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@roysebag @GreekFire23 @fleckcap When bidding duration assets out of market (t-bond, mortgage) for new CB liability (cash), static net asset balance sheet doesn’t change, but bank has more reserve liquidity & time pref. That delta is first shadow inflation (& remember its a dynamic system & that delta moves)..
@roysebag @GreekFire23 @fleckcap When ‘don’t fight Fed’ also reprices stock of duration risk lower (higher bond price), that’s 2nd (dynamic) delta & wealth transfer, & a showdow inflation bomb palaces in the market. ..but the total net assets outside Fed don’t change significantly (statically), & hope is..
@roysebag @GreekFire23 @fleckcap ..that new cash flows into new duration risk further down quality & therefore new risk in market employs labour at margin. Assuming Phillips curve works (has been bad assumption of late), inflation not significantly more than marginal labor as net asset change not significant..
@roysebag @GreekFire23 @fleckcap That’s theory. Where did risk flow? Financial leverage & buy backs of existing assets, so financial inflation was much sharper than “new entrepreneur” capital formation & labor..sure, new labor was there,but broad cash didn’t exit financial system, just a bunch of shadow deltas..
@roysebag @GreekFire23 @fleckcap So that’s where the paper inequality started...plus the shadow deltas created INSANE real wealth transfers transferred to the financial manager class & buyback CEOs who took it off the table...but the deltas are dynamic.Which brings us to the next phase playing out in real time..
@roysebag @GreekFire23 @fleckcap Assets inflated everywhere from financial system leverage & the shadow inflation deltas handed out in market (say the dif between NIRP Southern Europe bond & real risk price), plus new balance sheet holes to fill when firms like Boeing chase buybacks & require new moral hazard..
@roysebag @GreekFire23 @fleckcap Now, with CBs owning “good assets”, and don’t fight the Fed still in full effect, the first round inflation deltas are growing in paper price, and new unlimited repo everywhere means they are always growing in asset/inflation value. A) Plugging new moral hazards will leverage..
@roysebag @GreekFire23 @fleckcap ..the whole thing levers up again, while reifying the asset holes transferred out of companies (comp). B) The MMT confidence means we’ll get new fiscal spending based on subsidized price of debt in first mispricing, and C) cash flow losses on Main Street mean helicopter needed..
@roysebag @GreekFire23 @fleckcap ..helicopter needed to plug holes in previous inflated debt & equity prices. B & C are directly more inflationary for Main Street than anything before. ..but what we haven’t even dealt with yet is the inflated price of the t-bonds. This is where B&C turn hyper-inflationary..
@roysebag @GreekFire23 @fleckcap ..What first started as small deltas inflating just the financial economy (& fin managers), bidding up t-bond prices w/o much change in net assets in economy (just more liquidity & bank reserves), is now a negative convexity time bomb on Fed BS when do get Main Street inflation
@roysebag @GreekFire23 @fleckcap When inflation up to say 4-5% & Fed’s marked up book only yielding 3-4%, Fed is insolvent if tries to pay cash IOER to fight..& as its asset are falling below par & unsellable, then falling asset value backing currency (liability) means value evaporates, no tools to fight. So..
@roysebag @GreekFire23 @fleckcap ..brings us to end game. The only reserve of last resort it has: making market in gold reserves at a marked up price. An “orderly devalue” of dollar that allows the balance sheet to still work nominally from a lower real value. ..at least my current thinking. Still working out
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