Breaking Down Russell Napier’s Rationale on Inflation

Published on
November 17th, 2020
Duration
27 minutes

Breaking Down Kyle Bass and Michael Pettis – Dueling Perspectives on China


Breaking Down Russell Napier’s Rationale on Inflation

Presentations ·
Featuring Steven Van Metre

Published on: November 17th, 2020 • Duration: 27 minutes

Steven Van Metre, macro fund manager and creator of "Portfolio Shield", breaks down Brent Johnson's recent conversation with Russell Napier. Van Metre provides key information crucial to understanding the crux of Napier's thesis on inflation, such as the difference between base money and broad money. He also provides additional color on the finer points of Napier's views on macroprudential regulation, as well as the underlying correlation between interest rates and inflation.

Comments

Transcript

  • AI
    Alan I.
    28 November 2020 @ 22:00
    Steve's breakdown videos alone are worth the price of membership
  • PP
    Patrick P.
    28 November 2020 @ 16:51
    I read most of the comments.... two words stood out ... inflation and deflation. The only word that was missing and has the highest probability is "stagflation".... look it it up, and prepare for it, because that is where we are headed.
  • SW
    Scott W.
    19 November 2020 @ 04:25
    It's stated by SVM and Brent that QE is not money printing. Is it more nuanced to say that it's not M2 printing, but it is base printing? And that base printing does not (or hasn't yet) manifested as inflation?
    • LS
      L S.
      25 November 2020 @ 16:37
      Is there any way out for them? It seems clearly no. They will just destroy the BS balance sheet, won't they
  • JT
    John T.
    19 November 2020 @ 18:56
    One thing about non-productive debt - it is highly deflationary and most dont understand why. The purchase has a short lived effect, such as allowing furloughed workers pay for food and rent for a few months. The debt lasts and payments must be made to cover it. Incomes go nowhere, so cash out over time far exceeds cash in. Also, I like how you show the correlation between wage growth and CPI. I have long argued that CPI tracks discretionary purchases rather than costs of living, so it really is just a proxy for wage growth.
    • LS
      L S.
      25 November 2020 @ 16:36
      Really good points John - yes, the short term benefit is dominated by long term issues, including the crowding out effect of the private sector, which then hurts wages and production. Your description of CPI tracking discretionary purchases sounds spot on. Great stuff.
  • MB
    Michael B.
    25 November 2020 @ 11:42
    incredibly insightful video, thanks Steve. Showing people how to access the data themselves is a great idea
  • RD
    Robert D.
    24 November 2020 @ 20:51
    I must confess to not having seen the original video so apologies if this was discussed, but under Russel's idea of forcing investors to buy more treasuries in their portfolios, wouldn't they have to sell other assets to do so? Or at the least, not buy more of them? Wouldn't this be terribly bearish for stocks? And what are the implications for broader credit?
  • DK
    Daniel K.
    23 November 2020 @ 15:05
    I really like these segments that explain the interviews and where to find the information. Great idea, guys.
  • RC
    Renzo C.
    22 November 2020 @ 12:51
    Russell says that bank will need to sell assets, equities. Do bank own so much equities?
  • DG
    David G.
    20 November 2020 @ 01:01
    OK, you so you can incentivize banks to lend, how do you incentivize corporations to raise wages and abandon job killing technology? With technology making humans more and more obsolete by the decade, are we all just frogs in a pot waiting for an inevitable death, debating over predicting the periotic fluctuations in water temp? How do corporations continue to do business selling consumer tech, while they continue to roll out job killing tech. Which dies first, consumer tech or job killing tech? How long do we have to wait to find out?
  • SB
    Stewart B.
    19 November 2020 @ 14:31
    With reference to velocity, Steve says, 'right now it's not really exchanging hands that much because, well, a lot of the economy is somewhat still shut down, where money can't move.' I humbly disagree. Money velocity is not complicated at all. It is not directly measured by calculated simply by GDP divided by money supply. The reason why velocity has fallen off a cliff is because we have massively increased the money supply. As an example, for the same GDP, doubling your money supply will halve your velocity. Given the rapid expansion of the money supply, we should not be surprised at all by the rapid slowing of velocity. Good interview otherwise.
    • SB
      Stewart B.
      19 November 2020 @ 14:33
      Typo: "It is not directly measured by calculated..." should read "It is not directly measured BUT calculated..."
    • SB
      Stewart B.
      19 November 2020 @ 14:34
      Steve - I very much liked the use of the FRED2 charts. A picture tells a thousand words.
    • SB
      Stewart B.
      19 November 2020 @ 14:37
      Also, great comparison of wages vs inflation. Thanks.
  • CM
    Cory M.
    19 November 2020 @ 00:44
    Thanks Steve. I found Russell to be one of the best guests ever. I was hoping you'd help me find the BIS chart that he used as a reference which shows levels of Debt / GDP for individual countries. I visited their webpage, but I failed to break through the maze. If you (or anyone) can paste one of them here, that'd be a great service! Cheers!
  • WP
    Walter P.
    18 November 2020 @ 23:11
    I fully agree with you in everything you said. For a while there will be no inflation in the CPI. All other asset classes which the wealthy can afford there is high inflation (stocks, art, classic cars, you name it). It is amazing that the FED and the ECB seem not understand that theey will not drive up inflation with the low interest rates. As long as there are not massive wage gains for Joe Blow there will not be inflation. Especially when the Central Banks give free money to the banks to give out loans to people who never can pay the loan back and then blame them that they are at fault for handing out money to people who are not credit worthy.
  • BP
    Bakulesh P.
    18 November 2020 @ 22:21
    Superbly and simply well presented. Thank you Steve.
  • TC
    Timothy C.
    18 November 2020 @ 20:43
    I really enjoyed the breakdown on effects of low interest rates. I've been trying to convince my friends of this for years, but I've clearly failed at articulating it as well as Russel and Steve...
  • LS
    L S.
    17 November 2020 @ 18:05
    Steve, what do you believe eventually happens with the (insolvent) pension funds? Does the Fed lend to them at a high interest rate, but does the act prove to others in the lending markets that pension funding is in fact a joke, materially --- and have downstream consequences? How quickly do you, or does Lacey Hunt (I don't think he's guessed on any of this for his own conservative reasons) believe that Fed policy or legislation can turn the direct treasury spigots on? My whole question regarding the "deflationary phase" investing, trading, timing, etc is "Will a smart but common man be able to trade it, even?"
    • JL
      J L.
      17 November 2020 @ 18:59
      I honestly don't understand this expectation that the Fed and Treasury are expected to play by the standard rulebook. (Not your expectation, but rather the implied expectation of Hunt et al). As Jeff Gundlach has pointed out, the Fed has already trashed the norms and guidelines of the Federal Reserve Act, and nobody has stopped them or even much cared, and the incoming Biden administration Treasury Secretary will basically be pro-MMT. When it comes time to bail out the pension funds, they will figure out another accounting gimmick and do what they want. They might not even wait for crisis conditions to hit. It's all Calvinball. The score is X-47 to 12, and the only way the Fed and Treasury lose is when faith in the purchasing power of the currency is eroded away.
    • LS
      L S.
      18 November 2020 @ 00:07
      We shall see, yes JL, I'm loving our back and forth here. There is still too much political correctness in many of the RV guests and hosts (not Brent or Rusell, just saying generally) so they always get upset when in other posts I speak of the leftist degeneracy and how they as elites are tacitly supporting it for not calling out its lies. I say that because it underpins the corrupt maneuvers you suggest and I agree with. I don't know what Calvinball is, but I'm with you; just as Chris Cole said the main possibility was a Fed operation to continually buy junk (IL/CA/NJ/NY) debt, the admission that the dollar is increasingly becoming a joke, beyond all of the objecting states (which adds fuel to the fire) is imminent. I hope you have gold and BTC too, bro.
    • SV
      Steven V. | Contributor
      18 November 2020 @ 17:12
      I think the pension funds will ask for a Federal bailout. It will seem like a good idea at the time but later on when they find out they are a dumping ground for Treasuries, they will regret it. I don't think changing the Federal Reserve Act is a quick decision.
    • LS
      L S.
      18 November 2020 @ 20:01
      Yes, Steve, you are basically saying that the full throttle Fed buying of boomer "preservation" will end in a confidence avalanche manifested by mass selling of US treasuries. Correct?
  • GM
    Gary M.
    17 November 2020 @ 21:11
    Thanks Steve, very informative. FYI, Hugh Hendry did a great interview for Real Vision with Richard Werner of ‘Princes of the Yen’ fame👍
    • SV
      Steven V. | Contributor
      18 November 2020 @ 17:10
      Yes he did!
    • LS
      L S.
      18 November 2020 @ 19:59
      We need to get Werner back, I don't care the platform, he knows what this great reset and conspiracy is because he follows the data and draws conclusions. The most honest of men, I've realized.
  • EM
    Eivind M.
    17 November 2020 @ 11:59
    One question: What about the dollars printed by commercial banks outside the US? How would this system incentivize the money markets and eurodollar lending markets? I understand that reduced (or removed) risk of lending inside the US would increase the velocity of money in the US market, but how can we be sure that it would impact the global dollar system and fire up the eurodollar engines again? If market participants don't really believe in a bright future with increased growth, can increased domestic lending in the US really lubricate the whole system?
    • SV
      Steven V. | Contributor
      17 November 2020 @ 18:00
      The Eurodollar system is important but without an increase in global trade, the flow of dollars out of the U.S. is diminished. The unwillingness of banks to lend is also exasperating the problem.
    • EM
      Eivind M.
      18 November 2020 @ 09:40
      Not really talking about a flow out of the US here - I am talking about the trillions of dollars and dollar derivatives created outside of the domestic US system since the 60s. From a monetary standpoint it makes sense to me that this dollar market is at least as important for inflation/deflation and dollar value as the domestic market.
  • AS
    Alexander S.
    18 November 2020 @ 01:30
    Dear Steven Thx for your video. It think you help your audience to understand important elements such as why QE remains deflationary in isolation and on the back of diminishing aggregate demand (which decreases the return on new credit created). However, I am not sure u really picked up in what I consider to be the key point why Russell turned inflationary. Let me make the point again as I see it: His point IMHO was that most analyst remain stuck in a monetary policy discussion when the real price is unprecedented FISCAL policy (spending, equity, guarantees et al) that is already creating the credit central banks where unable to create for two decades (reserve requirements, Basel III, unwillingness to take credit risk, etc). So again, not monetary but fiscal, not future but present! He then makes the example of the UK Coronavirus Bounce-back Loan schemes. It guarantees credit to banks and “forces” them to lend. Again, the program WAS taken up in 3 months. GBP 40bn. Small example of credit creation, using banks as utilities and taking credit tests off the table. Again, this already happened. Not big enough? Please check out the IMF numbers on their Covid response page to get a sense of proportion for the overall OECD size today of $17 trillion or 22% of OECD GDP! Of course, some of it will fix past problems, keep overcapacity in place and thus remains largely unproductive (or even deflationary as it keeps certain producers from raising prices due to failing competitors bidding at marginal production cost to keep the lights on). But other credit will stimulate. This is new. Meanwhile, the fiscal programs only gets bigger and are likely changing everything in combination with vaccine rollout and normalization. He then goes on the explain that such new demand from government guaranteed programs, in combination with a catch up demand from a normalization thx to vaccine, are likely to meet lower inventories by suppliers in a normalized world 9 months or so from now. This combo creates the recipe for more transactions, higher prices, increased velocity and thus inflation. Likewise, higher commodity prices will be a given year over year due to base effects. Meanwhile, the expansion of the monetary base kept asset price high and with it collateral values and thus credit worthiness. In such a landscape, banks themselves and without the backstop of Government guarantees but instead a positive eco outlook are likely willing to lend more and so on. With 17% more M3 in system, not considering inflation as an option is negligent at the very least. This in fact may change inflation expectation which would lead to a spike in inflation come 2022. For sure, oil prices are tied off to spike from a decade of long cycle underinvestment and capital starvation in the US (bad shale rock). Frankly, I was a shocked by the complacency of Raoul and Huge on basically all of that. Have they ever bothered to study the IMF website on Covid response programs. To me, they seemed caught up in the past, thereby missing the future. Complacency I guess is the word... Cheers, Alexander
    • JL
      J L.
      18 November 2020 @ 04:07
      The fact they don't talk more about fiscal just... seems... nutty to me. It is ignoring the elephant in the room. My hunch is this: Those who oddly ignore the fiscal component have a kind of love affair with plumbing and technical details that deliberately excludes messy narratives that can't be translated into neat and clean mechanical relationships. It's like a market analyst who loves spreadsheets, and refuses to consider factors that can't be handled by a spreadsheet. To talk about fiscal impacts is to get into the realm of political decision-making, and policy uncertainty, and untried methods of cooperation between central banks and treasury departments. You can't spreadsheet that stuff, so they don't talk about it. And they aren't good at getting their head around it, so instead they lean hard on a narrative that leaves it out.
  • DG
    Dave G.
    17 November 2020 @ 21:40
    I'm sorry but this explainer video explains nothing to me. None of it makes sense, huge saving rate, huge food lines. M2 velocity dropping like crazy, inverse to stonk market going parabolic. If q.e doesn't create money where did all the money since 2008 come from to drive stonks. Like I said nothing is explained to me.
    • JA
      John A.
      17 November 2020 @ 22:53
      So I will basically bullet point the idea: - QE creates bank reserves, which can't escape the banking system. - For QE --> Money, you need Commercial banks to lend and create more debt. - Debt to GDP makes that unattractive right now, so Commerical Banks are not really keen on lending except to the highest-quality borrowers. This is (in oversimplified terms) why QE didn't lead to money printing. Instead, what it led to was access to more cash for the top end borrowers, who used it to buy assets, and the money never really got back into the economy in a material way. The subject of the interview believes that the paradigm shift has occurred. If the Fed guarantees the principal and tells banks they will back the loan if it defaults (the PPP Program is an example), then there is a way for fiscal policy to backstop the fear banks have of lending, and more credit can be issued. For example, imagine if Congress gave Treasury 2 Trillion to backstop Small Business loans? That money is earmarked and levered up massively and all of a sudden banks can lend like gangbusters, kicking the can down the road. Money this time goes into the real economy and it starts a wave of hiring. In any event, it would probably do more good than QE did. I could argue that this would end with a ton of malinvestment and an even bigger deflationary death spiral unless intelligently structured, but in the short term, it would for sure drive CPI if it was big enough. And it is probably the quickest way to bail out small businesses from the massive damage caused this year. That is if we have anyone left with an appetite for risk-taking after COVID.
    • LS
      L S.
      17 November 2020 @ 23:59
      Great analysis John. "Risk taking" regarding Covid is a funny addition at the end. Who doesn't like 1000-1 odds of something not happening?
    • TW
      Todd W.
      18 November 2020 @ 02:02
      There was no money created going to the stock market is the trick lol. Other than if a loan is given by a commercial bank then placed into the stock market then that would drive markets.
  • GV
    Gerard V.
    17 November 2020 @ 16:44
    A few thoughts... How can there be global growth? The Chinese economy is trying to change from a net producer of goods to a net consumer of goods. Europe faces a demographic crises as well. There are a lack of consumers to spur growth right now. The countries with good demographics like India, Brazil and Mexico face serious restrictions due to the pandemic. In this case global corporations are facing a lack of foreign markets for their goods. I would think that would lead to job destruction not job growth as supply lines move around the world. In this case, wouldn't the U.S. government need to become the employer of last resort? This would have to include a major influx of government spending to provide jobs for workers who either do not have the skills for the current market or are slowly being replaced by automation. While Biden will try to implement a massive infrastructure plan it will most likely be nowhere near the amount needed with a Republican Senate. Mexico, Brazil and India will lag in production AND consumption until the coronavirus is under control. Where is growth coming from? I agree with you and Brent, the only way that this massive change in government policy will happen is with a major shock. Let's not forget that Europe will need the same and it will be more difficult in Europe to pass any MAJOR spending program when they need 100 percent buy in as one country can veto any spending program. Just seems like the shock will come in Europe which will lead to a grab for dollars, which will lead to a deflationary environment in America which will lead to less jobs and spending for Americans until American and European leaders and bankers can develop a unified solution. Still believe in dollar milkshake; it's just very difficult to predict when this shock will happen. It could be years down the line. I just want to get it over with so we can rebuild - a complete system overhaul.
    • JL
      J L.
      17 November 2020 @ 18:41
      There is easily plentiful capacity for global growth. This is not to guarantee global growth will occur, it is just to point out that global growth is easily possible. First of all, we do not know the true capacity of government balance sheet expansion. By that meaning, governments worldwide can borrow trillions more than they already have. How do we know this? Because long-term interest rates are still at historic lows. If government borrowing had hit a capacity limit, rates would already be rising to the point of breaking things. They are not. Second, the pandemic is actually bullish for well-positioned companies in terms of post-pandemic expansion. The flipside of millions of small businesses dying is that the surviving companies with solid balance sheet will be able to expand into the footprint of the businesses that disappeared, and will use financing to do so. Third, the political will increasingly exists by which the government can create jobs, either by funding the jobs directly or supporting entrepreneurial and small business programs with forgivable loan type schemes. This will cost trillions, but refer to the first point: Government balance sheets have not reached their maximum point of expansion yet. As a fourth point, the global mood post-pandemic is likely to be optimistic and celebratory. The roaring 20s in part roared because they came after the 1918 pandemic and everyone wanted to eat, drink and be merry. Don't convince yourself that global growth can't happen. We could have another global boom, easily. This is not a hard forecast, but rather it is pointing out that such a scenario is very plausible.
    • GV
      Gerard V.
      17 November 2020 @ 20:11
      I don't disagree with anything you are saying, but, it seems like the ideal scenario. My point is that in Europe every single country would need to agree with MMT for the European banks to be able to backstop the debts. The nations of savers would lose out in this scenario in much the same way that the transfer of wealth would happen in the U.S. The policy would need to be slow and coordinated, which is mentioned in the video. I am not sure how the EU could develop a slow and coordinated policy when each country has veto power and very different interests in the short term. Regarding the post-Corona euphoria, it seems a bit optimistic right now. You may be correct, but there are many variables that would need work in the favor of a return to normality. One, we still do not have tons of data to see how the virus will adapt/evolve long term to understand the scope and scale of vaccine effectiveness. Although I do believe there are technologies that may address this that do not include what is currently in the pipeline. This is due to the idea that the immune response has not proven to be permanent. These vaccines seem to work under the premise of immune response, so we don't know if, long term it will successful eradicate the virus. It is possible that the disease is something that we will have to live with for a time, improving testing, public health and understanding how the disease interacts with different people with different genetic makeups. This will take time. Lastly, MMT is still a rather progressive idea. It will require a great deal of education to sell this to the American public, let alone the rest of the world. By what I have heard, and I don't understand it completely the numbers that are being tossed around to create a growth euphoria are astronomical by historical standards. This will need to be sold to the public. My point is that the public will need a major shock to "buy in." The fact that so many people are touting gold and bitcoin shows that most people think that large government spending (even if creative accounting will prevent it from showing up in the deficit ledger) will lead to debt and excessive inflation means that MMTers have their work cut out for them convincing the public that this is what is needed. Especially as China is tightening monetary policy to strengthen their digital currency.
    • JL
      J L.
      18 November 2020 @ 00:16
      Regarding MMT, I would disagree. The public doesn't have to understand what is going on at all, because MMT can be implemented in a technocratic manner. Also, the growth scenario I described is far from utopian. Imagine, for example, a scenario where 60% of the population falls below the poverty line, more than half of all small businesses die, and large corporations colonize the barren business landscape that is left behind. That is a world that could produce the growth scenario I am talking about, because growth driven by spending of the top 40% and asset expansion of those with positive net worth (less than half the population) could drive top lines higher, with more than half the country feeling destitute. Then, too, if things are as bad I just described for the bottom half, MMT is implemented in the sense that the government just guarantees them jobs. There is no policy to be explained, the government just starts making promises to a desperate populace and the citizenry accepts the promises, and the spending begins.
  • JL
    J L.
    17 November 2020 @ 18:26
    A lot of this misses the point that conditions can be created in which banks have a desire to lend, and companies and consumers have a desire to borrow, in which case inflation can then be off to the races faster than anyone expects, in part aided by the stagnant liqudity that was added to the system that is now like fuel on a fire. Imagine a scenario in which: -- all credit is backstopped by the Fed -- housing is in a new bubble, making homewoners feel wealthy -- publicly traded companies see a historic expansion opportunity -- the government is creating (or funding) tens of thousands of jobs The first two conditions have already happened. The Fed is backstopping everything and housing is in bubble territory, albeit in a low key way. The historic expansion opportunity comes from small businesses getting wiped out by the pandemic and publicly traded companies having the chance to expand into their empty footprint. Thousands of bars and restaurants and stores close, the big chains can expand their footprint by 20%, that kind of thing. That means financing demand for expansion on the part of the big companies. The final element could come from a green jobs program, or some kind of business stimulus program that gets bipartisan backing in congress, which in some manner creates lots of jobs with either a direct or implicit government guarantee (i.e. either the government hands out money, or the Fed and Treasury give guaranteed loans to businesses for expansion. If you put all of that together, you get conditions where: -- appetite for organic lending and spending takes off -- the liquidity already in the system ignites roaring inflation This goes back to a point Richard Koo made in talking about balance sheet recessions. Koo pointed out that QE is not inflationary, BUT, once the private sector goes back to a net borrowing stance, the liquidity in the system created by QE becomes super-inflationary, because you can't get rid of it fast enough. This isn't hard to picture. Suddenly, post-vaccine, conditions are created by which lending and spending shoot up. Businesses want to expand, investors want to fund this expansion, consumers are house-rich and unemployment is falling. What is the Fed going to do in that situation? Raise rates suddenly? Kill off the balance sheet suddenly? No way. They will have to act slowly, so as not to kill the latent inflation. But at this point, all the liquidity that was stagnant in the system goes from cold to hot, or catches fire or whatever you want to call it, and inflation comes back way faster than everyone thinks. All this talk of plumbing -- it's all technically correct, but again it feels like a red herring relative to understanding the various transmission impacts of potential scenarios in play here. There are very real plausible scenarios where inflation can come back in a big way, more aggressively than anyone thinks or expects, with stagnant liquidity fueling it because the powers that be can't or won't remove the liqudity fast enough. And meanwhile, price action is telling us this scenario is right. Look at Bitcoin, going almost straight up now. Look at the U.S. dollar which cannot seem to find its footing. Maybe something different happens, but the broader point here is that the macro scenario will dictate what happens next. And there are very viable scenarios that point to big, BIG inflation. There are also macro scenarios that are deflatoinary, but again -- look to price to see if those are playing out. Is the dollar going up? No. is Bitcoin going down? No. Is the market pointing toward the deflationary 2021 scenario then? No. Use imagination to understand the range of possible scenarios driven by macro factors, and then use price to get a sense of validation as to which configuration the market is discounting. And save the plumbing for the footnotes. As an active market practitioner, just my .02.
    • AT
      ALAN T.
      17 November 2020 @ 21:45
      Thanks for the insight. I'll re-listen to Russell's interview considering the points you've made. I've followed Jeff Snider Steve and Raoul very intently on this topic and appreciate your increasing the depth and breadth of the discussion.
    • LS
      L S.
      18 November 2020 @ 00:03
      Great analysis, JL, I asked Steve below (will check in a sec if he answered) about the potential of capturing the deflationary moment/trade/signs for a savvy, but otherwise average investor. My feeling is that what you are stating will happen and right now it's best to just play the inflation (the only way out) angle. Obviously, I'm happy as a commodity, gold, BTC hodler. (-:
  • RL
    Remmelt L.
    17 November 2020 @ 12:13
    Thanks for it Steve. I will watch it another time Napier stuff. You make real vision even more valuable. Could you also explain Michael Howell? Or is that too difficult.
    • SV
      Steven V. | Contributor
      17 November 2020 @ 17:55
      Howell was too difficult and much of it is based on his proprietary data, making it near impossible for me to do.
    • JB
      Joe B.
      17 November 2020 @ 19:46
      I second that. Howell's interview was excellent. I wish I had that data... or publicly available data that comes close.
  • SS
    Sunny S.
    17 November 2020 @ 16:40
    Hi Steven, I disagree with your explanation on deflation being caused by paying back loans in the context of the last 40 years. The way I see it is that deflationary force only applies in a financial crisis in the form of debt restructuring and loan default. I think that over the long term (last 40 years) the increase in the amount of debt and having more future income tied up in repaying debt and covering interest payments is the actual deflationary force. Increasing the stock of money isn't inflationary in the long term if it is tied up from being spent on new goods and services as occurs when drawing from future income in a long term debt structure.
    • RM
      Robert M.
      17 November 2020 @ 17:01
      Agree with the assessment that deflation is partly due to the servicing of debt in the private sector. It is also caused by excess production capacity, older demographics that consume less, and global trade (i.e. east Asia production, shale drilling). But for the impact of the debt blanket holding down inflation, recommend people read the Hoisington quarterly newsletter: https://hoisingtonmgt.com/pdf/HIM2020Q3NP.pdf
    • SV
      Steven V. | Contributor
      17 November 2020 @ 17:52
      Debt is deflationary. I like to show people the data and the charts to let them form their own opinion. You don't have to agree with mine!
    • JL
      J L.
      17 November 2020 @ 19:09
      It's illogical to say debt is deflationary without recognizing that the impact of debt is always relative. If a company borrows in order to invest at a high rate of return, the company can steadily accumulate debt over time, and yet the equity will expand at a faster rate than the debt. The debt becomes burdensome only when the borrowed fund are invested at a nonproductive rate relative to the debt service cost. It is similarly impossible to say there is a single explanatory reason for a disinflationary trend (inflation rates in decline) over a period of many decades. For example, imagine a growing economy where underlying productivity growth is happening faster than than money supply growth, even as worker wages are relatively capped and most of the profits are reflected in the valuation of capital assets. In this scenario you can have growth over a period of decades with disinflationary trends and rising corporate debt levels, irrespective of who was paying down what. Long story short, the impact of debt is relative to investment productivity and trends of deflation, inflation, or disinflation are related to a multi-factor equation including things like productivity growth, money supply growth, wage growth, capital versus labor profit capture, and so on. There isn't any "X = Y" that explains why something occurred. It is more like a gnarly calculus equation with each historical macro period being different relative to the situational specifics.
  • JL
    Jake L.
    17 November 2020 @ 14:47
    Hi Steven, unrelated question, I just got thinking about something. Based on the equation for velocity of money = GDP/Money Supply. Why does an increase in money supply reduce velocity? I would think it would be the other way around? Or is that equation wrong? Thanks.
    • ac
      adam c.
      17 November 2020 @ 15:08
      I think one of the reasons is that new money created can just sit in the banks without being used in the real economy, so the extra money does not always drive GDP higher.
    • RM
      Robert M.
      17 November 2020 @ 17:05
      Agree with Adam. Banks are paid interest on their reserves with the Fed. With low rates, there is little incentive to lend this money which is risk free versus lending into a weak economy and bearing loan write-offs. Plus, with companies so over-indebted, there is reduced demand for loans. Money can only be created by banks lending it and right now banks are not doing this.
    • SV
      Steven V. | Contributor
      17 November 2020 @ 17:52
      I'd argue the increase in government debt is putting a drag on GDP growth which is leading to a lower VofM2.
    • JL
      Jake L.
      17 November 2020 @ 19:08
      Thanks for the responses. Hypothetically, if GDP remains constant and money supply grows, but with the new money supply going into the hands of the average Joe instead of the banks. Does velocity still go down? Or would that drive up GDP (nominally)? The more I think about this, is VofM2 not constant? If GDP is measured nominally?
  • MS
    Mio S.
    17 November 2020 @ 12:00
    Thanks Steve, very helpful to get your take on RN's thesis. My only query is this - the majority view is that QE creates money and, like you, RN et al, I understand that it does not, but I'm a simpleton so my view doesn't count and I may well have misunderstood. Jeff Snider is good on the QE point that when FedRes buys UST's from dealer banks, the cash paid can ONLY be credited to bank reserves where it's locked forever, and it then becomes a credit analysis decision as to whether banks lend (create money) or not against those increased reserves. And that is the bottleneck as RN and you ably point out with deflationary credit contraction. I suspect this accounting/regulatory step in the system needs to be highlighted and clarified as it would help to reconcile the majority and minority views on this point? Moreover, bank reserves are not kept in cash and include bank purchases of UST's and other debt instruments so isn't there a leakage of cash into the wider system when bank's spend their FedRes QE cash to increase their reserves? Or is that just the liquidation of an asset on someone else's balance sheet and therefore neutral in terms the overall quantity of money? And the increase in the velocity of FedRes QE cash is microscopic in the purchase/sale of the new reserve asset, hence no inflation contrary to FedRes expectation management?
    • GS
      Greg S.
      17 November 2020 @ 16:07
      You have it right. The question to ask is why didn't the banks lend between 2009-2014 during initial QE's. A good argument could be made that they were insolvent AND illiquid in 2008. QE provided them ample liquidity to allow themselves to get solvent (depending on who's analysis you trust, a good argument could be made that they attain solvency around 2014) while bad loans rolled off and new loans were not made. So now the question is do they start lending again in size to create inflation. RN's point is that they will b/c the federal gov't has backstopped the credit decision by guaranteeing (there is also an argument to be made here that this is illegal b/c the federal reserve's liabilities cannot be used as legal tender and this kind of rhymes with legal tender). Then the real question is when does the federal gov't stop b/c inflation is a taxation of your productivity. This is the unknown and where bets are to be made. Gold, bitcoin, real assets, farm land in the Weimar Republic.
    • SV
      Steven V. | Contributor
      17 November 2020 @ 17:58
      Reserve assets aren't leaking out since they are reserves. The banks can use reserve assets to lend or as a deposit at a Treasury auction.
    • GS
      Greg S.
      17 November 2020 @ 18:50
      My point was that if the Treasury guarantees PPP and the Fed buys the bonds that the Treasury issues, then there is a grey area about Fed liabilities being indirectly legal tender.
  • RC
    Robert C.
    17 November 2020 @ 09:53
    Great stuff Steve, making the complex easy to understand. Could you talk a little on your youtube show on what part of Russell's thesis you consider a low probably outcome?
    • SV
      Steven V. | Contributor
      17 November 2020 @ 18:01
      Perhaps if the original interview is made public, otherwise my regular fans won't know what I'm talking about.
  • SH
    Sin H.
    17 November 2020 @ 12:40
    The part where Steve explained money is "created" through the cycle of actual lending, borrower paying back, and interest paid on top of principal --> I was wondering if banks have decreased lending activity ... how do NON-bank activities compare ... do those activities make up for the difference? Or they are not counted at all by Fed / Fred?
    • SV
      Steven V. | Contributor
      17 November 2020 @ 17:54
      Non-bank activities don't appear to be tracked by the Fed. Jeff Snider commented on this recently but I didn't understand what he meant. I'll try to remember the next time he and I talk.
  • ac
    adam c.
    17 November 2020 @ 14:00
    Great explanation thank you I also love your youtube show. If the government was to succeed in pushing banks to lend, would not any inflation pressures be short lived as the end result would be even more debt. There are many people with more money in their savings account but they may not want to spend it especially if they are feeling any job insecurity. I find it hard to imagine higher wages follow high unemployment, but I also do wonder if we should look at the UK and and the US economies differently I think QE is slightly different over here in the UK.
    • GS
      Greg S.
      17 November 2020 @ 15:57
      If you take out a loan, and get a return in excess of its costs, then it is not deflationary. And this is the great point of lower interest rates. They should be arbed away immediately if there were productive uses of capital to borrow for. Unfortunately, we have so much misallocated capital from this exact policy (low interest rates incentivize misallocation like share buybacks and fake til you make it tech stocks) that nobody wants the system to clear and standards of living to start going back up (sick patients need to get sick before they really heal and grow).
    • RM
      Robert M.
      17 November 2020 @ 17:09
      And with publicly traded companies, many are adding debt to buy back equity. So it is just financial engineering of their balance sheet and not a productive investment in future business growth. This has been the outcome of growing debt over the last decade.
    • SV
      Steven V. | Contributor
      17 November 2020 @ 17:53
      Thanks for being a fan! Yes, QE in the UK is slightly different.
  • IM
    Indranath M.
    17 November 2020 @ 17:02
    Thank you so much Steve. Love the charts and explanation!
  • PJ
    Peter J.
    17 November 2020 @ 17:00
    Great summary Steve, adds great detail and insight to the original interview
  • DT
    David T.
    17 November 2020 @ 16:56
    Steven does a great job.
  • MH
    Muddshir H.
    17 November 2020 @ 16:50
    Thanks Steven.
  • MP
    Michele P.
    17 November 2020 @ 16:46
    Great video as always Steve, thank you!
  • JJ
    Jay J.
    17 November 2020 @ 15:50
    Awesome job Steve as always, look forward to your next one
  • PM
    Ps M.
    17 November 2020 @ 11:15
    Thanks Steven, loved it!
  • JS
    John S.
    17 November 2020 @ 11:06
    Very good