on such a short notice desperate need (this is far beyond the great recession, in terms of extreme sudden need of dollars); using that is a form of a tax against the assets held in dollars and the productive output of the US economy.
There is a very plausible scenario where the US dollar sees little negative impact despite the trillions of dollars in magic printing the Fed is going to do. And that is: the other major currencies it is competing with globally, are all supported by economies being similarly smashed right now (Eurozone, China, Japan; and the Chinese Yuan has very little global footprint, so it's not very relevant to that context presently, it's really mostly the Euro). The global demand for US dollars right now is extreme, which pushed the dollar to a very high level recently. That dollar demand, for liquidity purposes, will relax later on as some normalcy returns with eg a vaccine (within ~12-18 months sometime probably), and then the dollar will see some fallout from what the Fed is doing now, that's when the long-term cost will begin to be represented in such things as consumer prices, commodity prices (priced in dollars), and so on.
People with assets will benefit tremendously from what the Fed is doing. The stock market would be anywhere from 1/3 to 1/2 lower than it is right now, if the Fed hadn't stepped in in an extreme way (and I don't like where the market is at right now at all, it's not properly pricing in the grinding damage we have to deal with over the coming year, it's temporarily buoyant on the Fed's sugar actions). This is the world's largest bailout for asset holders, and it also happens to be very necessary to preserve the economy until it can return to functioning properly.
The only approach that would have maybe been better, is if a national hold had been placed on all major firings, all mortgages and rents for N months (3 months initially). The Fed would then step in to pay that toll directly (ie prevent the fire, rather than try to put it out afterward), along with the Treasury doing various programs. That could have possibly prevented more damage than what we're doing now. The US system, legally speaking, doesn't allow for that kind of command-economy type action very easily though. So the Fed's moves, which were 'guns at-ready' and made possible by the great recession, were the best choice we had (if this were 2007 and it were happening then, the Fed wouldn't have been able to move as quickly; there was a lot of stumbling around in dark in the initialy days of the great recession, trying to figure out what the Fed was allowed to do and what made sense).
Long story short, the Fed is eating some of our national wealth to do what it's doing, that's the tax we're paying (and some of that is being paid by the rest of the world, as the dollar is the reserve currency and widely held). Instead of everyone selling off 1-3% of their wealth and handing that cash to a central authority to take bold actions, the Fed is doing a conceptually similar thing via 'stealth taxation' (aka inflation (which won't register near-term due to very slack demand), aka dollar debasement, aka printing).
I think you are a little too aggressive about inflation in terms of consumer prices and underselling the impact to wealth inequality. Hopefully we will be able to have interest rates rise.
I'm saying the inflation will show up over a long period of time, not in the form of 7% or 10% annualized traditional consumer inflation (eg in milk prices). We don't have enough economic / population growth to press the demand line enough to spur high inflation, and our debt maintenance requirements are perpetually throwing cold water on large amounts of loose money entering the economy (it absorbs extraordinary sums of capital that would otherwise be sloshing around, impacting the real economy; it puts all that capital into a deep freeze; I refer to it as an economic heat death, which Japan has experienced due to their debt robbing their economy of dynamism).
We'll likely see it show up aggressively in asset inflation. Every dollar the Fed puts toward artificially propping up asset prices, is going to gradually leak inflation into the economy as asset holders unlock those assets and convert them into dollars that touch the real economy. Some might ask: if that's true, why isn't consumer inflation far higher (eg in the post great recession era); consider that inflation might be even lower if they didn't do it. That's a very difficult speculation to make either direction, the fact is the best we can do is guess on the what-ifs (would inflation be that much lower otherwise). If the Fed props up the housing market (0% interest rates, buying junk mortgages to take them off the market to prop up values, keeping the lenders solvent, etc), enabling a homeowner to take out a big home equity line at cheap rates and then inject that cash into the real economy, we get some little jolt of inflation from it. The Fed helping to prop up the stock market, enabling millions of people to extract more value out of the market at higher prices, shoots inflation into the economy to the extent that it's abnormal to what would otherwise exist in the absence of the Fed actions. The interesting question is: how low would inflation be without that happening (now and in the recent past)?
The first paragraph clarifies my point and I believe we are largely in agreement. The difference I see in our views is that I don't consider asset price increase without CPI increases as inflation -- it is a materially different beast (it doesn't increase commodity prices or depress buying power of wage earners for day-to-day needs.)
Your second paragraph is exactly what I meant by wealth inequality. I don't think rich people buying things will increase CPI, but it does impact positional goods like college and real estate.
So far, the Fed has been providing liquidity to MBS but not enough to prevent real mortgage rates from _rising_ currently. I believe unemployment will remain high enough for long enough to stave off a housing price increase.
The sell-off of equities as boomers retire and live off their stock portfolios is also something to consider as counterbalancing equity prices over the medium to long-term.
I believe the prevailing belief is that we'd be in a deflationary period without Fed intervention.
Great comment, thank you very much. As the Fed is not actually buying stocks, can you explain the mechanism by which its actions are preventing the stock market dipping by another 1/3 or 1/2?
> print money and then make the rest of the world pay the bill
It is true that it's a benefit of US hegemony. The rest of the world will pay a minority fraction of the direct monetary bill (they'll take a minority share of the debasement hit over time). The vast majority of the wealth and productivity held/represented in US dollars, is in the US economy.
The worst of what the rest of the world sees isn't actually a direct financial cost in the manner the US will see that bill. The worst part is the risk of commodity prices increasing in a disorderly manner, as they did when the Bush Administration tanked the US dollar with spending + deficits + tax cuts and the wars, along with the Fed's over aggressive actions to try to dodge a recession after 9/11 (which then helped to cause the housing bubble afterward). The world got food turmoil [1] out of that dollar-inspired commodity bubble, which caused vast civil unrest around the world, primarily in less stable and poorer nations.
The motions of the dollar cause wild effects all over the planet, from food to banking/finance to energy. That's a much worse risk than the world eating 15% of the bill for what the Fed does here. Granted, that is indeed a form of paying the bill (so to speak), it's a different kind of bill than the one the US will likely be paying.
The tangible cost to what the Fed is doing, is that they will effectively destroy low single digit trillions of dollars in wealth held in US dollars (picture household wealth at $100 trillion for this purpose, and then picture the Fed lighting $1-3 trillion of that on fire as a means to prop up the economy; they're debasing our national wealth in this process, drawing on it via their control of the dollar, to point it as a firehose at the fire; not exact figures, merely a conceptual representation). That damage is likely to be anywhere from one to a few trillion dollars in real losses that they'll see from their programs (only a portion of what they do will result in losses of real value, as in the actions taken by the Fed during the great recession; % losses will be higher in this case, as they're doing some wider, riskier things). They're trading that hit as a cost to prop the whole thing up until the economy can find its legs again.
It's absolutely the right approach. It's the only serious option, other than doing nothing (which isn't reasonable, but it's another option). It will not be without a cost. It will prevent a far, far worse catastrophic outcome. If unemployment peaks at ~14-18% (it's almost guaranteed to hit at least the 15% area somewhere, and soon), without the Fed's actions you could easily double that figure.
The US is incredibly fortunate in this case. The many choices of our ancestors, which made the USD the global reserve currency post WW2, we're cashing in that rainy day benefit right now. We've been irresponsible with our fiscal condition the past 20 years, so our primary fiscal back-stop is the US dollar on such a short notice desperate need (this is far beyond the great recession, in terms of extreme sudden need of dollars); using that is a form of a tax against the assets held in dollars and the productive output of the US economy.
There is a very plausible scenario where the US dollar sees little negative impact despite the trillions of dollars in magic printing the Fed is going to do. And that is: the other major currencies it is competing with globally, are all supported by economies being similarly smashed right now (Eurozone, China, Japan; and the Chinese Yuan has very little global footprint, so it's not very relevant to that context presently, it's really mostly the Euro). The global demand for US dollars right now is extreme, which pushed the dollar to a very high level recently. That dollar demand, for liquidity purposes, will relax later on as some normalcy returns with eg a vaccine (within ~12-18 months sometime probably), and then the dollar will see some fallout from what the Fed is doing now, that's when the long-term cost will begin to be represented in such things as consumer prices, commodity prices (priced in dollars), and so on.
People with assets will benefit tremendously from what the Fed is doing. The stock market would be anywhere from 1/3 to 1/2 lower than it is right now, if the Fed hadn't stepped in in an extreme way (and I don't like where the market is at right now at all, it's not properly pricing in the grinding damage we have to deal with over the coming year, it's temporarily buoyant on the Fed's sugar actions). This is the world's largest bailout for asset holders, and it also happens to be very necessary to preserve the economy until it can return to functioning properly.
The only approach that would have maybe been better, is if a national hold had been placed on all major firings, all mortgages and rents for N months (3 months initially). The Fed would then step in to pay that toll directly (ie prevent the fire, rather than try to put it out afterward), along with the Treasury doing various programs. That could have possibly prevented more damage than what we're doing now. The US system, legally speaking, doesn't allow for that kind of command-economy type action very easily though. So the Fed's moves, which were 'guns at-ready' and made possible by the great recession, were the best choice we had (if this were 2007 and it were happening then, the Fed wouldn't have been able to move as quickly; there was a lot of stumbling around in dark in the initialy days of the great recession, trying to figure out what the Fed was allowed to do and what made sense).
Long story short, the Fed is eating some of our national wealth to do what it's doing, that's the tax we're paying (and some of that is being paid by the rest of the world, as the dollar is the reserve currency and widely held). Instead of everyone selling off 1-3% of their wealth and handing that cash to a central authority to take bold actions, the Fed is doing a conceptually similar thing via 'stealth taxation' (aka inflation (which won't register near-term due to very slack demand), aka dollar debasement, aka printing).