Cykros

Christ, Gloria quits and Bitcoin's already back up over 70k in only 3 hours...

GM Just had a bit of an epiphany about QE while over on Twitter (where I usually have to go for mainstream macro folks). The old debate about QE being inflationary or not was raging. For those not familiar, the idea that it isn't inflationary in itself (which I do happen to subscribe to) goes that QE simply swaps one form of money (that can be rehypothecated) out of the system (treasuries, mostly), and replaces it with one that can't (bank reserves). You can argue that one of these is collateral and the other is money all you want -- at the end of the day, both of them are used for settlement in the banking system, as the Eurodollar system, where most dollars live, does not use bank reserves. When the whole world operates on credit, credit IS money, and you're just comparing between 0 duration reserves, short duration T-bills, and longer duration credit of other sorts. Anyway, the argument for why this doesn't spur broad inflation, and why CPI stayed so low in the 2010's, is that banks that are afraid of counterparty risk aren't going to be incentivized to lend by this simple asset swap. And they're certainly not going to be incentivized to lend based on lower rates, which mean less of a return for them for taking on whatever risk they do take on. This can be corroborated by how much harder it was to actually get a mortgage during the 2010's -- particularly on the earlier side. They may have been happy to let Blackrock borrow, but not so much individuals, even if they were model borrowers. What I hadn't considered before though, and I think many miss, is that Reg T style margin loans (read: the margin loans almost everyone is familiar with -- as opposed to portfolio margin, used by hedge funds and some other institutions) are about the closest things to a risk free revenue stream for a bank that exists. They're making the loan to a brokerage, who they know is good for it, and the brokerage in turn is making it to a client, who has overcollateralized it 2:1 at the time of purchase, and has agreed to be liquidated if the collateral falls below the equity ratio that the brokerage sets -- AND CAN CHANGE AT ANY TIME WITHOUT PRIOR NOTICE (it's wild anyone takes them up on this when you think about it). So getting back to the point. CPI sat below 2 for just about the entire 2010's, despite trillions of QE across 4 rounds, while everyone assumed that QE would be massively inflationary. Now, we know CPI is a crap measure of inflation, so don't come at me there. But let's look at where we could say inflation happened: Assets. Did QE cause it there, or was it sentiment? I suppose on one hand, you could say it was perhaps helped by QE, though I'd argue more from the lower rates, because this lowered margin loan rates. But even that part only plays into what really spurred on asset prices soaring: the sentiment -- the belief-- that QE was going to be massively inflationary. From 2009 to the beginning of 2020, margin balances rose from ~$120 Trillion to $300 Trillion. That's a compounding rate of growth of nearly 10%, of money borrowed into existence against an economy that was rotting underneath, among banks who weren't particularly willing to take on any risk to lend into it. What "recovery" there was came from those companies who, receiving this additional investment, actually were able to see real improvements based on their own capital expenditures. But the vast majority of this has just been elephants flying because of a magic feather. As can be confirmed looking at the multiple expansion across assets (which is to say, higher valuations without corresponding higher underlying profit generation). Now, be mindful I'm specifically talking about 2010-2020 here. COVID response saw the Fiscal engine kicked into gear, which is why we DID see CPI spike, as the government was pushing new money into the real economy. This does seem to square the circle a bit about how asset inflation came about when banks were still too chickenshit to lend amid Fed policy that itself wasn't directly inflationary. QE does something if you're using it amid seized up repo markets, but that it was continued to be applied after they got moving was just the panic of central bankers who had no more tools, and the psychology of markets who didn't realize nothing was working, and in failing to realize it, made things seem to work, at least in some places. One need only look at the rust belt though to see what the costs of this failed experiment were though. Or the generation that will never afford a home (without Bitcoin). Anyway, mostly writing this out to organize my own thoughts but if it's helpful or you've got comment happy to chat.