Jason De Sena Trennert writes,
The Fed’s policy of quantitative easing injures middle-class savers. People without financial assets get kneecapped by the policy known as “financial repression”—purposefully attempting to pay for government spending by keeping interest rates below the rate of inflation. This policy has been a boon for the wealthy but a disaster for average people, who earn no return at all on their savings.
…Total financial assets in the U.S. now represent 565% of gross domestic product.
…A remarkable 50.9% of U.S. sovereign debt matures in the next three years. The weighted average cost of America’s outstanding debt is only 1.38%. With more than $22 trillion of that debt owed to the public, relatively small changes in short-term interest rates could greatly increase the federal deficit.
His point is that the Fed will be under tremendous pressure not to raise interest rates, because of the devastation it would bring to financial assets and the cost it would impose on the government deficit. My thoughts:
Interest rates are low either because (a) the Fed has the power to control them and is keeping them artificially low; or (b) the natural forces of supply and demand favor low interest rates (global supply of savings is high, global demand for investment is low, and/or preferences for low-risk assets are high).
I think that (b) is more likely to be the case.
If (a) is true, then it seems pretty certain to me that we will get lots of inflation over the next few years.
I also think we are headed for inflation if (b) is true, but it might take longer to get rolling and be much, much harder to stop.
I agree with the thrust of the story, that the Fed will be under intense pressure to keep nominal interest costs low. If it had the means to stop inflation, it might not have the will. But I don’t think it even has the means–it’s up to Congress to stop running up the debt.
Whatever about interest rates, the Fed has the power to control the money supply.
In your discussion of A versus B, you didn’t differentiate between real and nominal interest rates.
There may be structural reasons for low, even negative, real Treasury rates, such as aging of population and global glut of savings and need for safe assets. But nominal rates could be high because of inflation.
The term is “fiscal dominance” versus “monetary dominance.” The US had fiscal dominance during the Civil War and Second World War: money growth was set by the budget deficit. In 1951, the US went back to monetary dominance with the Fed-Treasury Accord. Maybe we will go back to fiscal dominance. Watch Biden’s Fed nominees to see.
Pre pandemic the fed was under “intense pressure” to keep easy money flowing. Arguably that might gave been the time to tighten but then the pandemic threw all the game pieces back into the air.
“Savers” have been pressured for 20 years now. Look at Japan.
>(b) the natural forces of supply and demand favor low interest rates (global supply of savings is high, global demand for investment is low, and/or preferences for low-risk assets are high).
The Savings Glut. High demand for low risk assets. I agree.
I like Michael Pettis’s preference which focuses on capital inflows into the US as a source of domestic deficits. It’s seems tough to pin down what his policy recommendation for what to do to reduce trade deficits, i.e., but I think I’ve found it.
https://carnegieendowment.org/chinafinancialmarkets/77009
…trade or capital imbalances originate abroad. The thinking goes that the United States accommodates these imbalances, partly because it has very deep, liquid capital markets with highly credible governance, and partly because of its role as the capital shock absorber of the world.
…These surplus countries prefer to export a substantial portion of their excess savings to the United States and, as they do so, they push down the cost of capital.
…Interest rates suggest very strongly that capital isn’t *sucked* into the United States from abroad, but rather is *pushed* into the United States from abroad.
…the United States acts as an investor of last resort, absorbing excess foreign savings that need a safe home.
…Only by reducing net foreign capital inflows will Washington be able to drive down the trade deficit. (One way Washington might be able to reduce foreign capital inflows would be to require that central banks no longer accumulate U.S. dollars in their reserves but rather that they accumulate a synthetic currency that is backed by all major global currencies—perhaps even the International Monetary Fund’s Special Drawing Right (SDR).)
This “glut of savings” we hear about: Are people, businesses, and governments around the world consuming less than their incomes, thereby piling up savings? My sense is the opposite, that governments universally are consuming more than their incomes and running up debt to do so. It is harder to generalize about individuals and businesses, but the trillion dollar deficits from governments should more than make up for any net savings on their part.
When the Fed “lends” to the government, that money gets spent or transferred and ends up in bank accounts but is that really savings, or just further sign of a society reducing its wealth by borrowing to consume?
Maybe someone can explain this…