Inflating Away the Debt & The Wealth Effect (Lyn Alden)

00:00
but it seems like they’re fighting
00:01
deflation but probably more like
00:03
deflation of assets right so they keep
00:05
saying they can’t get the inflation they
00:07
want they can’t get it well i think i
00:08
think they’ve got it now
00:09
i think it’s a little bit over their
00:10
target at this point but
00:12
um the d but then at the same time we’re
00:14
seeing prices of everything going
00:16
through the roof from
00:17
used cars to use bicycles all the way to
00:20
all types of financial assets and all
00:21
those types of things
00:22
um so the deflation that they’re afraid
00:25
of is that really in the markets that’s
00:26
what they’re worried about stocks
00:27
dropping you know real estate dropping
00:29
bonds
00:30
crashing things like that yeah they were
00:32
well they were pretty explicit uh you
know a decade ago
00:35
when they uh point out that they wanted
to do the wealth effect so they
pretty much said they wanted to cause
asset price inflation uh you know they
00:42
just you know
00:43
described a little bit more plately uh
00:45
and so that was their goal was to
basically
increase you know housing costs again
increase uh the stock market again
00:51
uh and if you do a lot of monetary
00:53
policy without doing a lot of fiscal
00:54
policy that that’s
00:55
that’s what you tend to get now we there
00:58
were still disinflationary forces over
00:59
the course that decade because for
01:01
example
01:02
uh you know about a decade ago you had a
01:03
period of commodity over supply
01:05
uh you had the slowdown in china and so
01:08
we’ve been kind of working through this
01:09
period of commodity over supply for a
01:11
while we also of course have the rise of
01:13
shale oil which was largely unprofitable
01:15
but it still contributed
01:16
to uh you know a ton of extra supply and
01:18
therefore pretty low prices across the
01:20
board
01:21
and so we’ve been in that kind of
01:22
disinflationary commodity environment
01:24
but we had a target you know inflation
in asset prices inflation in health care
inflation and education inflation
and child care things like that where
01:32
you had you know deflation in electronic
01:34
goods you had deflation in commodities
01:36
uh deflation due to technology and kind
01:38
of offshoring things like that
01:40
uh and so you know from their
01:42
perspective uh you know they
01:44
would prefer the say the inflation rate
to be higher than the treasury yields
right because that’s how you can you can
stop uh you know debt as a percentage of
gdp uh from from continuing to grow to
control if they
01:56
have you know the potentially nominal
01:58
gdp growing faster
02:00
than the combination of debt issuance
02:02
and as a percentage of gdp and interest
02:04
rates
02:04
uh but of course i mean that’s a really
02:06
bad environment if you’re holding cash
02:07
or bonds
02:08
and so there’s no free lunch i mean
02:10
someone somewhere is getting uh screwed
02:12
over sometimes
02:13
there are certain policy regimes where
02:15
the debtors are getting screwed over
02:16
and there are other times where the the
02:18
you know the the
02:20
people that own the debt that the
02:21
creditors are getting screwed over and
02:23
so
02:23
in this environment of high leverage
02:25
they they’re they’re trying to err on
02:27
the side of essentially the the
02:28
creditors getting
02:30
uh you know screwed over uh but instead
02:32
of kind of abrupt kind of nominal losses
02:34
they’d prefer you know to basically just
02:36
fail to keep up with inflation and
02:37
that’s what you saw back in say the
02:39
1970s and 1940s
02:40
these inflationary decades ironically
02:42
they tend to deleverage things because
02:44
the bonds fail to keep up with inflation
02:46
uh but you don’t want to be the ones
02:48
holding those assets and that’s a pretty
02:50
big pool of assets
02:51
yeah definitely i guess that you kind of
02:54
talked about that and that’s what i was
02:55
trying to
02:55
figure out is like what are they trying
02:57
to optimize for because
02:59
uh to your point you know electronics
03:00
coming down and deflationary source
03:02
things like that and
03:03
for i guess it depends on which side as
03:04
you said which side you’re on but it
03:06
seems like that would be good things for
03:07
most people if prices were coming down
03:09
um asset prices i guess if you’re
03:11
holding asset prices you want them to go
03:13
up if you’re
03:13
if you want to buy them you want them to
03:15
be down right so i guess it depends but
03:17
like overall it seems like if most
03:19
people had their cost of living going
03:21
down that would be a good thing and nasa
03:22
prices going up
03:24
uh at the same time that would be kind
03:25
of a good thing so um i guess kind of
03:28
the the question was uh are they really
03:30
trying you know
03:31
i guess they’re kind of targeting the
03:32
cpi basket which is like this consumer
03:34
price of goods
03:35
basket but it seems like the big risk of
03:36
deflation is in the markets like
03:38
stocks could crash 50 80 percent the
03:41
real estate could crash 50
03:42
and that’s like a massive deflation hit
03:44
so you think that’s what they’re trying
03:45
to optimize for
03:46
i mean even though they’re always
03:47
talking about cpi pretty much i mean
03:50
they’re trying to keep asset prices up
03:51
they’re also
03:52
you know they’re increasingly talking
03:53
about kind of nominal gdp targeting
03:55
uh you know again trying to have nominal
03:57
gdp higher than uh
03:58
some of those interest rates and some of
04:00
the debt accumulation levels
04:01
uh and of course you know the the
04:03
perspective will depend on if you’re the
04:05
the monetary
04:06
authority or the fiscal authority so as
04:08
consumers we generally would prefer
04:10
uh you know price deflation uh while
04:12
still having our jobs so we don’t want
04:14
some some sort of economic contraction
04:16
uh but we want technology and things
04:18
like that to lower prices over time
04:20
so that our money goes further and
04:22
that’s you know that’s normally the best
04:24
case scenario
04:24
the only time that’s bad is if you have
a debt bubble right because then the the
04:28
real value of your debt
04:29
goes up relative to your incomes and
04:31
things like that so if you if you had
04:33
avoided that in the first place
04:35
uh then that that deflation is really
04:37
good but what policymakers are afraid of
04:38
is that because we’ve had this you know
this kind of mix of lower interest rates
and
and you know different types of policy
mixes we’ve kind of encouraged this big
debt build up
and now you know they basically have to
04:49
in their view inflate it away before
04:51
they can they can kind of stabilize
04:53
and so if you’re the federal reserve
04:54
you’re trying to hold yields
04:56
lower than the inflation rate you’re
04:57
trying to be accommodative
04:59
uh and kind of you know trying to
05:02
balance between
05:03
you know uh causing asset bubbles uh but
05:06
then also you know not wanting to crash
05:08
the market so that’s their perspective
05:10
and if you’re fiscal policy makers
05:11
mainly you want to get votes every two
05:13
years or
05:14
four years or whatever the case may be
05:16
and you want to avoid you know rising
05:18
populism you want to avoid
05:19
uh you know things like that from their
05:21
perspective and so you you know
05:22
depending on which side
05:24
you know where you work essentially if
05:25
you’re if you’re the fed or if you’re in
05:27
the
05:27
congress you have kind of two different
05:29
things you’re balancing yeah
05:31
so the tools as you’re kind of laying
05:32
them out the monetary or the fiscal
05:34
monetary being like
05:35
issuing more debt to the banks monetary
05:37
or fiscal actually like putting money
05:39
out of the streets into kind of people’s
05:40
hands
05:41
and um it seems like you know i mean i
05:44
guess as a central bank
05:45
uh what’s the quote if all you have is a
05:47
hammer the whole world looks like a nail
05:48
and they really only have a couple tools
05:50
um and really it’s you know monetary
05:52
tools and so that’s kind of like
05:53
interest rates and
05:54
and increasing the debt supply uh the
05:56
money supply but
05:58
with interest rates i mean they’re
06:00
already almost down to zero
06:02
uh nominally we can talk about real
06:03
rates et cetera which i do want to get
06:05
to
06:05
but it seems like a lot of those tools
06:07
they’re basically running out of right
06:09
interest rates are down to zero
06:10
debts at all time high economy is not
06:13
growing so the debt to gdp is is tough
06:15
to move
06:15
i mean do you see that they’re like
06:17
running out of tools i mean like how
06:19
much further can this can be kicked down
06:21
the road
06:21
uh so for the federal reserve i do view
06:23
them as as towards the end of their rope
06:25
in terms of tools and so they really
06:26
only have two tools that they mostly
06:28
it’s interest rate manipulation
06:30
and asset purchases or sales in some
06:32
cases
06:34
and they have some other tools around
06:35
the margin like lending facilities and
06:36
things like that but ultimately it comes
06:38
down to
06:38
controlling them controlling uh the
06:40
price of money uh
06:41
and uh buying assets now the fiscal
06:44
authorities they
06:44
they’re the ones that you know they can
06:46
say send cash to people
06:48
uh but then they you know they have to
06:50
issue debt to do it uh
06:51
and so you have kind of i’ve described
06:53
it as like uh you know if you have like
06:55
a movie where they’re gonna launch like
06:56
a
06:56
nuclear missile like two generals have
06:58
to put their keys in at the same time to
07:00
so i viewed i view policy tools and
07:02
fiscal tools uh kind of like the two
07:04
keys there
07:04
when it comes to generating inflation uh
07:07
and so if you just have the
07:09
monetary policy that’s not generally
07:11
very inflationary on its own because you
07:13
can’t directly get money to people
07:15
right so the federal reserve can’t send
07:17
money to people all they can do
07:18
is control interest rates uh and they
07:20
can increase the amount of bank reserves
07:22
in the system but then those get stock
07:23
banking system because banks aren’t
07:24
doing loans uh and so
07:26
you have reserves go up you
07:27
re-capitalize the banks but doesn’t
07:28
actually get out into the public
07:30
on the other hand the fiscal authority
07:31
can send money to whoever they want as
07:32
long as they have a consensus
07:34
but they have to issue bonds to do it
07:37
and then therefore someone has to buy
07:38
those bonds which sucks money out of the
07:40
system
07:41
but then if you combine the two and the
07:43
treasury sends money to people they
07:44
issue bonds
07:45
which the federal reserve creates new
07:46
base money and buys those bonds and
07:48
holds them forever
07:49
well then you’re just literally
07:50
essentially creating new base money and
07:52
directing it into the economy
07:54
and that’s how you get say that the you
07:56
know the 25 percent broad money supply
07:58
year of year change that we had you know
08:00
in 2020
08:01
and so that tends to be a more
08:02
inflationary environment especially if
08:05
they were to sustain it for several
08:06
years
08:07
and so i think you know as we go forward
08:09
obviously right now we’re having some
08:10
base effects
08:11
right so we’re in in say march april
08:14
may june you’re comparing it to the 2020
08:16
period which was like the
08:17
kind of disinflationary crunch they had
08:19
during the worst part of the lockdown
08:21
and so we’re going to get some pretty
08:22
high bass effects like we’re probably
08:23
going to see
08:24
uh you know even even official cpi we’re
08:26
probably going to see it over three
08:27
percent year-over-year
08:28
uh but then the big question is going
08:30
forward uh you know what are we going to
08:31
do with
08:32
are they going to do like an
08:33
infrastructure build that also gets
08:34
monetized
08:35
are they going to do another round of
08:36
aid things like that and some of those
08:38
if they were to continue could be pretty
08:40
uh inflationary to a certain extent
08:42
especially because
08:44
you know a lot of economists don’t
08:45
incorporate say the current situation of
08:47
commodity markets
08:48
uh and so of course you know that kind
08:50
of say 15-year cycle of commodity supply
08:53
and commodity demand
08:54
has a big impact on inflation and so
08:56
when you’re in a period of commodity
08:58
oversupply
08:59
as it were for the past decade you know
09:01
that tends to keep a lid on
09:02
on most types of inflation whereas when
09:05
you’re in a period of
09:06
you know you say you haven’t done a lot
09:07
of capex uh you know you haven’t kind of
09:09
brought new minds uh
09:11
to market you haven’t found like new new
09:13
big uh you know we haven’t done the
09:14
investment
09:16
if you were to get that increase in
09:17
commodity demand uh well then
09:19
uh you know you have higher commodity
09:21
prices and that’s what we’re seeing
09:22
we’re starting to see that kind of show
09:23
up in the market where
09:25
many commodities are still below where
09:26
they were 10 to 15 years ago with some
09:28
exceptions like beef lumber
09:30
gold touch new all-time highs most of
09:32
them are still below their all-time
09:33
highs but they’re starting to break out
09:35
from their their big declining trend
09:36
they had
09:37
and so it does look like the 2020s could
09:39
be a more inflationary decade with
09:41
tighter commodity markets uh big big
09:44
increases in the broad money supply
09:45
and that money getting to people rather
09:48
than just stuck in the banking system
09:49
which of course can benefit some people
09:51
but then you have that that that risk of
09:53
inflation
09:54
where you you increase the broad money
09:55
supply by a lot but you haven’t
09:56
increased the the goods and services by
09:58
an equal amount

What are the ingredients which Suggest a Financial Crisis?

@RaoulGMI identified the following factors contributing to a crisis, before Coronavirus:

  1. Stocks: Largest Equity Bubble of All Time: (Pension Crisis & Buyback Bubble)
  2. Demographics:
    • Largest Retiree Wave, all wanting to sell stocks and bonds at the same time
    • Millennials are too poor and indebted (make 20% less than parents)
  3. Corporate Credit: Largest Credit Bubble of All Time
    • ($10 Trillion + Off balance Sheet = 75% of GDP)
  4. Student Loan Bubble:
    • $1.6 Trillion
  5. Auto Loan Bubble
    • ($1.2 Trillion)
  6. Indexation Bubble
  7. ETF/Market Structure Bubble
  8. Foreign Borrowings (Dollar Standard Bubble)
  9. Monetary Policy Bubble (The Central Bank Bubble)
  10. EU Banking Crisis
  11. A Trade War:
    • The Trade Wars “shattered” supply chains
  12. Coronavirus
    • Largest Supply & Demand Shocks of all Time

 

Big Picture:

Central Banks have been fighting for the last 20 years:

  • Full Scale Debt Deflation and a Solvency Crisis

Turns into:

  • A loss of confidence in the Dollar Standard and the Entire Financial Architecture

(page 29-30)