30 August 2021

I Told You So - 30 August 2021

Many's the times these missives have dissed the scardy cats in the Corner Offices for their demand for for-certain high returns on fiduciary capital. Such, of course, don't exist, so the Corner Offices now load up on Treasuries. We got the Great Recession just because the Corner Office guys gulled themselves (and we civilians) into believing that pell-mell residential housing mortgaging wasn't Just Another Ponzi Scheme. Thanks Blythe!

These days, we get conflicting arguments. Some say Powell will turn off the faucet of Fed Treasury buying: the party's over. The Fed's the reason Treasuries draw historic returns, and not in a pleasant way for the capital rich.
The short answer: Money is essentially free now, thanks to the Fed's double-barrel shotgun approach to economic stimulus — interest rates near zero and a massive investment in bonds that keeps yields near rock-bottom. If the Fed eases off the stimulus pedal, borrowing could grow more expensive, making businesses pay more, which means less profit which means Wall Street is sad.
Of course, that assertion is true IFF Treasury interest rates are solely the result of Fed buying. But what if that's just not true?
Rates on Treasury bonds are still near historically low levels, but banks have been buying government debt like never before. In the second quarter of 2021, banks bought a record of about $150 billion worth of Treasurys, according to a note published this month by JPMorgan analysts.
My my!!! The Smartest Guys In The Room just can't, or won't, find any useful ways to turn fiduciary capital into physical capital. There's the meme, been around for some years: "Software ate the world!" Meaning - real goods making is terminal, and so is most need for significant physical capital. (Of course, that tic again, the glow of AI has dimmed rather a bit in two years.)

It's worth keeping in mind that what Powell/Fed have been engaged in is not just more of Great Recession QE. It looks the same, but the two are separated by some years and events in time. It's arguable that Powell's Fed's action is more necessary than Bernanke's of a decade ago. Why, one might ask? Because Covid is a truly external systemic shock, while the Great Recession was the product of those self-same Smartest Guys fiddling the system.

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