This is part 2 of a 4 part series. The other posts can be found here:
- Part 1 - The Big Debt Cycle
- Part 2 - Central Banks are Failing Us
- Part 3 - The Market is Rigged
- Part 4 - Scarcity in a World of Unlimited Money Printing
Central Banks are Failing Us
Central banks have 3 ways of dealing with a crisis:
1. Interest Rates
Source: Big Debt Crises - Ray Dalio
Source: Bloomberg - John Authers
2. QE
Source: Big Debt Crises - Ray Dalio
Source: Bloomberg - John Authers
3. Helicopter Money
Source: Big Debt Crises - Ray Dalio
Source: Brookings Institution - Ben Bernanke
To a man with a hammer everything looks like a nail.
Source: The Changing World Order - Ray Dalio
Aside from printing, the other levers to manage debt & debt service levels are:
- Austerity (spending less)
- Debt defaults / restructurings
- Wealth transfer (Transfer money and credit from those who have more than they need, to those who have less)
Austerity is too painful, and can exacerbate the deflationary effects (ie. Great Depression).
Defaults / restructuring are also too painful - one person’s debt is another person’s asset. As a result, it is also deflationary.
Wealth redistribution is politically challenging, and rarely happens in large enough amounts to make a difference (unless a revolution occurs).
“In the end, policy makers always print.”
-Ray Dalio
This is what happened in 2008 when the bubble burst.
Ten years later the Fed tried to take the money back.
But the market said nope.
Fed stepped in again in 2019 when the repo market broke.
And now Covid just threw gas on the fire.
The Fed’s balance sheet now. Can you spot the previous two charts in here?
More and more money is being created.
Source: Bridgewater Associates, Ray Dalio, Annotated by Lyn Alden
This is not just a US phenomenon.
“We are witnessing the Great Monetary Inflation (GMI)—an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”
-Paul Tudor Jones
Source: Paul Tudor Jones - The Great Monetary Inflation
Source: Yardeni
So why have we not seen crazy inflation in the CPI?
Source: Paul Tudor Jones - The Great Monetary Inflation
Inflation is a function of spending. That spending is funded by either money or credit.
During a deflationary crisis, when increased spending cannot be financed by more credit, Central Banks provide the spending relief by adding more money.
Printing money won’t cause inflation if it offsets falling credit.
Basically, the money created by the Fed is to just fill the hole that has been left by the absence of credit.
Even with record levels of printing, the money is not making it into the system.
Or is it?
It may not show up in the CPI, but all this money printing does incentivize certain behaviors which result in inflation showing up in different ways.
Source: Lyn Alden
It’s also creating market distortions.
By aggressively buying Treasuries (and corporate bonds), the Fed is artificially keeping rates low by bidding up prices - allowing firms who would otherwise fail, to keep getting cheap financing.
Bond investors are no longer able to get the same yield, and must move up the risk spectrum to achieve the same returns. Forcing them to take on more risk than they otherwise would.
All of this artificially bids up asset prices across the board.
The Fed’s manipulation of the money supply also disproportionately benefits those who have assets, vs. those who don’t.
Source: Fortune
Source: Washington Post - Oren Cass
Wealth and income gaps are the largest they’ve been since the 1930-1945 period.
Source: The Changing World Order - Ray Dalio
Even though productivity has gone up.
Most of these productivity gains went to the asset holders, increasing their wealth.
(Annotated by me)
Source: Twitter - jesse_livermore
People are angry. The system is not working for them.
Gun sales are at record highs
It is time to give back to the people.
QE was printing for the haves.
Now the printer must run for the have nots.
Helicopter Money
Source: Big Debt Crises - Ray Dalio
BRRRRR…
Source: Visualcapitalist.com
But It’s not enough. We need MOOAAR!
Source: Fed Meeting 7/29/20 - Jerome Powell
Source: Nancy Pelosi CNN Interview 7/21/20
The Treasury is sitting on $1.8Tn of cash in its checking account. Just waiting for approval to spend.
Source: Lyn Alden
Source: Twitter- Barton_Options
The Fed is working on other ways.
Source: Bloomberg
What happens if the Democrats sweep in November?
Remember this?
Where do I sign up?
BTW, who’s going to fund it all?
Source: Tree Rings 7/24 - Luke Gromen
Source: Tree Rings 7/31 - Luke Gromen
Source: Bianco Research
Source: WSJ, Deutsche Bank
This is how empires fall.
Source: The Changing World Order - Ray Dalio
“The stats seem to suggest that the US is roughly 75% through that cycle, +/- 10%.”
- Ray Dalio
Source: The Changing World Order - Ray Dalio
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