Monday, July 19, 2021

A closer look at the Covid-related surge in M2

In my previous post I referenced the huge increase in the M2 money supply over the past 16 months, noting that much of the increase that occurred in the wake of the Covid panic (I estimated as much as $3 trillion) was money that likely was no longer wanted by its holders, given the improvement in confidence, the rapid decline in Covid cases, and the subsequent improvement in the economy. I further argued that this unwanted money was the likely fuel for the rising prices of many goods and services. This post provides some data to back up my point.

Chart #1

Chart #1 shows the level of Bank Reserves provided by the Fed to the banking system. Reserves are the only type of money the Fed can directly "create," and reserves can only be created for the purpose of buying high quality assets, which typically means Treasury securities—but more recently has come to include mortgage-backed securities and some corporate bonds. The Fed purchases these assets from the banking system, and the reserves it uses to pay for them are credited to the banks' accounts at the Fed. Reserves cannot be used to buy anything else, and they are only and always held on the Fed's books (i.e., they are liabilities on the Fed's balance sheet). Banks have traditionally held reserves as collateral for new lending, since by law banks must hold reserves equal to about 10% of their deposits. Today, however, banks hold reserves far in excess of what is required, and they do so because in 2008 the Fed started paying interest on reserves—and that, in turn, made bank reserves functionally equivalent to T-bills: high quality, liquid, default-free and carrying a floating interest rate. Prior to 2008, reserves were "dead" assets since they paid no interest yet banks were required to hold them—so banks tried to hold as few reserves as possible. 

The current huge amount of bank reserves means that banks have effectively lent boatloads of money (about $5 trillion)  to the Fed, and most of that money has come from huge deposit inflows to checking and savings accounts. Banks also lend money to the private sector, of course, but lending to the Fed carries no risk while paying a very modest rate of interest—currently 0.15%. If banks decide that the 0.15% interest they receive from the Fed has become unattractive relative to what they could earn by lending to the public sector (on a risk-adjusted basis), today's huge level of reserves means that banks have a virtually unlimited capacity to expand their lending—which is what expands the money supply. Only banks can create spendable money under our fractional reserve banking system. When a bank decides to lend you money, they simply credit your account with newly-minted money. You then use that money to buy other things, and that money enters into circulation as someone else receives it in their bank account.

As the chart also shows, the Fed has expanded its issuance of reserves by about $2.24 trillion since February of last year. This is almost as much as the $2.8 trillion of reserves created by three previous waves of Quantitative Easing from late 2008 through mid-2014. Those three waves of Quantitative Easings didn't lead to an unusual pickup in inflation, but QE4 did. Why is that?

Chart #2

Chart #2 provides the answer. It shows the level of the M2 money supply (which consists mainly of currency and bank checking and savings deposits, plus ) plotted on a semi-log y-axis to make it easy to see constant growth rates (a straight line means a constant rate of growth). For the 25 years prior to Covid, the M2 money supply expanded by a little over 6% per year, and consumer price inflation averaged about 2.2% per year. (See Chart #4 in my previous post.) Then in 2020 everything changed: banks apparently used their abundant supply of QE4-provided reserves to increase their lending, which in turn has resulted in a significant increase in currency and bank deposits. The "gap" I highlight is the result of a surge in money creation well above and beyond previous growth rates. M2 grew by about $5 trillion (33%) from the end of February 2020 through the end of June this year, and the lion's share of that increase came from an increase in retail bank savings and checking accounts, plus about $300 billion the form of currency in circulation.

At the beginning that was fine, since everyone scrambled to stockpile money as the economy shut down. But now people's desire to hold money is very likely declining as life gets back to normal. I'm guessing there's as much as $3 trillion of money in the banking system that is now "unwanted."

The problem, of course, is that money can't just disappear if people don't want it. If I want to reduce the balance in my bank savings account, I need to spend it on something else. The person who receives my money must then do something with the money. 

There are three ways the banking system can get rid of unwanted money: 1) Borrowers can pay off their bank loans (since bank lending is the fount of all money supply growth), 2) the Fed can drain reserves from the banking system by selling some of the bonds it bought (thus reducing excess bank reserves and banks' ability to increase lending), and 3) inflation can increase the price level and the level of incomes by enough to return people's desired cash balances (e.g., the ratio M2 to annual incomes) to reasonable levels. I think #3 is going to be the dominant factor.

What we have seen in the past 16 months is unique in the monetary history of the US: a massive and sudden expansion of M2 that far exceeds anything we've seen before. To me, it's no surprise that inflation is surging.


Benjamin Cole said...

I wonder if this means inflation globally will eventually rise also.

Right now there is deflation in Japan (despite a mirror fiscal-monetary policy to the US), under 2% consumer inflation in Europe and China, and very low inflation or deflation across SE Asia. Australia under 1% inflation, despite rising housing costs.

Really, the US and India are the only big nations with moderate inflation now.

It puzzling that inflation is so hit or miss, even though fiscal-monetary policy stimulus has been global.

Yet, the dollar is not sinking.

US Treasuries under 1.2% on 10-year yields.

As my great Uncle Jerry used to say, "If you are not confused, maybe you do not understand the situation."

Well, let's see if inflation is sustainable. Some one-offs out there, like oil, used cars, supply-chain glitches. The oddest labor market in US history.

And Scott Grannis is right, waaaayyyy too much government intrusion into free markets (especially property zoning!).

Benjamin Cole said...

Add on--

Some of my blood relatives are, well, to put it gently, not always steadily employed.

They all have jobs now. One got two job offers.

You know, tight labor markets have some virtues....

Benjamin Cole said...

Here is the view from Morgan Stanley (see below). Note: Wall Streeters are capable of "talking their book." That is, they stake out a position, then issue research.

Nevertheless, this is interesting, as it presents (at least in some corners), "the Wall Street view."

I am not endorsing, just posting:

"Global Macro Strategy: All About the Money Supply"

The relationship between money and CPI inflation is as tenuous as the relationship between labor market slack and CPI inflation. But people still worry about inflation when money supply increases. We dive deep into the pool of money floating around and emerge dry, without worry.

The Federal Reserve's narrow M2 measure and the broader Divisia M4 measure of the US money supply reached levels this year not seen even in the 1970s.
While most acknowledge the loose empirical relationship between the money supply and inflation, the "money multiplier" and "velocity of money" still enter the public discourse invariably when the money supply rises quickly.

We debunk the money multiplier concept as it applies to a modern monetary system, explain how loans create deposits, and analyze what has driven the money supply higher – banking deposits.

We discuss how banks have been using this deposit base and the implications for inflation. We don't think banks have added much to the inflationary impulse.

We look at how consumers are spending the money that eventually ended up in deposit accounts and the effect it has had on inflation.

Consumer spending has affected prices in understandable ways. Prices have risen most where spending has been highest: on durable and non-durable goods.

We find it hard to conclude that the dramatic increase in the money supply drove inflation higher. Rather, higher prices have been due to a combination of supply shortages amidst an unprecedented consumer demand substitution between goods and services.


Adam said...

Correct me if I am wrong, but it looks like you contradict yourself. By saying that banks lending shrinked, people paid down debt, and at the same time people started buying more things. Thanks for your effort as always.

Scott Grannis said...

Benjamin, re Morgan Stanley's inflation outlook. I read that and I am struck by how easily one can become confused about inflation. Is inflation caused by consumer spending? Supply shortages? Goods vs services? The economy overheating? China? Government debt? Government spending? Demographics? All of the above?

I'm a Milton Friedman fan. His greatest talent was to boil complex topics down to common sense. Inflation is a monetary phenomenon. Period. It's caused by an excess of money supply relative to money demand. The catch of course is that while it's easy to measure the money supply, it's very hard to measure money demand. Until after the fact, that is. If we observe that money supply increases by x, and inflation increases by 3x, then money demand must have declined.

EHR said...

Thank you for this post which I have been waiting 13 years for someone with your explanatory prowess and following to report to the public. Interest on reserves is otherwise so esoteric and the math involves such large numbers that "0.15%" flew under the radar of non-nerds. Bravo, encore!

Joe said...

Hi Scott - I'm not sure the following is accurate...

"banks apparently used their abundant supply of QE4-provided reserves to increase their lending, which in turn has resulted in a significant increase in currency and bank deposits."

Per the FRB, bank lending hasn't increased all that much since the start of the pandemic ( As you mentioned earlier in the post, reserves cannot be used to buy anything else. So for new money to be "created" via QE, we would need to see bank reserves go down and for the banks to re-allocate those funds to lending.

I suspect that the other sources of COVID-induced monetary expansion (stimulus checks, expanded unemployment benefits, PPP loan forgiveness) are what is driving the big increase in M2 rather than QE.


Scott Grannis said...

Joe: banks don't actually "use" reserves in the sense of exchanging them for something else. Given that they have a huge amount of excess reserves, that enables them to increase lending almost without limit since a given level of reserves can support about 9 times that amount of deposits. These days, creating loans and expanding the money supply does not mean that reserves have to change at all, whereas in the past any net increase in loans/deposits required additional reserves. Total Bank Credit actually increased from $14 trillion in Feb. '20 to now $15.6 trillion (+11%). Banks, in other words, increased their net lending by $1.6 trillion, which contributed to the increase in deposits.

Benjamin Cole said...

Scott Grannis:

Hey, I salute Milton Friedman as well.

But...perhaps there are times when a decrease in supply leads to higher measured inflation, even though supply and demand for money remain unchanged.

To make an extreme example, suppose a nation lost 20% of its housing stock to disaster. As people crowded into remaining units, rents (as measured) would rise, even if businesses and consumers did not change their demand for money. If rents figured in that nation's CPI...then, inflation as measured would rise.

The US has been relatively decreasing the supply of housing stock over vast regions of the country (West Coast, Northeast) for a couple generations now, and those housing costs are figured into the CPI.

George Selgin has addressed this issue in his blog, with a crop bust example.

Well, I do expect higher measured inflation in the US in the next couple of years, a lot for reasons you cite, and also because you have scared me with your commentary.

After that, my crystal ball gets foggy.

Joe said...

Scott - Thanks for the reply. I hate to be pedantic, but what's your source for the $1.6T increase in bank lending? It doesn't appear that way in the FRB's published H8 data which shows a much more modest increase of a few hundred $Bn over the time period you mention.

I question your statistic only because I don't feel that QE has effectively expanded the money supply and created a risk for inflation. As evidence by the lack of bank lending, the money "created" by QE has been trapped within the banking system. I should note that this observation is not new, as you showed this yourself in the original post whereby past QE efforts did not materially affect M2 (or inflation for that matter). Again, I would look to the more direct monetary expansions via fiscal policy to explain the rise in M2 (and potential cause for inflation-related concerns).

Thanks again

Ataraxia said...

I'm wondering where fiscal policy - direct payments for additional federal unemployment money above state, stimulus checks, child tax credits, fits in.

On that note these are funded directly from treasury bypassing fractional reserve banking, correct? Nonetheless, this is an expansion of the money supply, but through channels other than FED monetary policy.

I remember from university, FED must take this kind of expansionary fiscal policy into account when performing monetary policy.

Scott Grannis said...

Ataraxia, re fiscal policy: In order for Treasury to spend more than it receives from tax revenues, Treasury must sell Treasury securities (bills, notes, and bonds). Treasury cannot simply spend cash at will. Thus, fiscal policy “stimulus” that involves deficit-financed spending cannot really be stimulus, since Treasury must first borrow money in order to spend it. Deficit spending thus does not result in any monetary expansion. Only the Fed and the banking system can create dollars.

The Fed has been buying trillions of dollars worth of Treasury securities, however. But the Fed “pays” for these securities with bank reserves, which are not money. These reserves are functionally equivalent to T-bills, as I describe in the post above. In effect, what the Fed does is to buy notes and bonds and issue T-bill equivalents (i.e., bank reserves) in order to satisfy the banking system’s demand for “cash” or money equivalents.

Banks have been the buyers of all the bank reserves the Fed has issued, and they have done so willingly (at least initially) because they needed to invest a huge inflow of checking and savings deposits from the public. The banks have been lending their deposit inflows to the Fed rather than to other private sector operators. But now (unlike what happened in QE1, 2, and 3) banks have also been lending money to the private sector, and that lending has expanded the money supply as I have documented above. With tons of excess reserves, banks have no effective constraints to their ability to lend. It is bank lending which expands the money supply.

Expansionary fiscal policy is thus an oxymoron. The Fed needn’t take this into account, but in practice they probably do, since with federal debt now equal to annual GDP, an increase in market interest rates would have huge implications for federal finances (because debt service costs would rise).

Penguin90 said...

Scott, many thanks for your ongoing analysis of monetary policy that I have been following for several years now. I find it a lot more informative than what you can find in the mainstream media. One key aspect, though, keeps defying my understanding, and I hope you can clarify this in simple terms. My doubt is: if banks have effectively lent a huge inflow of deposits to the Fed, thereby increasing bank reserves (the other side of the Fed expanding its balance sheet) how did these inflows come into existence in the first place, for the banks to then lend them to the Fed? Can’t deposits increase only AFTER the Fed has expanded the monetary base by QE (since loan growth was so small until very recently)? How does the dynamic exactly play out, who kicks the ball first? The Fed expands its balance sheet first and therefore deposits grow, or deposits grow first and the Fed then expands its balance sheet to accommodate the growth?
Immensely grateful for any explanation. Greetings from Italy.

Scott Grannis said...

Joe, re bank lending: My data come from the top line of Table 2 on the Fed's H.8 report:

Note that most of the increase that I refer to comes from the purchase of Treasury and Agency securities. Banks were effectively extending credit to the government.

Salmo Trutta said...

re: "The relationship between money and CPI inflation is as tenuous"

There are more idiots that profess knowledge than you can shake a fist at. People can't define money nor velocity. There's a absolutely perfect relationship between our means-of-payment money supply and inflation. And it's been that way for > 100 years. It's absolutely astonishing that the FED's technical staff doesn't know this.

We already know when inflation will subside, Feb. 2022

Powell: "there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time"

Powell should be fired.

Salmo Trutta said...

Note that reserve requirements have been discontinued by Powell. That implies that the control of the money stock will become impossible. The money stock can never be properly managed by any attempt to control the cost of credit.

What FAIT implies is a repeat of Japan's bubbles in stocks and real estate.

Monetary policy is doomed as the FED's 400 Ph.Ds. in economics don't know a credit from a debit. Banks are black holes. Banks don't lend deposits. Deposits are the result of lending. Ergo, there is c. 15 trillion dollars of bank-held savings that are frozen. The 'taper tantrum' is prima facie evidence.

That is important because money products decrease the real rate of interest and savings products increase the real rate of interest. I.e., monetary policy is headed towards negative nominal rates of interest.

Note also that it's not just the banks that can create new money, but also the FED. I.e., the trading desk just targets Paul Meek's RPDs.

Salmo Trutta said...

Velocity is as Dr. Philip George defines it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of bank deposits" (or bank debits to deposit accounts, the old G.6 Debit and Demand Deposit turnover release).

I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.

“Money” is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured; You have to “isolate money intended for spending, from the money held as savings”.

Richard A. Werner's "Towards a New Research Programme on ‘Banking and the Economy’ – Implications of the Quantity Theory of Credit for the Prevention and Resolution of Banking and Debt Crises" is a good read.

Shane said...

Scott, thank you for this explanation. Finally someone speaking some plain English so I can learn. I'm confused about one point though. You say "The Fed purchases these assets from the banking system, and the reserves it uses to pay for them are credited to the banks' accounts at the Fed". In your reply to Ataraxia above, you go on to say "Banks have been the buyers of all the bank reserves the Fed has issued..." But my question is, how do the banks buy the reserves? What do they extend the Fed for them?

Benjamin Cole said...

I wonder how the Fed's reverse repo program plays into reported numbers.

The banks have so much cash they buy Treasuries overnight from the Fed. Or something like that.

Also, this is just a bunch of electronic impulses sent back and forth by some desk-jockeys armed with PCs.

Salmo Trutta said...

It's really, really, really stupid. In the circular flow of income, the upper income quintiles savings, income not spent, must be recycled. That's called velocity of circulation.

In this closed circuit, savings must be expeditiously activated, put back to work, or a dampening economic impact is generated. The U.S. Golden Era in Capitalism is prima facie evidence.

But the FED has engineered an open circuit, a break in the circuit, where the normal path of the current flow is interrupted. There are two mechanisms that impound and ensconce monetary savings.

The first was engineered by the most dominate economic predator, the ABA, it was the complete deregulation of interest rates for just the banks (the nonbanks were deregulated up until 1966). I.e., all bank-held savings are frozen. Paradoxically, the NBFIs are not in competition with the DFIs, the NBFIs are the DFIs customers.

The end of Reg. Q ceilings was supposed to solve disintermediation and interest rate inversions (but the GFC suffered the worst disintermediation on record).

The second was engineered by the FED, it was the payment of interest on interbank demand deposits. The short-end segment of the retail and wholesale money market funding yield curve was artificially inverted, at first inducing non-bank disintermediation, then flattening the non-bank's net interest rate margin.

Both of these policies destroy money velocity.

In the open circuit, unstable money products are introduced. Adding infinite, artificial, and misdirected money products (LSAPs on sovereigns) while remunerating IBDDs (synonymous with secular stagnation), results in an excess of savings over real investment outlets, generating negative real rates of interest; eventually has a negative economic multiplier; stokes asset bubbles, exacerbates mal-investment; aggravates income inequality, produces social unrest, and depreciates the exchange value of the U.S. $.

(“It is the real interest rate that affects spending”, pg. 19 Marcus Nunes and Benjamin Cole’s “With Market Monetarism – a Roadmap to Economic Prosperity”).

Whereas the activation and discharge of monetary savings, $15 trillion in commercial bank-held savings (income not spent), of finite savings products (near money substitutes), increases the real-rate of interest (+ R *), produces higher and firmer nominal rates, is more potent (affects real variables), increases the velocity of circulation, has a positive economic multiplier and supports the exchange value of the U.S. $. The 2013 Taper Tantrum is prima facie evidence (my "market zinger forecast").

Johnny Bee Dawg said...


L.A. to Atlanta $120 for August, one way.
Wilmington, NC to L.A. is $107 on the return trip the following week.

That trip used to take months in a covered wagon, each way.
Now it’s a few hours, and costs about a day’s pay at minimum wage.

Seems pretty reasonable to me.
Inflation not killing everything yet.

The Cliff Claven of Finance said...

Johnny Dawg
Imagine a lower class, or lower middle class, family with no stock investments and not owning their own home. A lot of people are in that category.

They are facing incredible rises in food prices, including restaurants, used car prices, new car prices, rents, and existing and new home prices.

In addition to rising prices, there are fewer discounts and "new" smaller sizes of products sold for the "old" larger size price, both of which are equivalent to price hikes.

I say "incredible" inflation meaning relative to the low inflation rates these people have faced in the past 20 years.

The airline industry was hit hard by COVID, and is still recovering.
A focus on the airline industry, while ignoring all other prices,
is data mining.

Scott Grannis said...

Shane, re “banks have been the buyers of bank reserves:” I think my choice of words was faulty. The Fed can only buy securities from banks, and only the Fed can create bank reserves which it uses to pay for those securities. Thus, banks were the recipients and remain the holders of all the bank reserves the Fed has issued..

Johnny Bee Dawg said...

Im not ignoring anything.
In fact, my point is that monetary inflation is certainly not spreading price hikes everywhere.
Horrible incompetent government policy has screwed up the supply chain immensely and jacked up the price of lots of basic goods and services quite unevenly.
Taco Bell has food shortages.
I think the variance means its supply chain at this point, rather than universal money dilution.

Workers still sit at home collecting Biden checks for not working in way too many states.
Drivers dont show up for shifts.
Biden hates US pipelines and drilling....but loves Vlad Putin's pipelines and drilling.
The US went from buying zero Russian fossil fuels, to buying record amounts in just 6 months.
I could go on.

If M2 was killing us, I think plane tickets would be up just like lumber at Home Depot.

I just think all of this supply chain stuff will get sorted out by 2022 as people go back to work.
I dont think the bond market is signaling long term inflation fears. I think the bond market is looking for SLOW growth and sand in the gears or the economy. 10 year yield plunged this week.

I think the bonds are signalling that the Fed is propping everything up to mask bad policy.
Fed Balance sheet just hit another record: $8.174 trillion. (Up over 18% since last July, and up almost 120% since July 2019).

But we shall see. Its all a very dangerous game, imo.

Scott Grannis said...

Cliff and JBD: clearly, not all good and services have experienced inflation. But enough of them have, I would argue, to warrant the recent episode of rising prices as “rising inflation.” For that matter, even when there is broad-based inflation lasting for many years, it’s possible for many things to actually decline in price. That has been the case for a broad basket of durable goods, whose prices have actually declined almost every year (save the last) since 1995. I think that may be the only period in which an entire class of goods have declined for many years in the midst of a general inflation. As I’ve argued in prior posts, the emergence of China as a major source of exports was likely the proximate case of that phenomenon.

Scott Grannis said...

JBD: re the bond market not signaling long term inflation fears. You are correct to make that argument, since breakeven inflation rates embedded in Treasury note and bond pricing are not reflecting anything more than 2.5% CPI inflation for as far as the eye can see.

I have great respect for the bond market, after having worked in its bowels for almost 20 years. I don’t have as much respect for the Fed, however, since I have seen the Fed repeatedly err in its management of monetary policy. As I’ve argued many times, Fed tightening, which was almost always a response to their having been too easy for too long, has been the proximate cause of every recession in my lifetime, save the last one.

Regardless, the Fed and the bond market have been dancing partners for decades, and they are intimately entwined to this day. Both seem to be saying the same thing these days, which is that the current bout of inflation will be only temporary and the long-term outlook for economic growth is definitely weak. Witness 10-yr real yields of -1%!!

I’m not willing to buy into that forecast completely. I think inflation is going to be problematic for at least the next year. If Biden succeeds in passing his massive, multi-trillion dollar “stimulus” packages, the I would agree that the long-term growth outlook is indeed miserable. But I don’t think that is a slam-dunk scenario. In the absence of foolhardy “stimulus” the economy is certainly capable of generating rather impressive growth for at least the remainder of this year. I base this view on the fact that the Covid shutdowns that crushed the economy also forced the economy to do more with less, with the result being a significant increase in worker productivity. As workers return to the workforce in the wake of the expiry of the foolhardy extra unemployment benefits (in early September), that will almost certainly fuel some impressive growth.

Johnny Bee Dawg said...

Scott: I agree with every word of your last comment. Not arguing with any of that.
Im quite willing to be scared of inflation and the M2 which already skyrocketed.
I am not a fan of the Fed, either. But its what we have.
I dont think the bond market thinks M2 will stay that way.

I think prices are going to be unnaturally high for the next several months to a year.
But I am more scared of BIG bad lawless government slowing our economy more than anything.
And I am scared of a loss of US sovereignty. Those forces are deflationary in my simplistic pea brain.
Trump's low tax rates and low regs have quite a carry over benefit and growth SHOULD be off the charts right now.
We were in fantastic shape before the Covid release, and the idiotic shutdown.

I think bonds and I are worried that high taxes, massive regs, skyrocketing debt, citizens disconnected from a lawless world government that rules them will conspire to slow growth once the Fed has to remove its "emergency measures", and continue the deflationary effects we have seen for 2 decades now.
Once PUBs gain in the midterms, I predict the Fed will punish voters and hike to end the current inflation pop.

We have the most resilient and efficient economy on earth, but this reminds me of Obama, Part 2.
Obama presided over the slowest economic recovery since WW2...all because of idiot policy and rhetoric.
Grifting addled Joe is not long for that job, and then we get the brilliant cackling Socialist.

Look how desperate all the Central Banks are to create inflation right now. They are BEGGING for it.
They know all about the deflationary collapse that looms from Fundamental Transformation.
The European Central Bank today announced they will keep rates negative until inflation gets ABOVE 2%!
They are trying to talk it up. Desperate for inflation. They worry its too early for deflationary collapse just yet.

Europe may grow a little better on the margin for a minute because of how our politicians are weakening the USA.
But this whole world is devolving into more and more authoritarian socialism every month.
The whole Covid release was to create a permanent worldwide addictive vaccine with perpetual boosters, and permanent government controls. Watch and see. Fauci tried and failed for a decade with the Flu vaccines. Trudeau made a 2 year deal with Pfizer for boosters this week. That is just the start.

Money Managers are saying this is the brightest outlook they have ever seen in their careers for growth and investing.
I hope they are right, but Im seeing market behavior that would be a disaster without Fed propping.
Just my pesky charts and internals.

Lets see how it goes.

Johnny Bee Dawg said...

Want to have your mind blown about Covid and the vaccine response?
Listen to this explanation....with evidence you can look up yourself.

Well worth it to skip thru the occasional German translations, and keep listening. It gets worse, the whole video.

Sorry no time for HTML. Copy and paste the link if you are up to it.
There is a reason Moderna is up 45% in the week and a half since this video came out.

Benjamin Cole said...

Salmo Truttra:

You read my book? You are one of dozens and dozens who did so.


Ataraxia said...

Thanks for the explanation Scott.

Scott Grannis said...

JBD: several friends sent that same link to me a few days ago. Unfortunately my hearing is not up to understanding the dialogue. I’d love to see a transcript.

Johnny Bee Dawg said...


I listen to pretty much everything these days with noise canceling headphones via Bluetooth.
They are amazing for my bad hearing. Solves all hearing problems on computer videos or audio for me.
I use them for all phone calls with my iPhone, too.
You can answer and speak and hang up without being near your phone.
All at low volume.

In noise canceling mode they block out ALL outside sounds even at low volume.
I wear them on all flights so I can hear my audio in a soundproof cocoon without ever having to turn up the volume at all.
Sony-WH1000XM4. Life changers.
The XM3’s are great too, but I gave them away.
Holding your hand over the right ear stops the noise canceling so you can hear wife or flight steward without removing headphones.

That said, I will try to transcribe that video this weekend. I’m a giver. For the people.
Google Docs works pretty well for transcribing videos.
That Video is tedious when fast forwarding thru the German translation sections.

The contents are mind blowing.
No part of the Covid 19 virus is novel. There are 73 patents involved.
Ask UNC-Chapel Hill, Moderna and Fauci. And Wuhan.
Perpetual government contracts.

Scott Grannis said...

JBD: Just the highlights would be fine, you don't have to transcribe everything. I wish I could use headphones/earphones. My problem is that I'm totally deaf except for a cochlear implant. The implant restores simple sounds pretty well, but falls apart when dealing with complex sounds; voices and music are very complex—I don't listen to music at all since all notes sound pretty much the same. Watching TV or movies without captions means my comprehension drops dramatically. Live captions (e.g., TV broadcasts) are notorious for their errors and their delay, which can be 5 seconds or more. Fortunately, movie captions are almost always perfect—a true godsend for the hard of hearing.

Fred said...

Bitchute has wonderful articles like this:
"Jews Are The Only Genociders...Ever by Salamandren" I suggest you look elsewhere for information.

Johnny Bee Dawg said...


Bitchute is just a hosting site for videos from anyone.
One upload has literally nothing to do with another.
Disliking some other content published on Wordpress has nothing to do with information on this blog, either.

All White House press conferences are uploaded to Bitchute, for instance.
Dont let that kind of dis-information on one channel keep you from watching someone else's unrelated content.

Benjamin Cole said...

Israel says Pfizer Covid vaccine is just 39% effective as Delta spreads, but still prevents severe illness--NBC


And the lambda variant on the horizon.

I would like to know, and maybe Johnny Bee Dawg can tell us---

Was this virus designed to mutate quickly? In other words, it was a work-in-progress on a bioweapon?

This is the strangest virus...infects minx, lions, dogs, civets

"Recent experimental research shows that many mammals, including cats, dogs, bank voles, ferrets, fruit bats, hamsters, mink, pigs, rabbits, racoon dogs, tree shrews, and white-tailed deer can be infected with the virus.

Cats, ferrets, fruit bats, hamsters, racoon dogs, and white-tailed deer can also spread the infection to other animals of the same species in laboratory settings.

A number of studies have investigated non-human primates as models for human infection. Rhesus macaques, cynomolgus macaques, baboons, grivets, and common marmosets can become infected with SARS-CoV-2 and become sick in a laboratory setting.

There is some evidence suggesting that laboratory mice, which could not be infected with original strains of SARS-CoV-2, can be infected with new virus variants."---WHO


Really? Before I always read the viruses had trouble hopping among species, not that I ever read much about viruses.

Nothing about this virus makes sense....

K T Cat said...

While I agree with Scott that inflation is going to be the result of the crazy government spending of money that didn't exist ten minutes ago, allow me to pose a counter-argument.

What if, after a few cycles of changing hands in the US, the dollars make their way overseas? That is, I might go to Best Buy to get a new computer and the Best Buy Employees spend their salaries on take out, but after a while, someone in the chain has bought something imported and the dollars leave the country. Wouldn't that tamp down on inflation?

I'm sure I'm making a logical error in there somewhere, but I don't know what it is.

The Cliff Claven of Finance said...

If our socialist government spends money recklessly, as they have been doing.
With more trillion dollar spending proposals coming.

And they raise taxes to pay for the spending, taxpayers will complain, and may vote Democrats out of office.

If they borrow money instead of raising taxes, they drive up interest rates on Treasury debt.

But if they borrow money AND the Fed buys a similar amount of Treasury debt, the interest rates are not affected.

At first glance, it would seem that if the Treasury issues $1 trillion of new Treasury bonds, while the Fed buys $1 trillion of existing Treasury bonds, reckless government spending is "painless".

Until rising inflation makes consumers complain, and they vote Democrats out of office..

My theory is that government deficit spending is the root cause of inflation.

I also have a theory that it is impossible to prove anything,
but I can't prove it.

Ataraxia said...

The intersection between FED monetary policy, treasury, fiscal policy, and global capital market flows is a monster to understand.

On top of this, they change the rules of the games in real time. I remember a Money and Banking test question in college regarding how the FED performs monetary policy to maintain the FED Funds Rate. I answered it correctly but that model no longer applies with IOER policy.

McKibbinUSA said...

I suspect the true state of monetary policy in the US is much worse than we know. Why else would the Fed embark on such an extensive monetary expansion (?). The amount of monetary expansion by the Fed is hardly justified by the ostensive current state of the economy. I suggest ordinary people take cover, stock up on everything, and keep a sharp lookout for unexpected political changes. Perhaps even a reorganization of the USA into separate countries (West Coast, Gulf Coast, and Northern Tier). Something is very wrong right now.

PS: I am long commodities and cryptocurrencies.

McKibbinUSA said...

I have much more to report about the economy -- Twitter users can follow me @McKibbinUSA -- you will find Scott's postings there as well.

Carl said...

The underlying thesis in this post is that M2 growth is about to cause inflation. In theory, it should and, in theory, there is no difference between theory and practice but, in practice, there is.
Since 1996, M2 growth has consistently (yearly basis) outpaced inflation readings, often by a significant margin. What happened over that period using a MV=PY perspective? Why should we expect something different if we are doing more of the same?

A word about reserves.
We now live in a world of excess reserves and the level of those reserves in the system is dictated by the Fed (banks can only use indirect influence to alter policy).Even if banks can try to switch reserves around with other designated institutions, the total amount of reserves in the system cannot change without Fed intervention. Reserves stay out of the real economy cycle (financial plumbing banks-Fed) and cannot be "used" directly to lend. Reserves can only be used as a capital cushion to lend against. For the longest time now and more obviously recently, commercial banks keep lamenting at the enduring dearth of investment opportunities (loans etc). Since the era of excess reserves, banks (as a group) have had to keep reserves on their books (asset to them and a liability to the Fed) and the only reason interest is paid on excess reserves is because the Fed, willingly, decided to pay as a mitigating factors against forcing banks to hold such high level of reserves. Not paying some interest on those reserves can to be perceived as a capital tax on banks.

A word about the unprecedented growth in deposits in 2020-1
Dissecting the numbers, bank deposits are typically backed by bank loans and base money ( it's not a balance; there are other factors to look at). Bank loan growth has continued to be very low despite ultra low interest rates. The biggest driver in the rise of deposits has been the rise in base money combined with cash deposits from the Treasury. Note that commercial banks recycled a lot of the extra cash (asset related to those liability cash deposits) into another asset class: Treasury and Agency securities. The level of such asset swap was much larger than loan growth (very tepid at best) and underlines the lack of 'investment' opportunities for banks.

Yes there is huge amount of 'unwanted' or excess money in the system now but the current defining picture is that the ingredients for a real economy money velocity decline continue to be present, in fact, never to such an extent in the monetary history of the US.

Those interested in the debt spiral trap concept:

Carl said...

@KT Cat
What you spontaneously describe is the Triffin dilemma. The idea was that the holder of the international reserve currency had to issue dollars to the world with the necessary associated finding that it had to run a (unsustainable, how far can we go?) trade deficit (cash going back to the US to balance through the capital account with foreigners buying US assets (mostly US government debt lately). This phenomenon has to be inflationary in nature eventually (end game) but there is a race to the bottom with all developed nations and China involved. At this point, in this race, what could replace the USD as the international currency?
My bet is that this dilemma needs to be reassessed but the discussion period has to go through a flight-to-safety episode during the transition.

@Johnny Bee Dawg
i appreciate your opinion about deflation but your Covid-19 comments are baffling. Have you followed up the Missouri's rising disease burden among (primarily) the unvaccinated?
The BitChute site can be looked at but i would be careful in using such an avenue for a complete and balanced picture. It's a site ranked amazingly low in fact accuracy, amazingly high in bias and is a preferred vehicle for the diffusion of unsubstantiated, wrong and weird conspiracy theories.

fixer said...

@ Carl
Surely it's obvious that what you are referring to in nothing more than a "cold" "epidemic" (it would appear). Deaths attributed to the "virus" are virtually zero. Is there evidence to the contrary?

Carl said...

Hi fixer,
Flu-associated deaths in Missouri, by season:
2020-21: 2 deaths (as of end of April 2021)
2019-20: 101 deaths
2018-19: 93 deaths
2017-18: 279 deaths
2016-17: 99 deaths

Covid-deaths so far in Missouri: 9557 deaths, according to (and cross-verified through other sources, similar numbers):
The public health in Missouri reports, as usual, deaths with some lag and reports now a recent 24 deaths per the last reported 7 days. On balance, Missouri's death rate will raise some before it goes down and Missouri will get, in the next few weeks, the equivalent of a about 2 or more flu-seasons (typically December to February mostly) of deaths.
Also, here are the % occupation in healthcare resources related to Covid-19 cases in Missouri:
Hospital beds: 8%
ICU beds: 18%
Ventilators: 10%
If you've ever worked in a hospital, these numbers would likely resonate even more.

Why so little flu cases, hospitalizations and deaths this year?
Please be aware that if your answer is based on some conspiracy or weird theory, i have a factual-based answer ready and i would prefer macro talk.

Look, most of the dying Covid people in Missouri are older and sicker and American society will survive and it's no time for aggressive measures or hysteria.
It's just that due to various factors including mis-comprehension and disproportionate fear, vaccination rates in Missouri (and a few other similar states) are low and this is the driving force behind the recent wave ('we' have known about this for more than a year and vaccines are such an obvious solution). Overall and especially recently, there has been so much unnecessary (and easily preventable) suffering.
Back to M2 growth and the oncoming unnecessary suffering...
Similar to how it felt at the beginning of 2020 from a biologic standpoint, this time around for the monetary and financial system, don't you feel the "slight premonitory movement of the ground under our feet"?

Ataraxia said...

@Carl Thanks for your contributions regarding monetary policy, etc.

Carl said...

This topic is really a monster to understand and likely not helpful, in general, from a personal-wealth building point of view but, these days, i wonder.
Earlier you wrote:
"On that note these are funded directly from treasury bypassing fractional reserve banking, correct? Nonetheless, this is an expansion of the money supply, but through channels other than FED monetary policy."
On a first-level basis, this is a very simple statement but, thinking about it, it's also very controversial even for those in the know (ivory-tower types). The answer is not so clear.
Can you elaborate how you think that the Treasury can leverage will bypassing the traditional private bank lending channel?

Ataraxia said...


I completed a BA in Economics from Cal State Long Beach in 2008 using my GI Bill and tuition reimbursement from my employer but never did anything with it professionally.

While studying and since then economics has been a serious hobby of mine not necessarily to create wealth but because I like to understand how things work, and econ really interests me.

That said I've gone from roughly 10K when I first started reading Scott's blog around 2008 to about 750K net worth presently simply low cost index fund investing Jack Bogle style. Some if not a lot of that success is owed to this blog. This is with at least 450K of other mistakes along the way! :-)

When I pose my question above, and also made the statement, it comes from a very simplistic understanding that the FED performs monetary policy, dual mandated with low unemployment and price stability.

Any form of spending and taxation, Fiscal Policy, is decided by the government - funded through the treasury???

So if the administration decides to direct deposit stimulus checks, child tax credits, supplemental unemployment payments above state payments, etc. - these can't originate through Central Bank/Fractional Reserve Banking.

The above, as you say on a first level basis is very simple logic which is why I come here to discuss and better understand.

I know Milton Friedman as Scott point's out also taught us that inflation is always and everywhere a monetary phenomena...

But if the Administration Fiscally distributes direct payments to Americans this comes from as I believe you pointed out - taxes, budget, debt financed.

Somewhere along the line the money supply must accommodate this currency in circulation.

Now I stop rambling :-)

Carl said...

^Thank you for the response.
My thinking may be evolving on this.

Let's say you are a bank and you underwrite a loan while keeping the loan on your books (asset), the process has created money (based on the fractional reserve system). Let's say you sell that bond to a private party in exchange for cash, the previously created money from the loan stays within the system.

Isn't that what the government does in a way when they use deficits? They underwrite a loan and sell it to the private market and while doing so 'create' deposits. Fractional reserve doesn't directly apply but there is an understanding that the issued debt is backed by the present and future taxing power of the state.

Conceptually then, government debt issuance would tend to contribute to the growth in money supply.

Anyways, the concept doesn't really matter. Common sense indicates simply that not enough or too much of something is not best (marginal productivity). Also, the key is where the borrowed money is invested. My opinion is that the borrowed money is not directed to productive purposes in an efficient way.

For example, if you follow the money flow that happened out of the Treasury General Account (account of the Treasury at the Fed consisting in money deposited as a result of debt issuances, with a large bump as a result of Covid and coming down as a result of building pressures from debt limit talks), there has been an equivalent amount going in money market funds. Where did this new money go to? The equivalent amount went to the reverse repo window at the Fed, meaning that the money was 'lent' in exchange for the short term government debt that the government had issued previously. So the printed money goes back to the printer. Weird, no?

i would tend to say that this is (and will be, even more so going forward) likely to be deflationary in nature.

Scott Grannis said...

Re whether deficit spending expands the money supply. The simple answer is no. Whatever Treasury spends it must collect either by levying taxes or by selling bonds. Treasury cannot create money, only the banking system (in conjunction with willing borrowers) can.

Carl makes a good point, which I expanded on in several previous posts (years ago). Borrowing is not necessarily bad, and in general it is probably good. What matters is how the borrowed money is spent. If spent productively (e.g. to build a business) then it is good because it helps grow the economy. But if the money is spent on consumption (e.g., paid out in the form of unemployment benefits) then it doesn't help the economy at all: it actually consumes scarce resources without getting anything in return. Government spending in general is unproductive, with some important exceptions (research, defense, infrastructure, etc). Lots of new spending (most of which would be unproductive), which the Biden folks are pushing, is almost certain to be bad for the economy.

Inflation, of course, is almost always bad because it is equivalent to a tax on whoever holds the money, and the burden of that tax falls heavily on the poor and middle classes. Inflation distorts prices and that makes the economy less efficient, which in turn erodes living standards. Inflation transfers purchasing power from the private sector to the public sector.

Carl said...

"Re whether deficit spending expands the money supply. The simple answer is no. Whatever Treasury spends it must collect either by levying taxes or by selling bonds. Treasury cannot create money, only the banking system (in conjunction with willing borrowers) can."

Thank you. This is so interesting. Obviously the simple answer is no but i wonder if there is something missing in the thought process. Obviously the statement above needs to integrate quantitative easing: money reserves (new money, included in M2 etc) are created out of thin air in exchange for certain specific debt securities (expansion of Fed balance sheet). So borrowed money spent by governments with the Fed swapping the issued debt for cash does result in the expansion of money supply. But we know that these digitally printed reserves have to stay within the banks-Fed cycle and do not go directly into the economy although, in theory, this could incentivize banks to lend more against this 'excess' capital (unlikely as it's simply an asset swap between assets that have become quite similar if not identical: rates etc and not (IMO) happening since the beginning of the different QE iterations including the Covid variations.)
But there is something more to it. What if a significant part of the unusually high level of debt issued by the government ends up on private bank balance sheets ie allowing the banks to loan effectively to the government and crediting private accounts for that loan amount?
There's somebody else who thought of that before:
The interesting part about this aspect is that commercial banks have, like the Fed, significantly increased their holdings (asset side) of government debt securities lately often stating (mostly through the CFOs on conference calls) that they're stuck doing that in this excess-money-and-0%-interest-rate environment. This component of the loan growth would mean that underlying real private loan growth has been even more anemic than presently/recently reported.

Moving away from the quantitative, mathematical and balance-sheet aspect, the public debt binge that is happening resulting in increasing overall balance sheet expansion and leverage feels like the situation where a house would be heated in the winter using furniture and wall pieces. This would obviously increase the inflationary heat, at least temporarily, and may cause more than temporary inflationary harm if it gets out of control and may allow to go through the winter and to reach blue skies again to compensate for the future spending carried today but, based on the Japan experience and several other inputs, i offer the opinion that there may be an interim period of deflationary cold.
Being anonymous here, i'm not afraid to say it would be a good thing but who wants to take the punchbowl away these days? You KT Cat?

McKibbinUSA said...

Is it true that every dollar of QE ends up on the Fed's balance sheet?

Scott Grannis said...

Carl: You make a common mistake. Bank reserves issued by the Fed in exchange for a purchase of securities are NOT money. Think of them like a T-bill; they are a liability of the Fed that pays interest. Reserves cannot be spent on anything. Banks view them as an investment, just as they would the purchase of a bond.

Banks can use deposit inflows (which have been significant, on the order of $4 trillion or so in the past 16 months) to purchase bonds on the open market and then sell those bonds to the Fed. Banks effectively exchange notes and bonds for bank reserves: no money is created in the process. But the fact that the money supply has increased by about $4 trillion or so suggests that somewhere along the line banks increased their lending by crediting borrowers' accounts with money. But substantially all of the increase in bank reserves was matched by an increase in demand and savings deposits (all at the retail level). We know that personal savings increased dramatically, and so it looks like a lot of the increased savings was channeled to bank deposits. The money can and does follow circuitous paths. At the end of the day, however, the public ended up holding $4 trillion extra in their bank accounts, and the banks have facilitated that expansion. What happens next to a all that extra money is the big question.

Benjamin Cole said...

Scott Grannis:

I am sure you know that the only organizations that sell Treasuries to the Fed (with some very minor exceptions) are the "primary dealers":

Amherst Pierpont Securities LLC

Bank of Nova Scotia, New York Agency

BMO Capital Markets Corp.

BNP Paribas Securities Corp.

Barclays Capital Inc.

BofA Securities, Inc.

Cantor Fitzgerald & Co.

Citigroup Global Markets Inc.

Credit Suisse AG, New York Branch

Daiwa Capital Markets America Inc.

Deutsche Bank Securities Inc.

Goldman Sachs & Co. LLC

HSBC Securities (USA) Inc.

Jefferies LLC

J.P. Morgan Securities LLC

Mizuho Securities USA LLC

Morgan Stanley & Co. LLC

NatWest Markets Securities Inc.

Nomura Securities International, Inc.

RBC Capital Markets, LLC

Societe Generale, New York Branch

TD Securities (USA) LLC

UBS Securities LLC.

Wells Fargo Securities, LLC


These are not commercial banks. Seems to me, when the Fed buys Treasuries (or MBS) the central bank is printing money to essentially "inject capital" into global capital markets.

The sellers of the Treasuries (through the intermediary of primary dealers) now have money they can re-deploy into other assets, be it bonds, stocks or property. Or they can spend the money.

After selling Treasuries to the Fed, the primary dealers then deposit the money into their commercial bank accounts.

I know of no rules that prevent commercial banks from lending out the reserves, other than the minimum reserve requirements, long ago exceeded.

For reasons that escape me, the Fed is paying IOER now. This strikes me as an example of a "captured regulatory body," one that is working for an industry.

The Fed explanation for IOER, that without IOER the economy would overheat...well, that makes my head spin.

Sheesh, maybe free banking would work better.

Carl said...

^You are right. The statement i made was confusing and it's important to make clear that increased reserves printed by the Fed can only potentially allow banks to lend more and then create money according to the classic definition. Also, it's important to make clear that consolidated Fed-commercial banks balance sheet reveals that money supply does NOT increase from QE (items net out).
Still, your perspective may benefit from the following.
i've invested in CDN and US commercial banks in spades, especially US banks post GFC.
If you look at the consolidated balance sheet of all US commercial banks comparing end 2020 to end 2019 (you get a very similar picture if you include what's been developing in 2021 so far), you get the following key numbers:
Note: equity has remained about the same
-deposits have risen by 2.89T
Note: these deposits (liability) were associated with a matching rise in cash (asset) and some of this cash was swapped to other assets (and some debt paid), so:
-cash, INCLUDING central bank balances (reserves) increased by 1.44T
-Treasury and Agency securities (assets) increased by 0.87T
-Bank debt (liability) decreased by 0.28T
So (leaving all other balance sheet elements so far), you get 2.89 increase in deposits matched by a 2.31 increase in asset securities and 0.28 of debt, resulting in a net difference of 0.30T for all other items, which are not relevant except one: a 0.34T rise in loans.
That's right, the 2.89T rise in deposits was matched by a 0.34T rise in loans, a 3.3% rise from the previous year in loans, continuing a long established negative trend (disinflationary trend) since the GFC.
Please also note that currency in circulation's trend is also up since early 2020. Demand for currency in circulation is not the same as demand for 'money' but the message seems to be that both supply and demand for money remain unusually high. i think the Fed is pushing on a string (and the wrong string).
Also note that commercial banks (during 2020 but also a significant trend for a few years) have increased, on a net basis, their holdings of government debt (despite the huge swaps going in the Fed's direction). If you play along the balance sheet exercise described above for commercial banks (look at government debt held (as assets) to securities, total assets, equity etc), you will find that money is created that way too even if not reported on the loan line item. If banks buy, on a net basis, more government debt over time, this is the functional equivalent of a loan made to the government by the bank and the cash credited to accounts of private participants (the definition of creation of money through the loan process). Of course the deposited funds (as with any loans) would need, in theory, to be matched by additional required reserves but who cares since we now live in an excess reserves world anyways.

Carl said...

@Benjamin Cole
Primary dealers are subsidiaries of bank-holding companies. if you want to formulate insights here, remember that they need to be consolidated. Primary dealers are only a technical tool to lubricate the system.
Reserves deposited at the Fed cannot be spent or loaned in the mainstream economy. Reserves are a different type of 'money' not available to the average Joe. If the reserves are retired from the Fed account, they can be exchanged to another bank but the other bank, by definition, can only keep those reserves deposited at the Fed. Only if the Fed decides to swap Treasury or Agency securities against those reserves that something happens (the reserves get retired from the Fed financial plumbing circulation).
For the IOER, it's the same old cooperation/collusion story with a new post-GFC twist. The banks have continued to prosper on a loose leash. The profits come more now from non-interest income and various fees but they have been squeezed by ultra-low and declining net interest margins and by the following balance sheet changes imposed from the gods above:
1-cash (incl. CB 'balances') over total assets: 3.0%
2-Treasuries over total assets 0%
3-Agencies over total assets 10.4%
The higher forced exposure to low-yielding securities has been significant and the yields on those securities have decreased a lot also. IOER is 0.15% now and, even if you're leveraged 10:1, this is not exactly 🚀.

Benjamin Cole said...


I dunno.

Seems like this a Fed-speak for, "We didn't want the banks to lend out excess reserves."

PS I understand Glass-Steagall is gone, but commercial banks and primary dealers are still two horses of a different color...

I will ponder this some more....

Carl said...

Hi Benjamin,
Primary dealers are essentially (and ultimately) run by people like Jamie Dimon of JPM and the primary reason for their existence is to act as an intermediate party (buy government stuff and sell it to others, including the Fed). The primary driver for large banks is to make them profit centers. i estimate for example that simply using the role as an intermediate between the Treasury and the Fed for all QEs (not exactly a 'risky' activity for a big bank under the regulatory umbrella) resulted in more than 1B in fees since 2009.

For the IOER, there are many components including technical ones. One cannot adequately both control the quantity and the price of something, including for money. The central banks have chosen to focus on the managed-interest-rate aspect and used (before unconventional tools on a large scale) to make their interest rate control efficient through a tight management of excess reserves (as little as possible). When excess reserves applied, central bankers realized that interest rates tended to go negative (below where they preferred to set interest rates). Paying interest on excess reserves helped with that (managed Fed fund rate) by providing some kind of floor. You see a similar phenomenon playing out (since earlier this year) in the reverse repo program. Rates tended 'naturally' to go negatives and this has been so far a no-no for the US-based Fed. Interest rates going negative raises two questions: 1-would the Fed's management of rates still be effective? and 2-what would this mean for private market behavior? Japan, the leader in this space, has been recognizing that negative interest rates on excess reserves doesn't really work and they've recently started to pay interest on excess reserves even if they remain mired in a deflationary spiral.
With the debt spiral and the introduction of excess reserves, it's like if the central banks are driving the plane and are trying to fix the spiral by going higher in altitude. It could work, or not?
For an average Joe like me, try to imagine that you go to the bank and get a loan with a negative rate (you get paid to borrow and get richer by going deeper into debt). It sounds like private participants will eventually figure out that the emperor has no clothes.
If interested for a Fed reference that elevates the discussion above what is conveyed in mainstream media (ie QEs injected 'money' in the economy etc):
NB Before 2019, money authorities also suggested that raising IOER would help them leave Hotel California. LOL

Benjamin Cole said...


It may be that monetary policy, central banking, and the laws and plumbing involved are too complicated for me to understand.

For example, the Fed is doing $1 trillion a day in overnight reverse repos now.

Of course, this is desk jockeys with PCs sending electric impulses to and fro.

I take comfort in my limited intellectual abilities by this measure:

It is more than 90 years after the start of the Great Depression, and highly credentialed macroeconomists are still holding shrill debates on the causes of, and the solutions to, the Great Depression.

Which reminds of my late great Uncle Jerry, and his pronouncement that, "Alcohol is the cause of, yet the solution to, all of our problems."

Carl said...

Your perspectives are interesting.

i spend time here to learn and for two reasons:
1-one should always stay fully invested whatever the macro picture
2-i've been gradually moving away from this "truth" and even have a position that would benefit from deflation

i'm struggling to reconcile the two because this should happen only if you have compelling reasons to do it.
What is the meaning of compelling and what if there is an irrational part to it?
Howard Marks just suggested that nobody knows what will happen to inflation and that 1- should apply and he's been quite insightful with financial cycles.
i'm trying to be convinced to go back to 1-. Please continue to help if you can.

From a recent press conference with Mr. Powell:
“We’ve seen long-term yields come down significantly,” Powell said at a press conference following the central bank’s latest policy meeting. “I don’t think that there’s a real consensus on what explains the moves between the last meeting and this meeting.”
"Powell did cite three possible explanations for the recent decline. Some of it was driven by a decline in real yields as the spread of the delta variant raised investors’ concern about a growth slowdown. Meanwhile, investors’ inflation expectations have moderated. And finally, there are the so-called technical factors — “where you put things that you can’t quite explain,” he said."

i'm concerned by the secular decline in real yields and don't think that the delta variant is relevant. But i do realize that most of what we do here is to discuss things that we can't quite explain.

Last night, i poured myself a nice drink and the Great Depression is a great topic but not to be discussed in cocktail parties.

Benjamin Cole said...

Well, some inflation figures came out yesterday, and they were not scary.

PCE core in June was up 3.5% YOY. That's about 1% higher than wanted, IMHO (I am a fan of the Reserve Bank of Australia's 2% to 3% inflation target).

The Q2 employment cost index (measures total compensation), private sector, was up 3.1%, YOY. That means if employees were 1% more productive in Q2, then unit labor costs were up about 2% YOY, and thus labor is not driving inflation.

Of course, all of this could get worse in coming months. But many signals seem to be weakening. Oil has had its run, used car prices are a one-off. Hotel-motel prices are higher than a year ago, but duh.

10-year US Treasuries at 1.23%.

The big problems are that government and allies do not want to go back to normal, in terms of COVID-19, and that housing costs are rising, due to restrictions on supply.

So...declare victory on C19, and restore property rights to property owners.

Carl said...

"The Q2 employment cost index (measures total compensation), private sector, was up 3.1%, YOY. That means if employees were 1% more productive in Q2, then unit labor costs were up about 2% YOY, and thus labor is not driving inflation."

That's good then. No?
Why then such low nominal yields on government bonds and why record lows in real yields, even the 30-yr maturity is solidly in negative territory?

Wages have been coming up slowly (about since 2011; the present trend is nothing new apart from specific and non-enduring features).
My bet is that nothing indicates that the overall secular trend established decades ago will change direction (apart from noisy changes).

When you look at headlines, it's been reported that corporations are heading for higher corporate profit margins, especially if you look at reported GAAP numbers and especially if you focus on the 'winner-take-all' candidates. However, looking at real aggregated data collected and reported over time reveals that rising wages since about 2011 have resulted, for a while now, in a shrinking net corporate margin, despite record low interest and tax burdens. Is that inflationary?

When you look at headlines, it's been suggested that productivity has recently increased significantly (since the Covid thing) and consensus thinking attributes this to 'investments' in information technology, work from home etc. However, when you look at real data aggregated over time, you see a very clear pattern over the last three recessions. There is an apparent rise in productivity during recessions and then productivity growth resumes with a lower slope, getting less productivity growth with each successive recessions. Productivity increases during recessions as lower productivity workers work less (in 2020, there was a huge rise in productivity in Q2 2020!) and then productivity decreases and returns to its trend line as lower productivity workers work more. Is this inflationary?

For about 40 years now, main street people have harvested a tiny amount of the value resulting from declining productivity growth. Is that inflationary?

i would say that all the above could potentially be inflationary but the overriding factor has been the reliance on increasingly more debt overall and i don't see this changing, at least for a while.

Will this constellation of data improve with the massive population aging that will occur over the next 10 years?

With real yields this negative, the gap could be closed by rising real growth. It could however be also closed with lower inflation.

Zoning and related restrictions have played an important role in housing inflation but ultra low mortgage rates have allowed people to hold assets with higher values, while actually maintaining or even decreasing debt service ratios. Do zoning restrictions explain the unprecedented high level of household net worth (at least on paper) to GDP?

Benjamin Cole said...

Do zoning restrictions explain the unprecedented high level of household net worth (at least on paper) to GDP?---Carl

Interestingly, housing scholar Kevin Erdmann has suggested that with unregulated housing construction in California, aggregate housing values would actually decline, even as supply boomed.

When it comes to property, the upper quarter of the US population is absolutely addicted to government control, regulations, ukases and manipulation.

There are no atheists in foxholes and there are no Libertarians when neighborhood property zoning is under review!

Carl said...

"When it comes to property, the upper quarter of the US population is absolutely addicted to government control, regulations, ukases and manipulation."
You live in California?
Disclosure: i followed the build-up of the USA-made housing bu**le of the mid 2000s and, not long ago, invested for a while in PG&E stock (California electricity utility) during bankruptcy proceedings and looked into housing supply and zoning restrictions in California (or the lack thereof at the wild-urban interface; that's another story).

i wonder if inflation numbers should combine classic consumer inflation as well as asset inflation. i recently read a good paper (from the early 70s) and the author made a convincing argument for this combination although the author felt that asset inflation, through the wealth effect, was a signal of present and potentially future consumption although there needs to be an underlying assumption of no asset price deflation (the thing 'we' are trying to prevent at all costs).

Zoning and various supply issues are important and are part of a large array of variables affecting house prices and this showed up, to some degree, as we're going through the pandemic (various demographic and supply-side factors playing out). However, until convinced otherwise, i think that ultra low interest rates combined with the Fed/Treasury/Congress involvement is the most important variable. Across the board, US home prices recently went up by 15 to 20%. In Boise, Idaho, buying a typical home cost about $469,000 in June, up from $335,000 a year ago, based on Zillow estimates of local housing values. How do you explain such a rise in housing 'value' if you think supply issues are the main factor. When people buy a home, the most important variable is the monthly payment (interest and principal) and based on debt service ratio, this does not appear outlandish although the same paradigm applies for the government. Heard from a recent buyer of a house which recently appreciated (before the buying decision): “Interest rates are so low and money is cheap, why not do it?” (from a recent NYT article). There is a built-in expectations that 1-home prices will continue to rise and that 2-the government provides (and will continue to provide) a floor on prices. 1- is so American and 2- is so un-American. You may want to note that similar dynamics applied in the late 80s Japan when rent prices did not follow (see US stats now) and people relied on low interest rates and price appreciation to compensate.

Carl said...

i did not know what a ukase was and had only seen Mr. Erdmann in passing. Interesting stuff. Some of Mr. Erdmann's arguments is (appears to me) that the US housing bubble was not a bubble since other countries (eg Canada) were able to avoid deflation and were able to engineer an even bigger bu**le after. For somebody who would like to get government off the zoning-and-other-supply-restrictions sector, it's bizarre that he suggests to target nominal GDP for monetary policy because this would imply for the Fed, in addition to the 'management' of inflation, to also 'manage' real economic growth. So un-American.

When i 'graduated' in 1995, 80% of my specific cohort went to the US to practice. When trying to convince me, an argument was that the US was such a great place for home ownership: deductibility of mortgage interest, GSE involvement in lowering rates of financing and refinancing, property tax refunds, government policies etc. i thought it was (and is) so un-American.

What is the 'right' level of home ownership in the US?

Build it and they will come, they say. i agree but the foundations have to be solid.

Disclosure: i realize this post is fairly negative but please be assured that i'm an optimist. i recently came up with the idea of selling our (Canadian) home and the idea was vetoed. Of course, she's right as the profit realized would not change a single fundamental aspect of our lives, apart from a slight increase in the investable money pool. i still think that most pockets of the markets are crazy. Am i the only one?

Benjamin Cole said...


I was a born and bred Californian, but left 10 years ago.

House prices in some regions are rising because of out-migration from high-cost regions, and sure, interest rates play a role.

Personally, I think the US should scrap income taxes, and replace with property taxes, fuel taxes and import tariffs.

Please put on a tin-foil hat and join me.

Carl said...

"Please put on a tin-foil hat and join me."
Yeah, most of this is 'forecasting' complex situations so...

A Fed talking head is coming out saying that the economy was transformed from Covid and is about to enter a new era of high growth and high inflation but he feels he is in control...

i'm just a dumb bell and have to use analogies but, when looking at the US locomotive economy, i see a great future after some reform but now the economy looks like the patient with heavy risk factors who comes to the intensive care area with a heart attack and when you see the heart rate and blood pressure rise due to the levophed drip...

What happens when the levophed drip is tapered is always interesting. The drip has been going on for a while now and circumstances indicate that an attempt at withdrawal is about to be done.

Forecasting is risky and may be a waste of time? Look (including your comment):
Japan, after 10 months, saw its yoy (June 2020 to June 2021) inflation rate "jump" to 0.1%! Ready for take off or last dead cat bounce?

So what why waste our time and look at underlying data?

Up above, there was a poster suggesting that building Covid-cases at this point in Missouri was a non-event. Quite predictably, Missouri and neighboring states with similar characteristics, is now entering a phase (hospitalizations and deaths) which corresponds to the yearly flu disease burden every three weeks and this will last for a while.

Yeah, i know, 'we' will survive but there is now so much unnecessary and preventable suffering and forecast is not the same as foresight.

Expressed in a scholarly way, timing is difficult but it's hard to imagine how this sucker is not going down.

Looking forward to more food for thought from Mr. Grannis.

Scott Grannis said...

If you want things to worry about, look no further than the sharply rising number of new Covid cases in most parts of the country (Hawaii is now at a record high). If our leaders can look at this rise in the context of a very low and barely increasing number of deaths and conclude that it's best at this point to just do nothing, then we are set for smooth sailing. But surely there will be many that succumb to the urge to impose new lockdowns (we already have number of states imposing mask mandates).

Lockdowns only damage the economy and punish the most vulnerable among us. They are powerless to stop the virus. We must learn to live with it.

The proper perspective is to remember that the big rise in new cases is highly concentrated among the young and the non-vaccinated. The younger members of society are very likely to survive Covid in large numbers, and there is so far no evidence that the Delta variant is more lethal. Vaccinated persons who get a breakthrough infection invariably end up with a mild case; very very few die or are hospitalized.

The economy is perfectly capable of continuing to grow if left alone.

The other thing to worry about is another Biden max stimulus policy. Everything he is proposing is wasteful and destructive to the economy's efficiency. Huge spending will only smother the economy. And we certainly don't need more multi-trillion dollar stimulus measures! I'm hopeful that they won't pass Congress. It would also be crazy to adopt such massive spending plans with the slimmest of Congressional majorities. That is simply bad politics.

Benjamin Cole said...

I agree that we should declare victory on Covid-19 and go back to normal.

The public health bureaucracy, like the defense bureaucracy, will never say that risks are declining.

Carl said...

^From an outsider (and objective?) perspective, it is mind boggling to see how the political prism can negatively influence basic analysis of biologic facts.
The US did relatively poorly overall (apologies), despite huge potential and an early and rapid vaccine roll-out because of:
1-poor demographic risk factors (age, health risk factors) and
2-poor cooperation and inefficient adoption and application of cost effective policy mostly due to the above mentioned polarized political prism
From a humane point of view, there were individual tragedies and an outsized population burden, but the Covid episode is basically a macro non-event, If anything, the pandemic will result in slightly better demographic and work force fundamentals going forward.
The episode just gave a glimpse on how the US will tackle issues that were on their way to become salient: aging population, unsustainable pensions and entitlements, unsustainable debt, rising income inequality...
Still, the amount of unnecessary and preventable Covid morbidity and mortality as a result of the failure to apply cost-effective measures due to competing ideologies is staggering.
And yes, the is late-stage and a late phase reach for herd immunity and there is decoupling (partial) between 1-cases and 2-hospitalizations and deaths (mostly due to vaccines) but it's painful to watch.
There has been a wide gap between capacity and performance and the politicized approach proved to be a massive co-morbidity. Isn't there something to learn here?
FWIW, the public health officials i indirectly know have been very uncomfortable with the powers that have been bestowed to them in a properly constitutional way and can't wait to go back to anonymity.
-----)Back to macro talk

Benjamin Cole said...

"CoreLogic: House Prices up 17.2% Year-over-year in June"


This is another nail in the coffin of an America that once could get most people into the middle-class, if they would just go to work everyday and be productive.

What happens when governments combine subsidies with supply constraints? See health care, college costs. Housing.

Stop subsidizing housing (through the tax code or by any other method) and end property zoning.

Carl said...

"CoreLogic: House Prices up 17.2% Year-over-year in June"
Here are some relevant variables versus the yoy price change mentioned above:
The house price increase was associated with (during an unprecedented rise in government debt to GDP):
-markedly improved pattern for mortgage origination credit score
-nadir levels in delinquency rates (down trend since GFC accelerated (!) during Covid) with low levels matching those reached around 2006

On a first-level basis, this looks great. No?
However, it may represent a late stage of the present cycle with growing inequality and growing dependence on the central Bank and Treasury.

Today, the 30-yr fixed mortgage rate is at around 2.8% (!) and the 30-yr Treasury is at around 1.82% (!).

On a first-level basis, this looks great. No?
i wonder if we're about to find out where 2019 was 2021.

Good luck if you expect/hope for governments to step out of the way.
My guess is that You ain't seen nothin' yet
The virus is about to disappear from headlines but the disease is still there.

randy said...

Benjamin: "What happens when governments combine subsidies with supply constraints? See health care, college costs. Housing."

Add to that your lament on zoning.

In just a few simple words above - the most significant policies that impact wealth inequality in US. Simple for anyone to observe; massive negative outcomes - over and over. So so sad that our disingenuous policy makers will always go for optics when they have every reason to know it will hurt most those they claim to champion.

Scott Grannis said...

I think most people are overlooking the impact of the massive shift in prices and wealth that are occurring these days. With real interest rates deep in negative territory, virtually anyone who owns bonds is experiencing a significant loss of purchasing power. On the other hand, anyone who has borrowed money (e.g., the federal government) is experiencing a significant boost to his investments (e.g., homeowners, equity owners, commodity producers). There is a massive transfer of wealth taking place from the private sector to the public sector. But only a part of the private sector is losing: e.g., fixed income owners, the retired population (living on a fixed income), those holding cash and cash equivalents. The combination of rising inflation and easy money is deadly for some and a boon to others. Inequalities are surging everywhere.

This is not a stable or sustainable situation.

Carl said...

"The combination of rising inflation and easy money is deadly for some and a boon to others. Inequalities are surging everywhere."
"There is a massive transfer of wealth taking place from the private sector to the public sector."

The last time financial repression applied in a material way (post WW2), private debt was low and real economic activity was about to grow significantly as a result of enduring and positive trends in productivity growth (it was also a time of reasonably shared growth).
What is it going to be this time?
Financial repression can be an ingredient, at least temporarily, but there is an iron law that forces the two to converge and one should at least discount the possibility that it's the inflation that will pull down to interest rate levels. No?

Earlier in this thread i asked:
What is the right level of home ownership in America?
The question, i would humbly submit, has correlated to the trend in the size of government expenses over GDP.
So a related question is:
What is the right level of public spending per GDP in America?
A more delicate question now:
How to get there?
There is a political component with the risk of tribal discussions but there is also a 'macro' component.

Ataraxia said...

Keep it simple. The wealth effect from rising home prices is material and goosed asymmetric inflation will prompt spending reduction M2. After all, monetary policy in the end is designed to incentivize actual human behavior.

Sometimes I try to imagine the incentive structure schematic of human behavior similar to the way current and voltage flows through a complex electronic circuit.

Obviously there will be special rules because humans can flip flop between rational and irrational.

Benjamin Cole said...

Well, whatever the prospects, new zeniths on Wall Street, Europe and Australia this week...

K T Cat said...

Politics are irrelevant because the voters can't see the real cost-benefits tradeoffs. That's a big problem with the Fed printing money to buy government debt. It conceals the costs of things. We've been doing this for decades, which is how we ended up with ~$30T of debt.

People are making rational decisions in a world where everything the government does is essentially free, hence the serious discussions of a $3.5T "infrastructure" bill. Until the debt bomb goes off, talking about M2 is interesting and can motivate good, personal decisions, but it's useless in terms of moving the electorate.

Benjamin Cole said...

I realize that one company does not an economy make.

Still Berkshire Hathaway is a conglomerate.

"Berkshire Hathaway's Operating Earnings Jump 21%, Repurchases $6 Billion Of Its Stock"--headline

If these are bad times...give to me bad times (minus the COVID-19)

Ataraxia said...

Like Scott said, this has been an immediate and massive transfer of wealth mostly to large established businesses and the pubic sector. If home prices stick it will have also greatly benefitted those with individual properties. Home equity withdrawal comeback?

Except the small landlords without deep pockets whose hard work and wealth will be transferred because they default from the eviction moratoriums.

Carl said...

"People are making rational decisions in a world where everything the government does is essentially free..."
Mr. Benjamin Friedman came up with the hypothesis (the permanent income hypothesis) that is quite powerful to (under usual conditions) explain consumption/saving behavior at the individual and collective levels ie people will not consume more when it is felt that the increase in income or wealth is transitory.
We know this is not true all the time but it's a powerful idea.
Somehow, the representatives of We, the People, have figured out (it seems) a way to make people feel wealthier and the feeling is related to the spending of other people's money.
Humble opinion: timing is difficult but this feeling has got to be, eventually, transitory.
This time is different or this time is permanent?

Carl said...

"If these are bad times...give to me bad times (minus the COVID-19)..."
Disclosure: i've held BRK shares at various times.

Mr. Buffett's genius includes the automatic capacity to adapt and to benefit from any situations without sounding like a market timer which, in reality, he is, at least partially and indirectly due to his rational framework.
The float portfolio which backs insurance reserves has now (building up in the last few years) a composition of very high cash (unique in the insurance industry) versus total float portfolio and a relatively high ratio this float portfolio (as defined above) over insurance reserves. The ratios described above look like what happened around 2000 and 2007.

If you find a good business at a fair price by all means buy it.

The recent spike in asset prices is related to the fiscal multiplier. This multiplier has been shown to be decreasing and, in fact, has entered negative territory (after short-term positive bumps). It is interesting to note also that the composition of fiscal spending is changing and a gradually increasing portion of the spending is clearly not productive signaling that the fiscal multiplier is going deeper into negative territory (after the recent sugar high).

The trade deficit is reaching record highs also (this means foreigners are buying US assets with USD...) so, in this period of the sentimental cycle when the underlying assumption is that money is free, who cares about the fiscal multiplier or domestic conditions that point to the future development of protectionist policies (ie Smoot Hawley tariff), at this point of the cycle:
Let the Good Times Roll
Hey, everybody, let's have some fun
You only live but once
And when you're dead you're done
So let the good times roll
Let the good times roll
I don't care if you're young or old
Get together, let the good times roll
Don't sit there mumblin', talkin' trash
If you wanna have some fun
You gotta spend some cash...

Benjamin Cole said...

Gold at $1,740 now.

People say gold is an inflation predictor, but maybe not.

The big buyers of gold are central banks (entirely artificial demand) and jewelry buyers in China and India.

However, gold jewelry in China-India is considered an investment by unbanked people and tradition. So, like everything in real life, a mixed and muddy picture.

Add some smoke and mirrors, and you can make an argument one way or the other.

Gold is the same price now as in 2011. At least that much is true.

Carl said...

^The gold market (from an inflation-hedge perspective) has become even fuzzier.
The real yield market is doing head fakes similar to 1974 and 1979 but, this time around (opinion), the defining factor may be that recent inflation numbers are transitory and it's the zero bound that won't resist.
Since last May, global negative yield debt markets increased by 50% (from 12 to 18T).

From a few inputs, i infer that you think that human adaptive behaviors to limit Covid community spread are, in fact, maladaptive and are driving the rise in variants, a conclusion i strongly disagree with as it goes against overwhelming fundamental and scientific evidence.
However, my opinion (FWIW) is that the human management of interest rates reflected, for a while, a certain degree of adaptive sophistication, but, for a few years now, has reached a maladaptive phase which tends to make us financial zombies. With negative yields in sight, nobody can explain or predict what will happen, not even the guiding lights in the Eccles building.

Benjamin Cole said...


"Unit labor costs - the price of labor per single unit of output - rose at a 1.0% rate (in Q2). They contracted at a revised 2.8% pace in the first quarter. Unit labor costs increased at a 0.1% rate from a year ago. They have also been distorted by the pandemic's disproportionate impact on lower-wage industries."

Unit labor costs in Q2 were up 0.1% from a year earlier.

Not sure about the inflation story. So labor is not the problem, at least not yet.

Oil, used cars, residential rents, semiconductor chips, cargo shipping---but these may be one-offs.

Keep an eye out....

Carl said...

The pattern developed is quite typical going through any type of slowing in economic activity.
Japan's productivity numbers are (on that front also) slightly ahead of the US:
Normally, classic thinking indicates that slowing productivity show be inflationary and Japan is showing that this is not always true. Why?
Isn't it possible that artificial asset price inflation ahead of wage growth and productivity improvement could be an underlying issue here.
Japan is finding out that an aging population and a growing services sector (low productivity) cannot be compensated by improved productivity in a declining manufacturing sector.
The labor cost index is going down in Japan:
Why will the US be different when it seems to follow the same path?

Benjamin Cole said...


A big difference between Japan and the US is Japan has much looser property zoning, meaning housing can get built. Add on, a stable to slowing shrinking population (although Tokyo keeps growing).

So, housing is cheap, as are medical services. Labor costs can go down, even as living standards hold up.

Not sure labor costs will continually drop in the US, but Q2 data says they are under control.

The CPI core today at 4.3% for July. My guess is we have seen the worst, and now inflation will grind down to the 3% range for a while.

I can live with 3% inflation. The worst thing is chronically high unemployment rates.

honestcreditguy said...

Gold is a rigged game of pigmen, they rigged the libor for 40 years...they rigged the market, housing market etc...

I look forward to this crash, it will finally kill the pigmen and all the creditcriminals wandering around this country

what a messed up nation, democrats are the bane to society.

Time for the move down

honestcreditguy said...

B Cole,
Inflation is escaping the feds models, they have lost it and its going to get much worse.
No one is thinking about their children today....

Get ready little ladies, hell is coming for breakfast

Carl said...

Hi Benjamin,
"Japan has much looser property zoning..."
My understanding is different as it seems that there are more regulations and some suggest that the outcome is better (for affordability) because of 'better', more homogeneous and more centralized (ie federal-type) policies. i guess there is also some kind of social scars from the financial trauma that Japanese citizens sustained as a result of the real estate (land value) bubble and the period they went through after 1989, similar to the inflation trauma imprint that Germans citizens still manifest today when the topic is even only mentioned. For most of western societies, house values now also reflect 'security' and social status to a degree that departs from historical norms and it's not clear if that's sustainable.
I've been looking at a commercial real estate deal (similar dynamics vs the typical real estate decision) near me and the only way the deal would make sense (my perspective) is if unusual capital appreciation eventually compensates for the low present-day return given the tight differential between rent and interest costs. Ultra low interest rates may be here to stay for a while? but are distorting the traditional economic value model (yes zoning restrictions also play a marginal role in the economics of the deal but zoning restrictions often come with a more desirable location so..)
"even as living standards hold up."
These few words don't seem to amount to much but there is a historical and very troubling fact: humans don't typically settle for this kind of compromise.
Productivity declining has meant lower growth per capita for Japan. My bet is based on the understanding that the US is following the same path with a lag but will eventually allow some kind of creative destruction.