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Lyn Alden Profile picture
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7 Jan, 5 tweets, 2 min read
This article assumes banks are reserve constrained, but they're usually not reserve constrained.

In 2020, bank holdings of Treasuries, MBS, cash at the Fed, and loans, *all* went up.
When the government runs large fiscal deficits, and the Fed buys the Treasuries on the secondary market, it sends bank deposits (M2) up a lot, which increases their capital base to buy even more Treasuries or make more loans.

No deflationary "crowding out" effect.

Reflationary.
More about the mechanics of this here:
lynalden.com/money-printing/
I see similar analysis in the 2020Q3 Hoisington letter. This appears to be a crux of the inflation-vs-deflation debate.

However, both private and Fed holdings of UST increased in 2020, because supply increased. Fed buying UST does not necessarily reduce private UST holdings.
Instead what happens with fiscal deficits + QE, is that the whole base rises. Banks end up owning more cash reserves, Treasuries, MBS, and have more loan-making capacity.

No crowding out effect.

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More from @LynAldenContact

Lyn Alden Profile picture
9 Jan
There’s an old Zen koan that goes, “if you meet the Buddha, kill him.”

In other words, when something is self-verifiable or self-iterating, looking too heavily towards the originator can be a distraction along the path. Results speak for themselves.
Some folks have applied that to Bitcoin as well.


For example, sometimes there are debates about Satoshi Nakamoto’s original intent. Should block sizes be increased to facilitate “e-cash” or should block sizes be kept small for any user to run a node?
This is the type of problem encountered by engineers all the time: trade-offs.

A project can iterate or stay the same depending on what the market says.
Read 15 tweets
Lyn Alden Profile picture
8 Jan
Imagine a thought experiment:

The Federal Reserve Act gets changed, and the Fed is able to print dollars to buy Treasuries directly from the Treasury, rather than on the secondary market.
Congress says “awesome!”, and decides to send everyone $5k stimulus checks. They sell the Treasuries directly to the Fed, and the Fed buys them with electronically-printed money. No banks as intermediaries, no secondary market purchases.
The stimulus checks get deposited by the Treasury into everyone’s bank account. Their banks then get the cash as an asset, and have new deposit liabilities to their depositors in equal amount. The money is freely spendable by the consumers.
Read 6 tweets
Lyn Alden Profile picture
3 Jan
When interest rates hit zero for the first time in decades, interesting things happen.

Here's the 100-year chart of total debt to GDP in blue on the left axis, vs interest rates in orange on the right axis. Total debt includes public and private debt.
Another way of looking at it is total debt as a % of M2.

With this metric, we can see the big changes since 2008 in particular. The ratio dropped from 700% to 400% in 12 years.
If we separate out federal debt vs nonfederal debt as a percentage of GDP, it also provides more clarity.

In each long-term cycle, the first stage was a private debt bubble and banking crisis, while the second stage was a public debt bubble and massive M2 increase.
Read 5 tweets
Lyn Alden Profile picture
20 Dec 20
This cycle of dollar strength was created by the end of QE in mid-2014, and the initiation of QT in early 2018, all of which made US monetary policy relatively tight vs peers.

The cycle of strength is seemingly ending, on the cessation of QT into indefinite QE, from late 2019.
The US runs persistent current account deficits (weak FX), while Europe and Japan run current account surpluses (strong FX).

The dollar's strength, therefore, mainly comes from tight monetary policy, along with the global offshore USD debt that represents persistent demand.
So, when fiscal and monetary policy in the US become loose, the USD historically has plenty of room to fall.

USD demand remains relatively steady year-to-year, while USD supply rapidly shifted from tightening to loosening over the past 16 months.
Read 4 tweets
Lyn Alden Profile picture
17 Oct 20
New Treasury holders report out yesterday. The foreign sector slightly reduced U.S. Treasury holdings in Aug, from July, despite ongoing large issuance.

YTD through August, the foreign sector only bought about 5% of net new Treasury issuance.
We know from Fed custody data, which is incomplete but faster-updating, that going into October, the foreign sector still isn't really buying Treasuries in size:
About 2/3rds of net new U.S. Treasury issuance this year was bought by the combo of the Fed and U.S. banking system.

There's very little foreign demand. There's moderate non-bank domestic demand, but not enough vs the massive issuance (at least at current prices).
Read 4 tweets
Lyn Alden Profile picture
1 Aug 20
It's a common view that QE leads to wealth inequality, and this view is largely justified.

Here's a weird fact though: Between Japan, Europe, China, and the United States, there is an *inverse* correlation between the amount of QE they did as a % of GDP, and wealth inequality.
Japan did the most QE in terms of how long they did it, and what percentage of GDP they did it. And yet, they have among the lowest inequality, and the share of assets among the top 1% actually deceased over the span of doing it.
On the other hand, the U.S. did the least QE as a percentage of GDP, and yet has the highest wealth inequality among major developed nations.

China and Europe performed middling amounts of QE as a percentage of GDP, and have middling wealth inequality.
Read 4 tweets

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