View Full Version : Fed to pump more than $1 trillion in dramatic ramping up of market intervention
Fed to pump more than $1 trillion in dramatic ramping up of market intervention
https://www.cnbc.com/2020/03/12/fed-to-pump-more-than-500-billion-into-short-term-bank-funding-expand-types-of-security-purchases.html
SomeOtherGuy
03-12-20, 12:47
Ooooh, what could possibly go wrong?
Ooooh, what could possibly go wrong?
Hold my beer!
Where is that trillion $$ coming from? are they printing more money? would that create inflation? My economics knowledge is extremely basic.
Where is that trillion $$ coming from? are they printing more money? would that create inflation? My economics knowledge is extremely basic.
Sadly your economics knowledge seems higher than our current leadership.
Sadly your economics knowledge seems higher than our current leadership.
From what I can see, it's going to come from borrowing money from someone else (like Saudi or China), and adding to the 23.45 trillion USD which constitutes national debt right now... OR they are printing 1.5 trillion dollars worth of cash.
The direct consequence to the American citizen is roughly identical: In theory, every dollar (or fraction thereof) in our pocket currently is now worth less than what it was before, because there are more dollars in circulation.
Eventually this will mean that the dozen eggs that you bought yesterday which cost $1.99 will cost more for the same dozen eggs if you were to buy them at a later period in time (such as 4-6 weeks from now).
On a greater level, the practical and unintended consequences of just putting 1.5 trillion USD into our economy could be described by a Bill O'Reilly quote about "doing things live".
https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements/repurchase-agreement-operational-details
SomeOtherGuy
03-12-20, 13:46
From what I can see, it's going to come from borrowing money from someone else (like Saudi or China), and adding to the 23.45 trillion USD which constitutes national debt right now... OR they are printing 1.5 trillion dollars worth of cash.
They are not literally printing paper money, but they are taking actions that affect its value in the same way.
In the repo operation, the Fed is buying US Treasury securities and simply expanding its own balance sheet. Nominal money is created from nothing. This is how the Fed has always worked, but it's been getting out of hand since 2008 and this March 12, 2020 announcement is a new high or low, depending on your perspective.
Some portion of US debt is purchased by various foreign governments, but that amount has decreased greatly since 2008, and it appears China in particular has sold off much US debt in the last few years. Who bought it? Really hard to know. Much of it is "bought" in certain banking centers and the trail disappears. Most likely a lot of it is covertly on the balance sheet of the Fed or other central banks, backed by nothing.
The direct consequence to the American citizen is roughly identical: In theory, every dollar (or fraction thereof) in our pocket currently is now worth less than what it was before, because there are more dollars in circulation.
Yes.
Eventually this will mean that the dozen eggs that you bought yesterday which cost $1.99 will cost more for the same dozen eggs if you were to buy them at a later period in time (such as 4-6 weeks from now).
Yes, and I was seeing a lot of price increases in the last 4-6 months before COVID started. This will make it worse.
The basic version: there's a range of ways this could go bad, but it's kinda like having an unexpected "dawn" at 3am coming from the western horizon. It could be nukes, a refinery fire, a forest fire, SMOD, or aliens, but no possible cause is good news.
sundance435
03-12-20, 14:37
From what I can see, it's going to come from borrowing money from someone else (like Saudi or China), and adding to the 23.45 trillion USD which constitutes national debt right now... OR they are printing 1.5 trillion dollars worth of cash.
The direct consequence to the American citizen is roughly identical: In theory, every dollar (or fraction thereof) in our pocket currently is now worth less than what it was before, because there are more dollars in circulation.
Eventually this will mean that the dozen eggs that you bought yesterday which cost $1.99 will cost more for the same dozen eggs if you were to buy them at a later period in time (such as 4-6 weeks from now).
On a greater level, the practical and unintended consequences of just putting 1.5 trillion USD into our economy could be described by a Bill O'Reilly quote about "doing things live".
Does anyone bother to read even the Wikipedia page about what greatly exacerbated the crash of '29 and turned it into a "Great Depression"? It was the Fed not taking steps like this.
Not to be glib, but your quote is how you would explain "printing money" to a 3rd-grader and doesn't come close to explaining what they're doing here. The Fed is not "printing money" - it's temporarily creating an additional $1.5 trillion of liquidity. They are buying U.S. Treasuries and other securities, which is not the same as injecting cash or dollars directly into the economy. The Fed rarely prints money in an unplanned sense, e.g. direct stimulus through a $1,000 "gift" to everyone over 18. "Repossession", in this sense, means the fed is buying securities that are worth more in the long term than the $1.5 trillion they are "creating", with an agreement for them to be repurchased at a later date by the possessor - to free up immediate capital with the obligation on the current asset holder to repurchase. It frees up $1.5 trillion in capital for the private sector. This will add to balance sheet debt in the short term (obviously offset by a corresponding asset), but it's not like traditional spending by the government. The Fed buying Treasuries and other securities is literally a wash on a balance sheet and could even be an appreciating asset.
Quantitative easing (which is also not the same thing) had the same effect on the national debt, which is to say, not much. It's $1+ trillion budget deficits that got us to the $20+ number.
Inflation? At worst, it would be temporary. It would also be going up against strong deflationary pressure from the rest of the economy and would eventually be removed once the assets are purchased back.
They are not literally printing paper money, but they are taking actions that affect its value in the same way.
In the repo operation, the Fed is buying US Treasury securities and simply expanding its own balance sheet. Nominal money is created from nothing. This is how the Fed has always worked, but it's been getting out of hand since 2008 and this March 12, 2020 announcement is a new high or low, depending on your perspective.
Some portion of US debt is purchased by various foreign governments, but that amount has decreased greatly since 2008, and it appears China in particular has sold off much US debt in the last few years. Who bought it? Really hard to know. Much of it is "bought" in certain banking centers and the trail disappears. Most likely a lot of it is covertly on the balance sheet of the Fed or other central banks, backed by nothing.
That's a really good point, and a great clarification. Repo operations are, in my mind, a potentially pernicious tool by which to regulate an economy which may have greater negative consequences on the economy, just not in the foreseeable future (however long you deem to be "foreseeable" is typically administration-dependent, it seems).
The "backed by nothing" component of foreign debt being potentially repurchased by an American entity (in USD, which is backed by nothing) I feel will be extremely important if the economy turns fully pear-shaped.
Without digging through historical commodities market data and cross-referencing with inflation data/home goods pricing, I'm in speculation territory on this. Anecdotally though, I've seen the same price increases, and am seeing enough components in adjacent sectors align to not like what is happening.
While I agree with your basic version being that no possible cause is good news, I'd like to at least have positive ID on the components to start triaging my response (if even possible).
From a market perspective, I would like to remain rosy and justify the current environment by saying that the downward trend is driven by algorithmic trading, fear sell-offs, and futures speculation having a compounded effect on the market, but I think that the next quarterly reports for many companies are going to show that there's a "there" there more than just a knee-jerk market reaction.
The_War_Wagon
03-12-20, 15:13
It's looking like DEFLATION, has come home to roost. The Fed would be more effective, throwing $100 bills from the tops of skyscrapers.
sundance435
03-12-20, 15:32
It's looking like DEFLATION, has come home to roost. The Fed would be more effective, throwing $100 bills from the tops of skyscrapers.
It's not an either/or proposition and there's no way of knowing the right combination until after the fact, especially for something unprecedented like this. The Fed should be adding liquidity to the market so companies have access to capital AND the government needs to do more to keep consumers' money in their own pockets. Payroll tax cut would be a start (that would actually add to the deficit without a cut in other spending, unlike repossession), but companies also need access to capital to keep the goods and services flowing for consumers to buy. A sudden, severe shortage on the supply side while the government throws money at people leads to people hoarding, a la 1929. Sudden, severe shortages on the supply side have long-term negative effects on the demand side as people adapt. Once they've adapted, it's much harder to get them to go back to their old spendthrift ways.
Paid sick leave and basically everything the House dems want will have little to no positive effect on the economy, but it sounds nicer and more "working man" friendly than a payroll tax cut, because many people don't know any better. In an economy with record unemployment, the government shouldn't be concerned with keeping people in jobs that by their nature don't already provide those benefits - direct stimulus would be far more effective.
It's not an either/or proposition and there's no way of knowing the right combination until after the fact, especially for something unprecedented like this. The Fed should be adding liquidity to the market so companies have access to capital AND the government needs to do more to keep consumers' money in their own pockets. Payroll tax cut would be a start (that would actually add to the deficit without a cut in other spending, unlike repossession), but companies also need access to capital to keep the goods and services flowing for consumers to buy. A sudden, severe shortage on the supply side while the government throws money at people leads to people hoarding, a la 1929. Sudden, severe shortages on the supply side have long-term negative effects on the demand side as people adapt. Once they've adapted, it's much harder to get them to go back to their old spendthrift ways.
I agree with you that there is no way of knowing the right combination until after the fact, but there is a great opportunity to learn from history and apply principles-based approaches to what is becoming a much more complex situation every moment.
While I agree that stimulus isn't a bad thing and that companies need operating capital, supply chains are globalized affairs and many precursors for American-manufactured items come from overseas. If there is a strain on the system, it will take time to replenish stocks of commonly available items and specialty items when there is en-masse demand.
What we are beginning to experience is a very complex issue because it will touch nearly every facet of industry in some way, shape, or form, and there will be unintended consequences economically which will be directly experienced immediately, and also be distributed throughout our daily lives on an extended timeframe. These issues will become compounded as they interact with with each other over time, and will create more unintended (and likely serious) consequences on a large scale.
Change My Mind:
We just saw the biggest stock crash in over 30 years, right after the Fed announcement.
Nothing they can do will fix things. They have no options left but to print. We are fvcked. Great Depression inbound.
Change My Mind:
We just saw the biggest stock crash in over 30 years, right after the Fed announcement.
Nothing they can do will fix things. They have no options left but to print. We are fvcked. Great Depression inbound.
No. The stock market is reacting to uncertainties caused by a world wide pandemic and the drastic reduction of products from China. We will not have a great depression.
The people who sold their stock/traded stock for bonds after the market dropped will be rending their garments and wailing about how they will never be able to retire. It's 2008 all over again, except this time we have the government and media whipping up a firestorm of terror over a pretty freaking nasty virus that still won't kill most of us.
Life is going to suck for a few months, and then we will be back to business as usual, only with a huge surplus of toilet paper.
Andy
No. The stock market is reacting to uncertainties caused by a world wide pandemic and the drastic reduction of products from China. We will not have a great depression.
The people who sold their stock/traded stock for bonds after the market dropped will be rending their garments and wailing about how they will never be able to retire. It's 2008 all over again, except this time we have the government and media whipping up a firestorm of terror over a pretty freaking nasty virus that still won't kill most of us.
Life is going to suck for a few months, and then we will be back to business as usual, only with a huge surplus of toilet paper.
Andy
You didn’t mention the $1 Trillion in liquidity that the Fed announced having ZERO effect. I don’t remember any of the rounds of QE being that large. They’re going to have to do more, and that doesn’t bode well for the dollar. You also didn’t mention the waves of bankruptcies and layoffs heading our way. We are all heavily debt-leveraged, personal and business/corporate. Defaults are going to have a cascading effect.
sundance435
03-13-20, 11:44
Change My Mind:
We just saw the biggest stock crash in over 30 years, right after the Fed announcement.
Nothing they can do will fix things. They have no options left but to print. We are fvcked. Great Depression inbound.
Well, yeah, but I don't think you need any specialized knowledge to realize that there's little an institution of monetary policy can do on it's own to stop a pandemic and the ensuing crisis of confidence. The Fed is making the right moves that it can - ensure liquidity for businesses and financial institutions. The Great Depression this is not, if for no other reason right now than the Fed is actually being proactive. Supply-side measures only go so far, though. We do need consumer-side stimulus from the government and more of a sense that the government in general has a handle on this (which they don't) for the Fed's moves to have a greater impact.
No. The stock market is reacting to uncertainties caused by a world wide pandemic and the drastic reduction of products from China. We will not have a great depression.
The people who sold their stock/traded stock for bonds after the market dropped will be rending their garments and wailing about how they will never be able to retire. It's 2008 all over again, except this time we have the government and media whipping up a firestorm of terror over a pretty freaking nasty virus that still won't kill most of us.
Life is going to suck for a few months, and then we will be back to business as usual, only with a huge surplus of toilet paper.
Andy
Caveat - the people selling/trading right now that don't absolutely need to are probably going to regret it. There are a fair number of people who have no better choice than to turn some of their portfolio into something more liquid/stable now. If you don't need a higher short-term guaranteed return, then there's no need to be selling broader mutual fund and 401(k) assets and ETFs - some quality ETFs are a bargain right now, even if the market dips another 2,000 points. Do what you want with individual stocks, but I wouldn't be buying them for the next few months. Gold is still too high at $1600.
So I don't like when the government does this kind of thing.
However I can tell you this. Mortgage rates were set to rise drastically. Banks were starting to run out of money to lend.
Rates have now stabilized and banks are going to continue.
ETA: Just for the record this is a major oversimplification of what happened. And has more to do with Mortgage companies than banks and how they warehouse loans.
Caveat - the people selling/trading right now that don't absolutely need to are probably going to regret it. There are a fair number of people who have no better choice than to turn some of their portfolio into something more liquid/stable now. If you don't need a higher short-term guaranteed return, then there's no need to be selling broader mutual fund and 401(k) assets and ETFs -
snip
Gold is still too high at $1600.
I generally agree with the above. Though it may be wishful thinking as my policy is to try to ride this type of thing out.
I mostly in institutional class age targeted funds plus an extra side of cash. (Very low fees due to my investment size.) And another 1/3 roughly in a pension I track as a current lump sum cash value, but I could take as an annuity if desired. If that also drops, I'll be bluesing some. More incentive to ride things out.
My fund portfolio is beating my friends professionally managed portfolio, with my age targeted funds almost exactly matching his actively managed investment once the 1% active management fee is accounted for.
If it continues to crash I could be a sad puppy, my understanding is that actively managed can usually do better in falling markets then well managed funds.
I was kind of hoping that if we start looking deflationary that gold and silver would come down some. But I think the nervousness is keeping it out.
Much of what has been said here will age very badly. I believe this is the “reset” some of us have been anticipating. Nothing I’ve seen out there has been effective or positive or promising.
Much of what has been said here will age very badly. I believe this is the “reset” some of us have been anticipating. Nothing I’ve seen out there has been effective or positive or promising.
We have seen three "dead cat" bounces in the past two weeks, and trading has been halted via circuit breaker three times during this downturn. The market,if it breaks 19,000 tomorrow (I don't necessarily expect it to, pending any crazy news that comes out tomorrow, as futures are trading up), would confirm that we aren't out of this yet. I bet that we see another downward market trend starting on either Thursday or Friday, after a slight (well, by comparison in this amount of volatility it could mean 2500-3,000 point) rally.
I still believe that Q2 and Q3 of this year will be brutal for many publicly traded companies, and the markets will follow a downward trend. That being said, there will be a number of very solid securities which will be at bargain prices, and are currently trading at a major discount. If you are a patient investor, there is a significant potential upside long-term.
That being said, I don't think that it's fair to say that nothing has been effective or positive or promising. We just don't know yet. The Fed intervention won't necessarily produce a direct, positive, market reaction, but it will have an eventual effect. What the Fed did do, and Sundance435 made a really good point earlier in this thread, was to soften the blow to the market by adding liquidity to the market. Is it the solution? No (at least in my opinion it's not), but is it something that may potentially soften the blow down the road? Yes, I believe so, although it's too early to tell exactly to what extent, and, due to the nearly infinite number of variables involved, how precisely it helped.
In many respects, the Fed, the financial systems, and the real economy, are all in uncharted waters. That’s what concerns me the most. Nobody can look to other times in history when this happened. What is happening now is new, and the solutions are theoretical. Nobody knows for certain what is going to work. Just about every industry/ sector is going to request bailouts. Think about the tens of trillions of dollars it will take to make vast swaths of the economy functional again, because everyone has been heavily debt-leveraged. They’re going to have to bail everyone out, inject trillions into the system, destroy the dollar in the process of monetizing said bailouts, and replace it with some new currency.
Mauser KAR98K
03-16-20, 22:34
I'm working up here in North Dakota in the Bakken. I haul crude oil from the wells to the pipeline. We have gotten busy all of a sudden with Trump wanting to fill the strategic reserves. I heard his request is 77million bbls. U.S. output is about 12million a day. Will be interesting to see how this plays out for us.
Our saving grace is that Asia is getting better, and if they come back on line, oil will be in demand.
But that also factors in with the oil war with OPEC and Rusdia, which I suspect Russia is keeping their output high to kill American fracking.
Mauser KAR98K, I think that it's going to be an interesting ride for oil, to say the least. I'm also curious as to what will happen to the Russian economy in the coming months. In a bizarre way, their relative market isolation to the global economy may present a relative strategic advantage in the short term, although this strategy will likely present as a Phyrric victory for Russia, and be further compounded should COVID-19 become an issue for them (although the official numbers so far coming out of Russia are low - which is to be expected). Add in any relative global market exposure for Russian commercial entities and affiliates, and that will likely spell greater economic problems for Russia, and perhaps encourage more aggressive/belligerent behavior vis-a-vis global markets and the "West".
So, what will this mean for the average American? If they're living paycheck to paycheck, it's going to be a difficult and very expensive existence in the near future. If they have some savings, they will probably exhaust at least a portion of them as the economy contracts if their job situation changes. The economy is going to rebalance (probably a euphemism, to say the least), and I think that we are going to see what a modern market contraction (and subsequent adaptation sector-by-sector) looks like in the coming weeks. It's not a rosy picture, because it's extremely change-ridden, and most people don't deal with change well at all... Not going to say that we should do this as a nation, but there was a time when the United States Government became the single largest employer of Americans - from 1933 to 1939 - underneath FDR's New Deal and, as controversial as parts of the New Deal were, it was an extremely effective program for keeping Americans employed and focused on the big picture of country unity and perseverance.
We have more than enough infrastructure that we can repair and upgrade with such a program (if instituted correctly), while also propping up our economy, and laying an incredible foundation for the next half-century at least. Just a thought...
Whiskey_Bravo
03-20-20, 15:48
Not going to say that we should do this as a nation, but there was a time when the United States Government became the single largest employer of Americans - from 1933 to 1939 - underneath FDR's New Deal and, as controversial as parts of the New Deal were, it was an extremely effective program for keeping Americans employed and focused on the big picture of country unity and perseverance.
We have more than enough infrastructure that we can repair and upgrade with such a program (if instituted correctly), while also propping up our economy, and laying an incredible foundation for the next half-century at least. Just a thought...
I would much rather us spend money through large public works projects and repairing infrastructure than handing out money. At least have something to show for it in the end.
I would much rather us spend money through large public works projects and repairing infrastructure than handing out money. At least have something to show for it in the end.
I don't think that it's an either/or at this point. A "best case" scenario requires both to be used. I'm not a fan of a blanket stimulus (handing out money) either, but private industry is the single largest driving economic force in the United States, and letting market Darwinism eat flawed-but economically important- companies alive now will have greater ramifications in the long term for our economic success than bailing them out. In context, we have already spent around 2.5 trillion in the past two weeks as a government to create market stability, so what's another trillion or two USD in the grand scheme of things if the upside on the further investment is keeping people employed (people paying taxes to USG), keeping companies profitable (companies paying taxes to USG), and increasing the potential for greater revenue, growth, and profit (all good things equalling more money to USG, and to the average American) across the board. The other side of the coin is a massively complex economic slowdown and loss of momentum for American firms, which would be far more detrimental at this point than more debt. Still, I am sure that there is a place for USG to hire Americans and create public works projects, which would have an undeniably positive effect on the economy and probably head off some of the compounding effects of this slowdown by nature of keeping more Americans employed, and thereby keeping more individuals and families solvent (in theory).
I think that it's really important to note that I've changed my outlook on capital injection into the market from even a week ago on this thread, because many people may judge what I'm saying right now as hypocritical. Given the context of prior posts and the context around how the market was reacting, I felt that what the Fed did was premature. If anything, by witnessing the lackluster market response of the Fed's intervention, we just received a "gut check" on overall market health (a very, very expensive one.) Now, within the context of the market and the greater economic effect on all Americans, I think that it's of paramount importance to avoid a private-sector slowdown, and that initially requires aggressive market momentum in the private sector to keep Americans employed, followed shortly by USG offering/enacting public works projects as we see unemployment numbers increase substantially over the next few weeks.
Mauser KAR98K
03-20-20, 17:00
I don't think that it's an either/or at this point. A "best case" scenario requires both to be used. I'm not a fan of a blanket stimulus (handing out money) either, but private industry is the single largest driving economic force in the United States, and letting market Darwinism eat flawed-but economically important- companies alive now will have greater ramifications in the long term for our economic success than bailing them out. In context, we have already spent around 2.5 trillion in the past two weeks as a government to create market stability, so what's another trillion or two USD in the grand scheme of things if the upside on the further investment is keeping people employed (people paying taxes to USG), keeping companies profitable (companies paying taxes to USG), and increasing the potential for greater revenue, growth, and profit (all good things equalling more money to USG, and to the average American) across the board. The other side of the coin is a massively complex economic slowdown and loss of momentum for American firms, which would be far more detrimental at this point than more debt. Still, I am sure that there is a place for USG to hire Americans and create public works projects, which would have an undeniably positive effect on the economy and probably head off some of the compounding effects of this slowdown by nature of keeping more Americans employed, and thereby keeping more individuals and families solvent (in theory).
I think that it's really important to note that I've changed my outlook on capital injection into the market from even a week ago on this thread, because many people may judge what I'm saying right now as hypocritical. Given the context of prior posts and the context around how the market was reacting, I felt that what the Fed did was premature. If anything, by witnessing the lackluster market response of the Fed's intervention, we just received a "gut check" on overall market health (a very, very expensive one.) Now, within the context of the market and the greater economic effect on all Americans, I think that it's of paramount importance to avoid a private-sector slowdown, and that initially requires aggressive market momentum in the private sector to keep Americans employed, followed shortly by USG offering/enacting public works projects as we see unemployment numbers increase substantially over the next few weeks.
The unfortunate fact is that we've done these "stimulus" dumps for so long that the time we really need to do it (like right f***ing now), we are too broke to do it. I had questioned this back in 2008 and 2009 with Bush and Obama. What are we going to do when we really need it because of large disaster/emergency/war?
Here we are. Instead of paying down the debt, politicians used our "break glass in case of panic" to buy votes instead of using for a health insurance for the country. We all that the "great recession" would have sorted itself out with markets adjusting, and businesses filing restructuring bankruptcy to save them. Yet. Obama needed to buy the unions.
Public work projects at this time will not happen. Those efforts take team work...which includes gathering of 10 or more people. Could governments give concessions to that. Yes. But without a reliable treatment or vaccine, its risky.
What's got everyone spooked is the unknowns with this situation. How long will this last? How worse will it get? Will we be like Italy or Spain? Will we be better than them?
As for oil:
MBI is shutting down their whole operations here on May 15th. That's a lot of drivers and hands out of a job here in North Dakota.
There is news that some are blaming the Saudis for doing this, and trigger the recession (face it, we are in it). And Russia has reported they have lost $40 billion since their dick measuring contest started.
The good thing is is that Trump has bought a lot our oil to keep us going. But at some point, we will run out of storage.
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