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Without detracting from this thread, there is another trillion Dollar imbalance hiding in plain sight: the US current account deficit. Cracks in the support mechanism that sustain it are increasingly evident. In trade, the number of countries bypassing US Dollar settlement are growing: Brazil this week indicated a willingness to start receiving Renminbi for at least its exports to China. In capital, Greater Arabia is visibly recycling a larger part of its trade surplus towards capital investment in East Asia.

Currently the US accounts for 60% to 65% of ALL current account deficits being run worldwide...and thus, for the Dollar to 'hold', the US must also run 60% to 65% of the world's capital account surpluses. But for how much longer?

Your column points to a Trillion Dollar imbalance WITHIN the Dollar World. I highlight a Trillion Dollar imbalance BETWEEN the Dollar World and the Rest. The two are not disconnected, especially since your imbalance has brutally highlighted the fact that the so-called RISK FREE RATE is anything but. (Was it ever thus?). The surplus runners of the world have noted the US's Achilles Heel with alarm.

Fragility in one world will exacerbate fragility in the other.

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Apr 1, 2023·edited Apr 3, 2023

In regards to Silicon Valley Bank (California) and Signature Bank (New York), getting rid of the bad actors by imposing what amounts to lifetime bans on employment in the financial services industry would be the appropriate response to the moral hazard problem, where CEOs like Gregory Becker were clearly out of their depth. They, and their closest associates and allies within that industry need to find other, less ruminative employment. No working at banks, or businesses that banks rely on. The industry is shot through and through with conflicts of interest. The result will be fewer buccaneers and more people who behave like operators of nuclear power plants.

It's been far too easy for people to enrich themselves by taking on unfathomable risk in which they had virtually no skin in the game. It is a matter of record that Becker and his management team were repeatedly admonished by Fed regulators that they were treading on thin ice, and that their portfolio of long-term maturity dates (read: longer than years) Treasury bonds rendered their reserves vulnerable to a bank run, especially when more than 97 percent of their depositors owned accounts far in excess of the standard $250,000 maximum on deposit that would be guaranteed by the FDIC. SVB managers were using this business model to pad their personal wealth by being the 'go-to' guys in the Silicon Valley startup community. Their quest to build their personal wealth was always their primary concern. The real moral hazard was allowing these people to remain at the helm, knowing that they were indifferent to the risks they were taking.

So I say, don't let them ever get closer to a bank than an ATM machine. The banking system is a de facto public utility, so treat it that way. Scalability counts, and risk increases geometrically with size.

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The U.S. is a monetary sovereign; Italy is not (it does not control the Euro). The U.S. always has as much fiscal space as it needs and is only limited by the availability of its labour and resources.

Alan Greenspan, former U.S. Federal Reserve Chairman

http://www.federalreserve.gov/boarddocs/speeches/1997/19970114.htm

"...... monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies .......a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."

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Apr 2, 2023·edited Apr 2, 2023

A few observations, if I may.

1. I was trying to find the insight here (in the FT article, too, for that matter). I'm afraid it may have gotten lost entirely between trying to pin a label on a putative new era and whether any new era has objectively started.

2. An end to the Fed put? Could be. Would I call that a new macrofin regime? No. It could be just a transitory Fed call. – But, again, this is a pseudo-discussion. Who cares? The Fed Put was installed by Greenspan (hence being originally called the "Greenspan put"), which then morphed into the Bernanke put, the Yellen put and, until recently, the Powell put. You know what's common to these? Low inflation. (Well, lower than in the 70s and lower than now.) – What we see now is just the Fed doing its job. Lazy fin market actors will have to wake up and adapt. The others will fall aside as collateral damage.

3. I don't really buy the "venture dominance" thingy either, I'm afraid. Maybe it played some role, but ultimately, I think, the financial cops were spooked by seeing a few domino pieces falling and they overreacted a bit. That being said, I'm glad they did. It's the animal spirits that need containment under such circumstances. A strong, overwhelming (over)reaction is what was called for. Kudos to them. – Their additional moral hazard chicken may come home to roost some day though. I bet Powell and Yellen are secretly hoping they'll be retired by then.

4. For me the most important point here is whether the Fed put ended for the long run. Not because of the labelling game you so artfully seem to play, but as a test to the long-standing opinion of Larry Summers, that we may have to return to secular stagnation, once this inflation-blip ends, due essentially to demographic decline. Let's see whether it gets validated or invalidated by the current situation.

5. Most people seem to be bogged down now on the monetary side. Well.. I guess it's not sexy to write about fiscal policy, if it's successful. Rates were already at zero, so what got us out of the stagnation mess was not monetary, but a world-wide, massive fiscal stimulus as a reaction to Covid, which then caused inflation, which then was exacerbated by the energy price mess caused by Putin's 'special operation'. – I don't know about the US, but in the EU the stimulus is going to fizzle out relatively soon: the SGP will be reactivated in 2024 and the brunt of RRF money will be disbursed by the end of the same year. The music won't stop at that time, but half the orchestra will be fired. The relative winners will likely be those having made smart investments and reforms by then.

6. Why don't you ask some of the MMT crowd about fiscal space? – Ah, that's right: we have non-zero rates now. Turns out if financial markets won't be the constraint to your fiscal overspending, inflation is always happy to be, even if you have unchecked monetary sovereignty. Good riddance.

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founding

Adam, it is not just polycrisis, which I would argue is endemic if we look throughout history, but the scale of polycrisis is much better known thanks to the increased interconnectedness of the world and the lighting speed at which information (and disinformation) travel these days.

The problem is the extreme interconnected nature of economic sectors and geopolitics is so enmeshed that it pushed the limits of bounded rationality. It is almost impossible for any one person or organization to see all the linkages and possible permutations of what may happen. Even those that fully grasp they must understand they cannot anticipate everything

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The usual Tooze-ian talk about economic this and banker that - but no risk-taking whatsoever in looking beyond the moderately obvious.

And the beyond the moderately obvious is: as the US and EU - the West in general - "financially represses", the rest of the world continues to grow faster. So it isn't the case of the West suffering the same as the rest of the world - or being able to drive suffering to the rest of the world - it is the West building its own financial garden and then stewing in it.

All of these financial tricks do nothing to address issues of commodity and cheap manufacturing dependence on the Rest Of The World.

So while it is unfair to place the blame on Tooze for not addressing Western failures of domestic policy - it is quite fair to note that the Tooze-ian talk above is exactly what passes for Western domestic policy in this era; policies which in turn are predominantly the underlying causes of the economic and social problems in the West today.

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I think there's a typo in the sentence below;

"It is controversial to claim that the revaluation of Treasuries and other bonds happening in the market due to the interest rate hike - the revaluation that is marked as an unrealized loss on the balance sheets of banks - really amounts to a transfer of wealth from debtors to creditors."

-->at the last part of the sentence, words "debtors" and "creditors" are like misplaced? should switch their position?

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The poly crisis has been replaced with fiscal space!

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It was recently pointed out to me that with the Financial Services Regulatory Relief Act of 2006, the nature of money changed significantly. Of particular interest is the Fed paying interest on reserves held at the Fed, which may still be counted towards bank reserves. Although not slated to become effective until 2011, it was brought on in 2008 to counter the Great Recession. It is said that this is the source of the monies for QE1 2 and 3. Supposedly this was also the source of money during the Covid pandemic relief efforts. Essentially, the Fed used banking reserves to give the Treasury to spend. Apparently this may be tapped out. As is known, Washington spending is not evenly distributed around the country. Geographical areas not connected to government spending will see a fall in deposits, as money no longer circulates in a local economy. Potentially withdrawals or excessive spending from bank accounts can place local banks at risk to fall under the reserve ratio. Fragile, indeed.

Could this be the reason that a recession is necessary, that foreign trade was curtailed? That is to prevent USD from going overseas, thus keeping money domestic.

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There is need for a deeper system think. Further pursuit of traditional, leverage fueled, GDP growth will only magnify the faultlines identified in our loss of bio-diversity (exemplified by Prof. Dasgupta 600-page analysis), the further transgression of our planetary boundaries, including the depletion of the remaining carbon reserve of say 1,000 GT of CO2 to avoid the 2degrees C increase. What is holding us back to come up with a global 24/7/365 price for 1 tonne CO2, based off global ETS data points? What is holding us back to consider a dual interest rate monetary policy, one lower rate for green/blue economy and the other one for traditional business activity. You could increase the bandwith as a function of the development of your Keeling curve (time as a function of daily observations of atmospheric C02ppm. What are we waiting for to introduce carbon adjusted EPS and carbon adjusted firm valuation approaches? These are the more interesting questions to consider if we want to have any standing stance to combat this polycrisis in a smart manner, especially when even the oil and gas scientists in the room agree that we have to reverse the Keeling curve trend back to 350 C02 ppm from the current 421ppm level.

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Agree with those who say the datapoint of “marketable treasury securities” as a pct of GDP is not meaningful. Much more relevant will be federal interest as pct of GDP, which will soon double from 2015 levels.

As to something unusual happening to debt as a percentage of nominal GDP, I don’t think the effect of the recent bout of inflation was unanticipated and shouldn’t be considered unusual.

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