On the Fed QE

In an era where trillion dollars get thrown around like its no big deal, people are not focused enough on how enormous this Fed QE is.  The daily rate of $125B on Treasury/MBS purchases is almost twice as big as the monthly rate of QE during QE2 and QE3.  So on a daily basis, the Fed is currently buying 30 times more than past QE operations.   No wonder bonds refuse to go down this week as stocks rallied and pensions rebalanced out of bonds and into stocks.  The Fed is now the axe in Treasury market, dominating the money flows.
I vastly overestimated Powell.  Not to put it too bluntly, but Powell is a pussy.  He has no balls.  And no tact.  What he is doing now is 30 times worse than what Bernanke did.  Monetizing the debt is short term thinking and passing on the pain into the future.  Debasing the currency to try to drive long term interest rates from 1% to a few basis points doesn’t improve the economy.  It just breaks away bit by bit, the world’s confidence in the dollar as a reserve currency.  No one wants to hold dollars if its value is rapidly depreciating against real assets.

What Powell is doing not only a dereliction of duty, and a violation of the Fed charter, he’s speeding up the demise of the US dollar as the reserve currency.

The coronavirus, while a very deflationary force in the medium term, will not be an economic deterrant forever.  It will fade away, either through a vaccine or worst case scenario, global herd immunity.  Once its effects on the economy go away, what are you left with?  A bunch of junk on Fed’s balance sheet or hidden in SPVs at the Treasury.  And this is not like TARP.  Back then, the Fed actually had a lot of room to lower medium to long term rates through QE and ZIRP, thus providing plenty of monetary stimulus.  Now even the 30 year yield is barely above 1%.  Unless the Fed decides to go negative, which would only hasten the dollar’s demise, they are almost out of room to drive rates lower.

Last time the Fed did QE, rampant inflation didn’t show up because the budget deficit declined steadily after 2010 until 2016.  Trump changed all that, and his tax cuts along with increased government spending blew a huge deficit during an economic expansion.  One thing politicians have realized is that voters don’t really care about the deficit, but they do care about taxes.  So taxes have been cut while spending has increased.   That's why it was so easy for Congress to pass a 2.2 trillion dollar fiscal stimulus bill.  People don’t care about the deficit because there have been no negative consequences so far from it.  Dollarization of world trade has assured of there being a constant source of demand for dollars.

But the US is taking its reserve currency status for granted.  It takes a lot for the world to move on from the dollar to another currency but actively debasing the currency is the first step in losing that trust.  There is a reason that the world went on a gold standard and stayed under it for so long.  Inflation was devastating many times throughout history, so the only way governments could gain trust in their currency was to back it with something that couldn’t be printed and had a finite and limited supply.

If the Fed doesn’t retract all its excess money printing and rapidly shrink its balance sheet after the coronavirus recession is over, they are opening the door to  government abuse of deficit spending having no consequences on interest rates, and thus high inflation.  This time is not like the Obama years.  Deficits really don’t  matter now.  The way inflation blossoms is not just through debt monetization, its through massive debt issuance + monetization.  We will have both ingredients in the future.  Plus reduced globalization which was a deflationary force in the developed world.  That is an inflation powder keg waiting to be lit.  Inflation will be coming in the next expansion, and with force.