A deeper dive into the economy (Who’s driving the buss??)

[lowkey]

This thread is meant to be a look into what is driving the world economy. A look into the spokes and cogs and where the money is flowing and why it’s going there. All impute is welcome but please be able to back up what you say with hard facts and data. I look forward very much to our discussions

[whiskynovember]

It's wildly complex. There's:

all the sovereign monetary systems
the domestic financial systems composed of:
commercial entities that are trackable and shadow
the global financial system that facilitates credit/collateral chains with
reserve and non-reserve currency/sovereign issuance/assets while
both onshore and offshore.

[lowkey]

It's wildly complex. There's:

all the sovereign monetary systems
the domestic financial systems composed of:
commercial entities that are trackable and shadow
the global financial system that facilitates credit/collateral chains with
reserve and non-reserve currency/sovereign issuance/assets while
both onshore and offshore.

But let’s try to dig down starting at the top and discuss how the day to day cause and effect is turning the wheels. How the trades happening today are affecting the bigger picture and what is happening in slow time. Let’s discuss the dominoes as they fall

[lowkey]

So one of the bigger pieces for me that I won’t say started what’s happening but was one of the the first signs that things are starting to unravel was the Chinese real estate economy falling apart. That’s a massive industry and there’s no doubt to me that it will have ripples around the globe as the bonds and collateral become worthless junk

[whiskynovember]

China's domestic economic demand for commodities, whether part of its housing sector or its manufacturing export sector, is an important part of aggregate global demand. So I agree with you. But even further upstream in global aggregate economic input is the supply of dollars in the offshore (sometimes called the EuroDollar system) dollar monetary system. It's woefully undersupplied now that the US FED is raising interest rates and reducing its balance sheet. This dampens European, Asian and emerging market economies and any commercial entities that have dollar denominated loans. If they are settling payments for energy they have to do it in dollars, which are strengthening in value. If they have debt service payments they are hardening in a currency not their own. To raise dollars they must sell their reserves or sell their US assets, namely, equities or Treasuries.

China's economy is in trouble, but the dollar is pressuring the globe into recession. Here at home, prices of all interest rate sensitive assets will come under pressure: housing and autos and long duration debt instruments.

[whiskynovember]

FED induced market sentiment is driving the bus right now.

The FED is not actually a central bank in that it neither loans money into the real economy nor does it print money. The FED: 1.) creates bank reserves, but you can't buy a cup of coffee with bank reserves. The FED: 2) makes asset swaps (on both banks' and its own balance sheets), but this isn't money printing. Until a commercial bank makes a loan through private credit creation no new money is made to exist. Money in the banking system at the FED level is merely ledger money: base monetary digits,wholesale money that cannot be spent in real terms. Until ledger money becomes financialized in the real economy and becomes broad money it can't be used to pay loans, build widgets or buy services. The FED doesn't print money, and QE isn't money printing. QE is an asset swap at the ledger level.

Academic studies show the only significant positive correlation between FED policy decisions/actions and financial markets is in sentiment, because since the FED doesn't print money and doesn't alter money supply in the real economy, all it can affect is sentiment. It's a very real and potent affect. Just look at the market change since Powell spoke on Friday. The rally ended. The FED is driving the bus right now.

[lowkey]

FED induced market sentiment is driving the bus right now.

The FED is not actually a central bank in that it neither loans money into the real economy nor does it print money. The FED: 1.) creates bank reserves, but you can't buy a cup of coffee with bank reserves. The FED: 2) makes asset swaps (on both banks' and its own balance sheets), but this isn't money printing. Until a commercial bank makes a loan through private credit creation no new money is made to exist. Money in the banking system at the FED level is merely ledger money: base monetary digits,wholesale money that cannot be spent in real terms. Until ledger money becomes financialized in the real economy and becomes broad money it can't be used to pay loans, build widgets or buy services. The FED doesn't print money, and QE isn't money printing. QE is an asset swap at the ledger level.

Academic studies show the only significant positive correlation between FED policy decisions/actions and financial markets is in sentiment, because since the FED doesn't print money and doesn't alter money supply in the real economy, all it can affect is sentiment. It's a very real and potent affect. Just look at the market change since Powell spoke on Friday. The rally ended. The FED is driving the bus right now.

I mean this as a compliment, so please don’t take offense. I don’t understand 50% of what you say. What I do understand I tend to agree with most of the time. But moving forward I’m going to need you to explain it to me like I’m 5. Just assume that I don’t understand and then I can try to keep up with the conversation and contribute. Lol.

[whiskynovember]

I mean this as a compliment, so please don’t take offense. I don’t understand 50% of what you say. What I do understand I tend to agree with most of the time. But moving forward I’m going to need you to explain it to me like I’m 5. Just assume that I don’t understand and then I can try to keep up with the conversation and contribute. Lol.

LOL. No sweat, I mean, most people don't drill down into how the FED operates and how it is structured. And why would they, they have lives to lead and shit to do. Basically, the FED is the banks' digital accountant. It runs monetary policy. But it doesn't loan money .... it deposits reserves in bank balance sheets (it uses Treasury assets: bills, notes, and bonds to do this, *which it can create out of thin air) in order to affect the accounting status of commercial banks. It does this by means of an asset swap within the account all banks must keep with the FED: it swaps bank liabilities (loans to commercial entities) for assets (*Treasury securities) and places those liabilities on its own balance sheet. This swap improves the banks' asset ratios and thus frees them up to make further loans IF there is free market demand for credit. But these reserves have no financial value or affect on the real economy if the banks don't then give loans to existing businesses that seek credit. These reserves form the accounting basis by which banks CAN make loans within the fractional reserve ratios that allow for expansion of the money supply. This private credit creation is how money is printed into existence in the real economy in the American capitalistic fiat currency system, but it is balanced against the banks' ledger (held with the FED) in a ratio of loans to reserves mandated by law. By manipulating the ledger ratios the FED tries to make credit more available to the plumbing of the real economy. But you can have all the bank reserves imaginable and it won't increase money supply one dime if no loans are made with it. Reserves aren't money.

The only other way money is printed and spent is if Congress passes a law and the Treasury funds a bill that pays farmers a subsidy to cover Trump's tariffs on Chinese imports, or pays for Trump's pandemic stimulus plan, or pays for Biden's student loan forgiveness. The FED will buy from itself reserves it creates out of thin air, and give the $ to Treasury, but until Treasury spends the $ on the Congressional bills or the President's executive order, the $ doesn't enter the real economy.

QE (quantitative easing) is when the FED swaps/buys commercial bank liabilities (Mortgage backed Securities) for reserves/Treasury assets and takes those liabilities onto its own balance sheet, or when the FED buys from Treasury the bond, bill, note issuance the government uses to fund operations. It's euphemistically called money printing and it's said to be inflationary, but Japan has been doing this since 1989, and it has been mired in deflation the entire time. QE is not inflationary because it is not money printing. Academic studies show this. But QE does influence Wall Street sentiment. Just look at what has happened since last Friday when QT (quantitative tightening [when the FED REDUCES the liabilities held on its balance sheet]) and further interest rate hikes were confirmed by the FED.

Between China's economic problems and the restrictive rhetoric from the world's reserve currency issuer the bus is going to pull over into the slow lane.

[whiskynovember]

But moving forward I’m going to need you to explain it to me like I’m 5.

Here's an oversimplified analogy: Compare banks to people. Banks lend and people borrow. Bank reserves are to banks what credit scores are to people. I can't spend my credit score because it's not money. (*And strangely enough, some people with perfect credit scores cannot get loans if banks are uninterested in the collateral those people have.) Chase can't make mortgage loans with bank reserves because reserves are the credit score it has with the FED. Neither are money. However, both are an accounting basis for possible credit creation ----loan creation in the case of a bank, and future borrowing in my case.

But just because I have a credit score of 850 it doesn't mean I do borrow money (I never borrow money), or will borrow money, or need to borrow money, or even can borrow money (*see above). And by the same token, just because the FED increases Chase's bank reserves in the fractional reserve banking system it doesn't mean Chase will immediately make new loans, or even want to make new loans, or needed to make new loans that it couldn't make before its reserves were increased. In both my or Chase's case, no new money is created if no private credit is created.

Manipulation of reserves or credit scores are not money printing, and therefore they are not inflationary. They do affect market sentiment and therefore affect asset prices, but not because of money supply increases.

[whiskynovember]

Might as well take the FED at its word. It plans to take the FFR to 50 basis points above the CPI rate. Even with oil way down and the housing market rolling over there's still a ton of supply chain constraint keeping prices high. Now if Wall Street would only admit that 4% price inflation is the new normal to shoot for, and price equities accordingly.

[lowkey]

The crash is already here just like the recession. It’s going to take a while for the chips to fall, months, maybe years, but we are in uncharted territory. I’ve never been so worried about retired people, the middle class and people with debt but a steady income as I am now. I have total faith in the banks and the powers that be totally fucking everything up and everyone over, they always do.

[whiskynovember]

The American (onshore) banking system is regulated (somewhat) and tied to the powers-that-be (FED) through the fractional reserve system, but banking operates on commercial/market exigencies that the FED is often powerless to influence. That's just capitalism, and it's the best system. The global banking system (of offshore dollars) is much, much larger, and largely unregulated or even measurable. The global system has different dollar needs than the American domestic banking system does. There's the rub.

American workers labor hard but often do dumb things with their money. So does the government. In the end, when the cycles conclude, for better or for worse, the American system will always treat capital better than it does labor ..... that's why we call it capitalism. So in order to defend the value of capital, whether threatened by supply shortages or demand excesses, the FED will do what it can to devalue labor. That's how it works. And that's even before politics gets involved.

[whiskynovember]

Coatez still has a thread about 7% inflation and the woes of a weak dollar (see somewhere below on the Off Topic page). Well, be careful what you bitch about. How can the dollar be at 20 year highs if we PRINTED AND PRINTED AND PRINTED SO MANY DOLLARS AND CHOKED THE WORLD WITH OUR PROFLIGATE SOCIALIST CENTRAL PLANNING!!! Why is: oil way down, housing price rolling over, the labor market still hanging in there. It was all a supply problem, not a monetary problem, not a spending problem.

Markets are screaming that there's a global shortage of dollars. All the market signals are deflationary. How can that be? How can CPI still be "too high" if there's a global shortage of dollars?

Anybody?

[lowkey]

I’m kind of following what you’re putting down and agree very much with demand for the dollar being a thing for a long while. I’m also open to the possibility that it’s on a bubble like a lot of other things. I know the US is driving the price of it by refusing other currencies and other countries are following our lead. That said, we should be at least a little open to the idea that after the good times have been had and the debts to us have been milked there will be tough times ahead

[whiskynovember]

I’m kind of following what you’re putting down and agree very much with demand for the dollar being a thing for a long while.

Once dollars leave US regulatory jurisdiction they go offshore into the EuroDollar system (so-called, but it's really just offshore dollars in the global banking system mostly in Europe and Japan) and form the basis of collateral for loans and credit creation around the world. In the fiat capital system this is how money is created in the real economy. Those loans/debt are denominated and collateralized in dollars. When commercial entities take on debt around the globe it most likely in dollars, so when economic downturns occur and market sell offs cause deleveraging those loans have to be paid off in dollars but those commercial entities are based in countries that can't print dollars. So they have to get their hands on dollars to settle their accounts. This causes a global squeeze on dollars at a time our FED is raising interest rates and tightening liquidity at home. If you owe payment in a currency that is hardening and your earnings are in a weak currency the squeeze is enormous. The FED is causing global deflationary recession.

I’m also open to the possibility that it’s on a bubble like a lot of other things.

The entire world is in a debt bubble up to the sovereign level. It's been no problem in the past as long as interest rates kept falling and debt could be rolled over at lower annual carry costs. But that's over. Global commerce has become a version of Zombie companies, and developed country capital markets have become a version of emerging-market countries.

I know the US is driving the price of it by refusing other currencies and other countries are following our lead.

Not sure what you mean here by "refusing other currencies", but we have frozen the Ruble out of the SWIFT system, and no one else, especially China, even wants to be the world's reserve currency right now. No one can even bear the liquidity burden and trade deficit burden.

That said, we should be at least a little open to the idea that after the good times have been had and the debts to us have been milked there will be tough times ahead

The EuroDollar system is a much much larger pool of dollars than our onshore dollar system, and it needs more dollars for collateral and for credit expansion. Our FED won't tend to that deficit until our domestic labor market contracts and our housing market corrects. In short: There's some badass creative destruction coming. The only question is whether its resolution will be lead to de-dollarizing the system in an inflationary structure of nationalistic protectionist regions of trade, or if after ugly deflation the system prevails and the global de-leveraging leaves things even more dollar-dependent.