Money and the Federal Debt, what won't continue

Gaius · 2024-09-18T18:01:32.469Z

As goes the federal debt, so goes the money supply.

If the government borrows some amount of money,
no one else can use that money to

buy a house,
buy a car
expand a business (or keep it relevant with technology)
shop at a business
buy stocks
etc.

IOW government borrowing harms the economy (moves it toward recession).
To offset that, the Fed tends to print-up whatever money the government want to borrow. ← This is a key takeaway. The Fed has always done this. It has always printed enough money to offset damage that would be done by the debt. We can love the policy or hate the policy, but we should recognize it is the policy.

Note: The debt is not 100% printed. I am not touting a conspiracy theory here. I am simply noting that the debt and the money supply move in close tandem . . . until now. (See chart below.)

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Immediately post-pandemic — the Fed “printed” way more dollars (blue line) than needed to stay in normal alignment with the federal debt (red line.) Inflation was the result.

Right now — the Fed is printing too few dollars than necessary to maintain the normal alignment with federal debt. That is a very recessionary state of affairs and thus as I ma typing the Fed has announced it will cut rates 50 bps (print money)

Gaius · 2024-09-18T18:24:40.155Z

Focusing on the last part of the chart (the part we are in now)
The red line (federal debt)
is MUCH higher than the blue line (M2 money supply.)

It is not a partisan comment to recognize that the federal debt is not likely to be reduced in the foreseeable future.

Ergo, if the two lines are to meet again, then the money supply will increase.
We can call it good, we can call it bad, but that is what is gonna happen.
The form that it takes is lower rates, quantitiave easing, temporary rescue programs etc.

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Gaius · 2024-09-18T19:19:52.702Z

The really really short way of restating this is

The Fed just cut rates.

It will continue to cut rates and engage in similar policy for the foreseeable future. I happen to think that is bad policy. Jerome Powell et al will look at other charts and models and numbers but in the end all of those are tied to the one above. The Fed will continue to be dovish until these two lines meet again.

bigtwnvin · 2024-09-18T20:01:19.920Z

The Fed was supposed tho be apolitical. Not anymore.
Cutting rates is good. What about the middle class? Will cutting rates bring down the cost of consumer goods, food, fuel, rents?
Will it mean wage increases?
Other than politicians pounding their chests who benefits?

Gaius · 2024-09-18T20:17:52.756Z

bigtwnvin:

The Fed was supposed tho be apolitical. Not anymore.
Cutting rates is good. What about the middle class? Will cutting rates bring down the cost of consumer goods, food, fuel, rents?
Will it mean wage increases?
Other than politicians pounding their chests who benefits?

The economic foundations of Fed policy were perhaps true during the Great Depression. At that time, Congress could run a big deficit and the Fed could “accommodate” that policy and both of the following were true.

That pair of policies was good for the economy (would help address the depression.)
That pair of policies would especially benefit the lower and working classes.

Neither part of that is true today, yet they are stuck in their 1930s mindset.
There is no diversity of opinion on the Fed policy making board.

Gaius · 2024-09-18T21:24:35.600Z

Imagine interest rates are so low Americans won’t save money, instead we spend it. Then since spending is one of many economic indicators, we declare “the economy is great!”

bigtwnvin · 2024-09-18T23:22:09.735Z

Gaius:

Imagine interest rates are so low Americans won’t save money, instead we spend it.

Then they would be foolish and stupid.

Gaius · 2024-09-18T23:39:12.234Z

bigtwnvin:

Gaius:

Imagine interest rates are so low Americans won’t save money, instead we spend it.

Then they would be foolish and stupid.

Well latest figures are that we are drawing down ours savings.

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If banks and money market founds etc pay 5% or 10% or 20% people save money.
If banks and money market funds etc. suddenly start paying less people decide to spend instead of save. Since we measure the economy as spending (when in fact it is really just one indicator) the Fed gets to lower rates and declare victory.

bigtwnvin · 2024-09-19T01:17:21.249Z

(Some) Americans have been wiping out savings, 401ks and running up credit card debt for the last 3 plus years to make ends meet. The Fed dropping a half point won’t benefit them one bit.

Gaius · 2024-09-19T01:26:13.874Z

bigtwnvin:

(Some) Americans have been wiping out savings, 401ks and running up credit card debt for the last 3 plus years to make ends meet. The Fed dropping a half point won’t benefit them one bit.

Exactly!
There was a time (1930s) when a person could reasonably say
“Dollars hidden in mattresses do us no good. it is better, in the sort term at least that people stop saving and start spending.” But that is horrendous long term policy and probably does not apply tour current circumstances at all.

If those charts be true, and I have no reason to doubt them,
then we have changed slightly.
–>Immediately post-COVID we were a wounded economy that masked tis wound by feeding ourselves from a great pile of helicopter money the Fed printed-up earlier
→ and currently we are a wounded economy that feeds itself by not saving but by borrowing from other nations.

Gaius · 2024-09-19T23:12:02.333Z

Gaius:

There is no diversity of opinion on the Fed policy making board.

Gaius:

There is no diversity of opinion on the Fed policy making board.

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Yahoo News

Michelle Bowman becomes first Fed governor to dissent since 2005

Michelle Bowman, a governor on the Federal Reserve Board, became the first Fed official since 2005 to vote against the central bank’s interest rate decision when she dissented Wednesday against the Fed’s move to cut rates by 50 basis points. Bowman...

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How remarkably diverse of them.