Does that mean we have a free pass? No. This printing may cause
1. French revolution style riots (only 300 years ago)
2. Weimar republic style hyperinflation in assets (only 100 years ago)
3. Massive depreciation of US currency so now in the league of rich countries, US falls further behind
4. Other countries (China, EU, Russia) feel shafted and refuse to trade in depreciated dollars
Right now the supply side is going to be scrambling to catch up for a while.
The real risk IMO is deflation, not inflation. If money represents production and production goes down, then the money supply (in terms of circulation) is actually being reduced. If money represents activity and people stay at home without spending on much aside from essential costs, the same logic applies.
We have seen slight deflation for the last three months.
Simply printing more money doesn't impact consumer prices. The "where" and "when" and "how much" all matter. If you print the money and give it directly to rich folks who don't change their spending habits and simply add the new money to their coffers, it's almost like you haven't printed anything at all.
The Fed is trying to just "replace the wealth destruction that has happened". Keep in mind that even though the equity markets are back up close to pre covid levels, a lot of companies have had to take on Debt to weather the storm. This debt needs to be paid back with interest and in general can be a drag on company earnings.
The fed is also being somewhat judicious and buying shorter term securities (less than 5 years), so in essence they are only creating the money for the term of the bond they buy - they can choose to remove the money from the system when these bonds mature.
I also think that people are confusing the Fed trying to keep businesses solvent by providing short & medium term liquidity with them trying to raise equity prices.
Also the ECB & JCB have been doing this for the last several years with no inflation on the horizon there.
I don’t think the Fed has any plans to shrink its balance sheet in the near future or probably ever. And what happens when these BBB- bonds turn out to be junk and the companies default?
I hope anybody who is bearish on stocks has closed out any short positions because at this point, I can't see how stocks will be allowed to go down.
At the end of July, when the CARES Act unemployment benefits expire, people will have to tap into savings to pay their living expenses. If those savings are held in the form of equity (via Robinhood or whatever), then the markets will face a substantial amount of selling pressure.
At that point the corporate bond purchases make little difference.
It started off as backstopping counter-party risk, and kept expanding.
The markets are nothing but manipulation at this point. There is no market that's independent of the Fed.
Our "leaders" should have fixed this in the decade after 2008, but now we've arrived at another crisis.
Also isn’t this a sort of nationalization by financial instrument?
