The Fed can't raise rates to "at least 7-10% and possibly more" like it did 40 years ago. The US Government has $30T in debt now, and most of it is short-term, meaning it needs to rolled over, on average every few months to a year or so. Look at what would happen to the FedGov's budget if interest rates rose to that level. The FedGov and Federal Reserve painted themselves into a corner back in 2008-2009, and I see no way out. What they've done in the last two years just made things worse.
They are in a bind, and so is the hugely indebted federal government.
I have a theory (no research yet to support it) that in order to contain inflation, the federal funds rate needs to be at least the current rate of inflation.
Interest is also the cost/price of money. If money is cheaper than everything else, inflation will continue. If money is more expensive, inflation ends.
Volcker raised the federal funds rate to 20%, and inflation back then peaked at 14.6%. Strictly speculation on my part but I suspect the reason the FFR went so high was to get the natural interest rate up to at least 14.6%
Is there a way out? There is one, but it's a minefield: the Fed buys up all outstanding sovereign debts and then cancels it.
That would solve the outstanding debt problem, although what the knock-on effects would be I have not had a chance to figure out.
I don't think that will work. The Fed doesn't have $xx trillion in hard assets, so the only way they can buy all the sovereign debt is with $xx trillion in newly created (digitally "printed") dollars, which will just make the inflation problem worse -- much worse. And if they cancel the debt after they've purchased it, they no longer have a balance sheet. Right now, dollars are a liability of the Federal Reserve, and the debt they own is an asset. These are supposed to balance out. The moment they cancel the debt, they give up all pretense that the dollars they've created are backed by anything at all. Right now, they're still backed by that sovereign debt, i.e. by the future productivity of the American economy and the government's ability to tax it. If that isn't the case anymore, I think the the dollar's value will go to zero in short order.
I really don't see a way out that doesn't collapse things into the a financial black hole at some point.
You have a point. As I said, I had not worked the idea all the way through.
The one certainty about debt is that either the counterparty is paid or the debt is forgiven. There is no third option.
If the government is unable to pay the debt--i.e., the Treasury can't sell enough new debt to finance the old debt--then the debt must be forgiven. This can be forced (debt default followed by a "haircut" for current bondholders) or voluntary. The only entity I can envision forgiving sovereign US debt is the Fed.
Is it feasible? Certainly such a scheme would have to address the risks you just mentioned.
Can the dollar survive whatever is going to happen? I honestly don't know. It certainly does not look good.
And as an artifact of Bretton Woods, the dollar is ultimately the reserve currency behind all others. The euro, the pound, the yen, even the yuan, are all fiat currencies whose valuations ultimately revolve around the dollar. For all the talk in some circles of "dedollarization", the world is a long way from accomplishing that.
If the dollar collapses, the other fiat currencies follow in short order. Not even China and Russia have sufficient gold reserves to put their currencies on a metallic standard.
This is the one thing I can see that allows the dollar to survive: ultimately, the world still needs it.
And if that's no longer the case, then put some jam in your pockets because we're all going to be toast
That's my take on the world monetary situation, at any rate.
Indeed, the fact that the world needs the dollar, and so much debt world-wide is denominated in dollars is what has kept it alive and more-or-less healthy since 2008-2009, when the Fed also printed stupid amounts. The reason that event didn't give us inflation is because it happened at the same time that a roughly equivalent amount of private debt did fail, but that hasn't happened with the current balance sheet expansion.
I won't pretend that I know how this all ends or when, but I'm pretty confident it won't end well.
Perversely, I suspect the current inflation can be traced back to the pandemic stimulus checks that were sent out.
Prior to 2020, virtually all the dollars magically created by the Fed remained bottled up in financial markets--they are essential to the quadrillion (nominal) in derivatives floating around the world. The CPI didn't spike, but starting in 2008-2009, the major stock indices started trending along the growth curve in the M1 money supply. There WAS inflation since 2008, but in asset prices, not consumer prices.
As long as the money stayed on Wall Street, the charade could be sustained. Then came the pandemic lockdowns, and the federal government began shoveling money out to consumers and mom-and-pop businesses. The inflation that had been carrying Wall Street higher and higher was now on Main Street.
Now the Fed has to shrink the money supply--and that can't be contained to just Main Street.
The economic "experts" in the government and at the Fed forgot the most basic rule of all: follow the money.
The Fed can't raise rates to "at least 7-10% and possibly more" like it did 40 years ago. The US Government has $30T in debt now, and most of it is short-term, meaning it needs to rolled over, on average every few months to a year or so. Look at what would happen to the FedGov's budget if interest rates rose to that level. The FedGov and Federal Reserve painted themselves into a corner back in 2008-2009, and I see no way out. What they've done in the last two years just made things worse.
They are in a bind, and so is the hugely indebted federal government.
I have a theory (no research yet to support it) that in order to contain inflation, the federal funds rate needs to be at least the current rate of inflation.
Interest is also the cost/price of money. If money is cheaper than everything else, inflation will continue. If money is more expensive, inflation ends.
Volcker raised the federal funds rate to 20%, and inflation back then peaked at 14.6%. Strictly speculation on my part but I suspect the reason the FFR went so high was to get the natural interest rate up to at least 14.6%
Is there a way out? There is one, but it's a minefield: the Fed buys up all outstanding sovereign debts and then cancels it.
That would solve the outstanding debt problem, although what the knock-on effects would be I have not had a chance to figure out.
I don't think that will work. The Fed doesn't have $xx trillion in hard assets, so the only way they can buy all the sovereign debt is with $xx trillion in newly created (digitally "printed") dollars, which will just make the inflation problem worse -- much worse. And if they cancel the debt after they've purchased it, they no longer have a balance sheet. Right now, dollars are a liability of the Federal Reserve, and the debt they own is an asset. These are supposed to balance out. The moment they cancel the debt, they give up all pretense that the dollars they've created are backed by anything at all. Right now, they're still backed by that sovereign debt, i.e. by the future productivity of the American economy and the government's ability to tax it. If that isn't the case anymore, I think the the dollar's value will go to zero in short order.
I really don't see a way out that doesn't collapse things into the a financial black hole at some point.
You have a point. As I said, I had not worked the idea all the way through.
The one certainty about debt is that either the counterparty is paid or the debt is forgiven. There is no third option.
If the government is unable to pay the debt--i.e., the Treasury can't sell enough new debt to finance the old debt--then the debt must be forgiven. This can be forced (debt default followed by a "haircut" for current bondholders) or voluntary. The only entity I can envision forgiving sovereign US debt is the Fed.
Is it feasible? Certainly such a scheme would have to address the risks you just mentioned.
Can the dollar survive whatever is going to happen? I honestly don't know. It certainly does not look good.
And as an artifact of Bretton Woods, the dollar is ultimately the reserve currency behind all others. The euro, the pound, the yen, even the yuan, are all fiat currencies whose valuations ultimately revolve around the dollar. For all the talk in some circles of "dedollarization", the world is a long way from accomplishing that.
If the dollar collapses, the other fiat currencies follow in short order. Not even China and Russia have sufficient gold reserves to put their currencies on a metallic standard.
This is the one thing I can see that allows the dollar to survive: ultimately, the world still needs it.
And if that's no longer the case, then put some jam in your pockets because we're all going to be toast
That's my take on the world monetary situation, at any rate.
Indeed, the fact that the world needs the dollar, and so much debt world-wide is denominated in dollars is what has kept it alive and more-or-less healthy since 2008-2009, when the Fed also printed stupid amounts. The reason that event didn't give us inflation is because it happened at the same time that a roughly equivalent amount of private debt did fail, but that hasn't happened with the current balance sheet expansion.
I won't pretend that I know how this all ends or when, but I'm pretty confident it won't end well.
Perversely, I suspect the current inflation can be traced back to the pandemic stimulus checks that were sent out.
Prior to 2020, virtually all the dollars magically created by the Fed remained bottled up in financial markets--they are essential to the quadrillion (nominal) in derivatives floating around the world. The CPI didn't spike, but starting in 2008-2009, the major stock indices started trending along the growth curve in the M1 money supply. There WAS inflation since 2008, but in asset prices, not consumer prices.
As long as the money stayed on Wall Street, the charade could be sustained. Then came the pandemic lockdowns, and the federal government began shoveling money out to consumers and mom-and-pop businesses. The inflation that had been carrying Wall Street higher and higher was now on Main Street.
Now the Fed has to shrink the money supply--and that can't be contained to just Main Street.
The economic "experts" in the government and at the Fed forgot the most basic rule of all: follow the money.