Sea Change

Published on February 12, 2024 by Premium

The CBO's latest budget forecast show a persistently large fiscal deficit that likely still understates the trajectory of public finances. CBO projections are based on current law and show a fiscal deficit that will remain around 5% of GDP for the foreseeable future. This structural change is largely driven by rising retirement related spending and interest expense, both of which are politically very difficult to change. Using the CBO projections as a baseline, future deficits

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Crash Up

Published on December 4, 2023 by Premium

The coming months are looking to be very positive for equity markets as rate cuts are expected to occur in the context of significant deficit spending. In the modern financial system, Treasuries are money like assets so deficit spending is comparable to a form of money printing. As interest rates decline, Treasuries become less attractive and investors tend to rebalance into riskier assets. Given the size of the fiscal deficit, investor portfolios are growing significantly

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Credit Boom

Published on January 9, 2023 by Free

A tremendous credit boom took place in 2022 and it may not even be over. The combination of healthy banks, financially strong households, and attractive rates appears to have to led to a surge in bank lending. Banks and credit unions together created $1.5t in cash last year that likely has not yet fully filtered into economic activity. Recall, bank lending creates money out of thin air. Interestingly, higher interest rates have so far only

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Stock and Flow

Published on November 21, 2022 by Free

The stock effects of monetary tightening are clearly disinflationary, but the flow effects are less clear. The Fed’s rapid tightening markedly reduced the level of household wealth and thus potential demand, but the bulk of asset repricing seems to be behind us. The impact of tighter policy going forward is less certain because higher rates restrain some sectors but subsidize others. Interest income from reserves, RRP, and newly issued Treasuries rise along with rate hikes

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$2 Trillion Pandemic Savings

Published on November 15, 2021 by Free

There are around $2 trillion in pandemic savings held by American households that have yet to be spent. Despite a brief recession, fiscal stimulus supercharged American incomes the past year by maintaining wages through the PPP program, topping off incomes with stimulus checks, and boosting unemployment benefits. At the same time, Americans consumed less than usual as lockdowns limited spending opportunities. As noted by Clarida in two recent speeches (here and here), Americans have accumulated

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Two Tiered Monetary System

Published on August 29, 2020 by Free

We have a two tiered monetary system, where one type of money is used when transacting with the Fed and between commercial banks (reserves), and another type of money is use when transacting with everyone else (bank deposits). This note explains the two types of money, and how they interact with each other. Fed Reserves Reserves are an unsecured liability of the Fed that can only be held by entities with an account at the

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The Mechanics of Quantitative Easing and M2

Published on August 25, 2020 by Free

In recent months M2 has exploded higher by almost 3 trillion, generating enormous market chatter. This note briefly describes the mechanics of how Fed actions has led to a spike in bank deposits, which in turn has led to a large increase in M2. Note that M2 is largely comprised of different types of bank deposits, including demand deposits, savings deposits and time deposits. I’ll first go over the basic principles of central bank and

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