“The Banks are Going to Crash the Stock Market”

Published on
August 28th, 2020
Duration
68 minutes

COVID-19: The World’s Crash Course in Data Analysis and Modeling


“The Banks are Going to Crash the Stock Market”

The Interview ·
Featuring Brent Johnson and Steven Van Metre

Published on: August 28th, 2020 • Duration: 68 minutes

Brent Johnson, CEO of Santiago Capital, is joined by Steven Van Metre of Steven Van Metre Financial to discuss the most pressing issues on the macro horizon. After exploring whether quantitative easing (QE) and low rates are inflationary or deflationary, Johnson and Van Metre take a deep dive into the plumbing of the Treasury market and specifically the operations of the Fed's FOMC. Van Metre explains why he believes the Fed's policies have actually caused banks to tighten their lending standards rather than loosen them as the Fed intended. The pair then take a look at swap lines and the Eurodollar funding market as well as the effect a credit contraction would have on the U.S. dollar. Lastly, Van Metre talks about his Real Vision journey and how the knowledge he’s gained has helped him as an investor as well as a financial advisor. Filmed on August 24, 2020. For additional charts, click here: https://rvtv.io/3gARHG7

Comments

Transcript

  • MR
    Michael R.
    6 September 2020 @ 15:19
    If QE pulls out liquidity then surely the equity market would fall not rise? Equity markets react directly to increases or decreases in liquidity?
    • CC
      Charles C.
      25 September 2020 @ 06:10
      Agree. Not sure I'm convinced with Steven Van Metre's argument that QE pulls out liquidity from the market.
  • CC
    Charles C.
    25 September 2020 @ 06:05
    Question from a newcomer - Steven's position is that QE does not increase the money supply because the money from the Fed that goes to the bank in exchange for purchase of the UST goes into the bank's reserve account at the Fed and cannot be used by the bank. But, in response to Covid, the Fed eliminated reserve requirements on March 26, 2020. So, it seems wrong for Steven and Brent to say banks cannot lend out the proceeds of the USTs they sell to Fed. What am I missing? Thanks,
  • CE
    Carl E.
    28 August 2020 @ 14:42
    A friend sent me a copy of " The Creature from Jekyll Island" by Edward Griffin. Has anyone read this? Would you recommend others to read it as a source to understanding the Federal Reserve? If not can you recommend a book that would help in understanding the Fed and their role? Thanking you in advance.
    • SV
      Steven V.
      28 August 2020 @ 18:30
      The Lords of Finance is good.
    • GB
      Gary B.
      28 August 2020 @ 19:53
      This is a great book to understand why and what the Feds existence is for. It's great on audible too.
    • RM
      Robert M.
      28 August 2020 @ 20:41
      Started that book. It has a very biased perspective in my opinion. Picked up on inaccuracies as I got into it. Google book reviews before you spend a lot of time on it. Better to read "Lords of Finance" which was brought up in the interview today.
    • SB
      Stephen B.
      23 September 2020 @ 01:03
      Not only did i buy and read it but i then bought a dozen copies to get my friends and family to read it. Also read the Lords of Finance - interesting but not as riveting.
  • JC
    JESSICA C.
    19 September 2020 @ 15:33
    Nice interview!
  • BV
    Bas V.
    31 August 2020 @ 12:25
    Just got one question after this interview... If the Fed isn't printing money ( actual paper bills ) then who is printing the actual paper bills. Sure as hell not the commercial banks. (I know the paper bills are only a minor part of the total money supply) Question holds..
    • MS
      Mark S.
      31 August 2020 @ 17:07
      Fed
    • HV
      Henrik V.
      31 August 2020 @ 18:39
      I was about to say US Mint, but that’s coins. Probably this https://moneyfactory.gov/
    • AL
      An L.
      15 September 2020 @ 05:36
      Money (credit) is created by Banks creating loans
  • WB
    William B.
    10 September 2020 @ 11:27
    I have spent the last week reading academic papers on QE. I had a hard time finding evidence to support the assertion that QE drains liquidity . The following paper (which is the only one I could find detailing the process) is a good explanation of how QE works and was how I though it worked all along. https://economic-research.bnpparibas.com/html/en-US/QE-bank-balance-sheets-American-experience-7/23/2015,25852 I think RV needs to do a deep dive on this to make this crystal clear using accounting T charts across the various parties (primary dealers, banks, sellers and the Fed) as to how QE works.
    • JB
      James B.
      10 September 2020 @ 20:52
      It drains collateral (bonds) but adds to the monetary base, which is the "high powered-money" that the system uses to create bank deposits - the more reserves the more potential bank deposit growth (depending on demand for new debt). What I think many miss is the fact that the bonds the Fed buys in QE represents earlier government deficit spending - that liquidity remains in the system but the debt instrument issued to fund the deficit spending has now become part of the monetary base. Once upon a time, gold was the monetary base - now it's social security payments (among other Federal liabilities).
    • SE
      Shane E.
      11 September 2020 @ 20:14
      William, RV covers both sides of the Inflation/Deflation debate and puzzle, however you look at it. This guy (george gammon) sums up the differences in views really well, IMHO. Hope it helps. https://www.youtube.com/watch?v=oLhO7tIAtoY
  • JL
    Jonathan L.
    7 September 2020 @ 03:10
    Printing money is inflation. When it will affect consumer goods is the real question. QE stifles the hunger of entrepreneurs by giving them dinner without the hunt. The hunt IS production. Eventually we need to hunt before we eat...
    • EK
      Emil K.
      7 September 2020 @ 19:42
      Ok, fine. I've heard this from Peter Schiff as well. By definition printing is inflationary. But they're not printing, they're performing an asset swap. Reserves for US Treasury securities, government agency securities and mortgage backed securities. So, is it inflationary then? Even so, let us say it is, by definition, inflation. Well, that's not the inflation that the greater population is referring to. That one? The one whereby the price of goods and services increases because there is a tide of money flooding the global economy? That's not happening. Not for the last 13 years at least (present day supply shocks and demand surges exempted; nothing pervasive or persistent). Hot Sauce!!!!!!!!!
    • DT
      David T.
      8 September 2020 @ 23:43
      Jonathan, you need to listen to the interview again and check some other videos - George Gammon for example. Emil, say Hi to Jeff :)
  • NI
    Nate I.
    6 September 2020 @ 06:12
    The interview conflates a lot of terminology. Inflation is growth in the money supply (you'll need an old dictionary to find that definition). Rising prices I'll call CPI. The two are not the same. This interview was focused on money supply. What Brent and Steven said about money supply was true, but is it relevant? Honestly, I'm not 100% sure. What I do know is that production declines when people sit on the couch (labor participation is around 63% near a 40 year low). I think that drives up CPI because money is chasing fewer goods. We see it in lumber, cattle, etc. which are up 40% or more more this year. In that environment, I think either bonds go down or the currency goes down (if the Fed pegs interest rates by buying bonds) because ultimately everyday people have to make ends meet.
  • SB
    Stewart B.
    29 August 2020 @ 12:24
    It might be worth fact checking this guest. The Fed does not credit bank reserves directly when conducting open market operations (of which QE is just one type). At the margin, money injected though QE ends up as excess bank reserves, all other things being equal, but this is not done directly. For example, if I, as a photographer, take a desirable photo, and the Fed decides to buy it for a million dollars, they will take the photo and give me a million dollars. However this new million dollars will sit within Halifax bank (I bank with them), marked as being in my account. The banking system now has an extra million dollars. This also means the amount of reserves has increased by a million too (all other things being equal). This is why people correctly note that most new money injected through QE ends up as bank reserves, and more importantly not in the hands of the people who will spend it (with velocity) and hence isn't inflationary. Similarly, when the SNB or BoJ buys equities or ETFs, they take these assets to keep for themselves, while injecting money through open market operations. This money is part of their domestic banking system (and is very much earmarked in a customer's account), and increases reserves in the banking system. The total amount of money held across all banks can't be 'spent out of existence'. Carrying on with my example of the million dollar photo, yes, I can take my million dollars and buy Brent Johnson's house for exactly 1 million dollars, however in doing so, that million dollars simply leaves one account to enter another (Brent's). The net result is the same amount of bank reserves (across all banks). Your guest is correct that low rates are deflationary. A useful way of appreciating this is to think from the perspective of a project manager. In a sense, interest rates are a 'hurdle' of which a potential project must beat, through internal rate of return (IRR), in order to be put into action. For example if rates are 3%, you would start a project with an IRR of 5% but not say 1%. At any given time, the expected return on new enterprise will naturally fall a little above the interest rate. That is why cutting rates may stimulate economic activity in the short term, in the longer term it results in lower growth and lower inflation. This is because the 'hurdle' has been lowered, so now our aggregates include projects with much lower growth (that cleared the new lower hurdle, but wouldn't have been started with the older high hurdle). Nothing could be clearer from the data. Low rates beget low growth and low inflation in the long term. I hope that is useful.
    • BA
      Bruce A.
      29 August 2020 @ 12:44
      That million would not buy Brent Johnson's house!
    • DF
      Daniel F.
      29 August 2020 @ 13:34
      Nicely said!
    • BJ
      Brent J. | Contributor
      29 August 2020 @ 16:21
      With respect, the Fed is not currently buying photos from citizens as part of their QE operations. They are buying Treasuries from Banks. Those banks have their bank accounts at the Fed. And that is where the Fed places the credits when doing QE. These credits cannot be withdrawn. Thank you very much for listening.
    • MS
      Mark S.
      29 August 2020 @ 19:57
      they can be withdrawn in cash
    • SB
      Stewart B.
      31 August 2020 @ 09:27
      The following document by the St Louis Fed may be helpful. It's a great summary, but you can skip straight to the section Examples of Open Market Operations, "When the Trading Desk purchases government securities, such as Treasury bonds, the Fed deposits funds into the bank accounts of the sellers." https://www.stlouisfed.org/open-vault/2019/august/open-market-operations-monetary-policy-tools-explained The mechanism of banks posted reserves overnight with the Fed is a different system. Obviously the Fed doesn't buy photographs. I liked the example though as if I had have used a Treasury security instead, it may have raised other questions in the readers mind, such as the TGA, taxation, or government spending. A photograph is a new real asset created only with my labour, and hence doesn't have the complications of a Treasury, MBS, or gov-backed corporate debt. Hence a nice example. Central banks, through open market operations, can and do buy real assets, for example gold.
    • SB
      Stewart B.
      31 August 2020 @ 09:29
      Just a quick note too that I did actually enjoy Steve's interview. I gave it the thumbs up, but I do think the erroneous part should have been edited out :)
    • DY
      Damian Y.
      4 September 2020 @ 02:06
      This is how the Fed explains QE, it exactly how Steve has explained it. https://www.stlouisfed.org/open-vault/2019/august/open-market-operations-monetary-policy-tools-explained
  • RV
    Ryan V.
    3 September 2020 @ 20:20
    ok, ok, ok, ok, fine. Im convinced. I've hedged against a dollar spike. You win
    • RV
      Ryan V.
      3 September 2020 @ 20:25
      For the record this made me feel gross, like I need a shower now to wash this milkshake off me
  • MW
    McChicken W.
    3 September 2020 @ 05:57
    I'll quote them " HOLY COW what a Game Changer" This is the Devils Advocate information I was looking for, now I need to look into this
  • MW
    McChicken W.
    3 September 2020 @ 05:57
    I'll quote them " HOLY COW what a Game Changer" This is the Devils Advocate information I was looking for, now I need to look into this
  • MM
    Michael M.
    31 August 2020 @ 19:12
    Yet for the past 20 years the dollar had been devalued dramatically against gold . Where would rates be if the FED was not holding US govt debt? The FED is currently financing the US Govt--the Govt spends the money and the money never gets paid back--how is that deflationary?
    • LS
      Lemony S.
      31 August 2020 @ 20:46
      I'd love to hear the specific answer to this, since I've also asked it. I surmise that the answer will be "Government spending is largely unproductive." That is, they spend it but the system is still over leveraged, and barely any of the banks loans (or they don't lend) go to things that are productive. Another nuance might be that most government workers are older and they just hoard, and that's where most government spending goes to ... old workers and their pensions.
    • AP
      Aneil P.
      2 September 2020 @ 05:26
      He's talking about QE being deflationary. It boosts the assets prices higher by lowering supply. The banks get paid in dollars that cannot move (0 velocity). For holding those reserves the member banks get paid dividend by the Fed, I think about 6%.
    • LS
      Lemony S.
      3 September 2020 @ 01:47
      Our question regards YOY government spending via more debt. Is it just a trade with "money" pulled from member banks (economic potential) and then shelved, so it's a decrease in the money supply technical, to government spending which is directed and inefficient?
  • JM
    Jason M.
    2 September 2020 @ 15:05
    83 poor souls aren't ready for the dollar to pop and sour the ever so popular inflation trade. Tha ks for the great video
  • AP
    Aneil P.
    2 September 2020 @ 05:31
    We need to have another interview with Steve with Real vision pro folks asking questions. Please make it happen. I would like a Townhall type exchange, debate with him with Raoul, Julian and all the pros.
  • RK
    Roger K.
    31 August 2020 @ 11:55
    then how come QE inflates the stocks market ????
    • HV
      Henrik V.
      31 August 2020 @ 18:41
      How do you know that it does? Couldn’t it be pension funds, savers or non-US
    • AP
      Aneil P.
      2 September 2020 @ 05:29
      It's actually very simple. Because everyone believes it inflates it. They act accordingly. Momentum is created. Momentum begets more momentum and it actually changes things in the economy. The Fed's put the biggest poker face by lying and the market believes it! It's incredible!
  • ar
    andrew r.
    31 August 2020 @ 15:28
    First video I've watched twice in quite a while. Fantastic.
    • AP
      Aneil P.
      2 September 2020 @ 05:27
      I must have rewinded 4 or 5 times to listen to it over and over and think about this. This stuff makes sense. Finally!
  • AP
    Aneil P.
    2 September 2020 @ 05:23
    Steve's view "... While investors are arrogant, they are betting and praying for inflation to justify their risk-taking in stocks. Investors believe Quantitative Easing is going to lead to a flood of money entering the financial system which will drive consumer prices to the moon and corporate profits with them. Unfortunately, investors fail to realize the Fed does not have the tools or mechanisms to create inflation. The only tool the Fed has to create inflation is to convince consumers inflation is coming. The Fed preys on the ignorance of investors and consumers, who have bought into the inflation narrative with great anticipation. They will be wrong. To propel stock prices higher and to create an exit for those who understand stock prices are overvalued, stock Bulls need a greater fool. With short interest at a multi-decade low, stock Bulls are looking to the bond market to find a greater fool. By grinding stock prices higher and frantically shorting the bond market, stock Bulls have turned to shorting and selling Treasuries to make bond owners regret their decision to hold bonds. If the stock Bulls can convince the bond Bulls to capitulate and sell, then the bond Bulls will find themselves buying stocks at absurd valuations and greasing the exit for the stock Bulls who want to sell." Beautiful! Now it all makes sense!
  • AP
    Aneil P.
    2 September 2020 @ 05:22
    This is probably the best/eye opening/most enlightening video that I have yet seen in the entire Real Vision platform. So everyone who believed in inflation where just buying into the "greater fool theory". How does a guy like Steve, who is nowhere to be found in mainstream media with not a lot of Stocks/Hedge fund background comes out here and completely lays it out. This stuff is supposed to be simple! He explained it well. I'm glad this interview happened. I'm sure the Fed's don't want to see this video online for long! It ends their poker game. National Security issue! LOL :)
  • AP
    Aneil P.
    2 September 2020 @ 04:00
    Then what would reducing a balance sheet entail? It would be the opposite right? Why does the market tank when Fed reduces the balance sheet.
  • AP
    Aneil P.
    2 September 2020 @ 03:57
    Its not entirely correct. Fed pays interest/dividend on the money that the banks hold. It's about 6%. That interest is an income that the bank makes. That is the last .1% that is still not said here.
  • IW
    Ian W.
    30 August 2020 @ 11:26
    First, thanks so much Brent and Steve for the great discussion! This was a treat to watch and really got me thinking on a few points. I understand the arguments that the Fed crediting a banks reserve account to pay for bonds reduces the number of dollars in the commercial banking system. But it is my understanding that these reserves can be lent against. Even if they could not be lent against (due to some quirk of QE that I don’t understand?), didn’t the fed eliminate all reserve requirements back in March (https://www.federalreserve.gov/monetarypolicy/reservereq.htm)? It seems to me that the ability of commercial banks to create money remains as strong as ever in either case. As Brent and Steve said, QE does not exactly work as advertised. However, it seems that while swapping commercial bank dollars for reserve dollars could have stimulated lending in the past, the absence of a reserve requirement means that banks can now theoretically lend as much as they want. I’m not saying they will, but I’m not quite following the argument that QE is destroying dollars which will create deflationary pressure, as the bank’s money creation capacity seems to still be intact to me. The bigger concern is that the Fed will basically turn into the bank of Japan and destroy the bond market, so several of the other implications discussed remain valid. I’m just a bit stuck on the reserve account portion of the deflation argument. Unrelated to the above, it seems possible (likely even) that the left pocket will effectively end up lending to the right pocket, whether it's explicitly seen as such or not. Yes, the fed and treasury are separate, but I tend to think they could quite easily act in concert to achieve the desired end of generating inflation if they really wanted to.
    • IW
      Ian W.
      2 September 2020 @ 03:23
      Quick update: I am still unsure of the answers to the reserve account questions I raised above. However, Brent clarified on Twitter that he isn't saying QE is *never* inflationary; it just needs the commercial banks to lend to create inflation, which shows no signs of happening now. To which I would agree.
  • TC
    Timothy C.
    2 September 2020 @ 03:13
    So... Question. Assuming the Fed has a liability to the bank. That would mean the bank loaned the asset to the Fed vs. sold the asset to the Fed, or at least had some covenants on the transaction. In principal, the Federal Reserve Act would imply that, but means?
  • DL
    Dan L.
    2 September 2020 @ 02:06
    Man that conversation was good.
  • RK
    Roger K.
    1 September 2020 @ 10:14
    The most important question is left out in this interview; Q : if QE is not the liquidity which inflates the stock market who inflates the stock market ????
    • RB
      Romain B.
      1 September 2020 @ 21:04
      Indeed! Sounds like it's the Swiss National Bank!!! And obviously the government's checks... !!! What's the real data on them and all those Robinhood accounts last 6 months??
  • DM
    Don M.
    1 September 2020 @ 02:51
    What about SPV buying ETFs and bonds directly?
    • DM
      Don M.
      1 September 2020 @ 02:57
      Too early. How about bailing out Wall St buddies?
  • PM
    Phil M.
    31 August 2020 @ 23:50
    Really great interview, thanks
  • DH
    D H.
    31 August 2020 @ 21:24
    Thanks to both of you guys. This is very helpful.
  • CT
    Charles T.
    31 August 2020 @ 02:28
    To understand QE and the federal reserve system you first need to understand the principles of accounting. If you have never taken an accounting class or don't understand the concepts behind double entry accounting then it will be difficult to follow what happens. Here is a basic explanation. First let's simplify things by making a couple of assumptions. 1. Assume the federal government budget is not in deficit. (yearly tax revenue = all expenditures.) 2. Assume the bank(s) don't own the bond they transfer to the federal reserve. These assumptions eliminate any need to think about primary dealers or how the US treasury issues debt and are really external to QE. Now there are two steps to each QE "transaction" 1. The bank gives the Fed a T-Bond worth $100k and the Fed increases the bank's reserve deposit by $100k. (Steven and Brent are correct that reserve deposits are never withdrawn from the fed system. It is a ledger system to track each banks deposits and make interbank transfers possible. ) 2. The bank needs to acquire the T-Bond it gives the fed from an investor. To do this the bank deposits a $100k credit in the investor's account and to balance its own ledger, the bank credits its own liability account. So to recap. 1. The Fed receives a T-Bond. 2. The Fed creates a $100K reserve deposit in the banks name. 3. The investor gives up the T-Bond 4. The bank credits the investor's account by $100k 5 The bank increases its own liability account by $100k. (Note 4. and 5. are the same steps that occur when a bank makes a loan.) QE increases the banks ability to make loans because it increases their reserve deposits. It also takes bonds away from investors and gives them dollars. I believe it is inaccurate to say QE is deflationary. Credit expands and the number of privately held T-bonds are reduced.
    • DL
      Darryn L.
      31 August 2020 @ 02:51
      Nice example, so on the bank’s balance sheet the investor’s deposit is the bank’s liability. The bank’s asset is the $100k in reserves. In aggregate, the banking system will always have that reserve (which has to be funded), until the Fed changes it/allows it to change.
    • RC
      Romesh C.
      31 August 2020 @ 11:36
      Hi Charles, sorry but I don't follow the accounting here, nor can I see how steps 4 and 5 are equivalent to how a bank makes a loan. 1. When the bank buys the T-bond from the investor the entries must be (to the bank) Dr Bond Cr Cash If the investor is also a depositor at the bank then the 'net' effective entries would be (to the bank) Dr Bond Cr Customer deposits 2. When the bank sells the T-bond to the Fed, the entries are (to the bank) Dr. Reserve account with Fed Cr. Bond So after the two entries the bank has undertaken (buying then selling the bond), the bank has either - Increased its reserve account with the Fed, funded by its own cash, OR - Increased its reserve account with the Fed, funded by a customer deposit (if the investor is a depositor with the bank) What am I missing?
    • CT
      Charles T.
      31 August 2020 @ 17:43
      Hi Romesh, I probabbly over simplified it. First I assumed the investor had an account at the bank. Also to be clear the federal reserve system, it's ledger, is completely separate from the bank's internal ledger. I believe it would be more like the following: At the conclusion of the transaction the banks lending department accounts would look like this: asset account: would show the increase in the banks reserve deposit at the fed. (This is not actual money but the estimated value of the deposit. Think of it like a car title from a loan. ) liability account: $100k to the banks trading department. The trading departments accounts would look like this: liability account would include $100k in the investors name + $100k owed to the lending department asset account would include the $100k on deposit + $100k received from the lending department. As you can probably tell I am not an accountant just a student of markets and finance. My first reaction to Brent and Steven's interview was that I disagreed with them. However I think it may be more semantics. Here is what I took away from their discussion + a little bit of my own opinion. 1. All else equal, falling interest rates signal decreased demand for loans and rising interest rates signal increased demand for loans. 2. All else equal, increased loans are inflationary because it puts more money in the system. 3. All else equal, the level of demand for loans increases as rates decrease. For example for the same monthly payment you can have a larger home loan when rates are at 3% vs 5%. 4. QE manipulates markets to pull interest rates lower than their natural level. 5. The lower rates create additional demand for loans. However it is a one time increase. (QE is initially inflationary.) 6. QE causes banks loan margins to contract below their natural level. 7. Over time banks compensate for the lower loan margins by raising credit standards to reduce their loan losses. 8. Once the influence of 7. exceeds 5. QE becomes deflationary and the process is self reinforcing.
  • gc
    guillaume c.
    31 August 2020 @ 17:07
    But then what is the endgame? The yields go to zero or a bit negative... then what do you do? with a 10Y at 0.7% we are not very far away...
  • MT
    Matt T.
    31 August 2020 @ 00:06
    Can anyone clarify something to me.. The reading that I've done has always said that federal reserve deposits can be converted by banks to federal bank notes when required. So why do several people put forth the argument that reserve deposits can not be used in the real economy?
    • PP
      Peter P.
      31 August 2020 @ 01:43
      The reserve deposits the Fed has created can be used by the banks to fund themselves) & the banks can lend them into the real economy if there was demand - there is no demand. In that scenario the Fed thinks it will control the high powered money by paying Interest on Excess Reserves in ever higher interest rates directly to the banks (to do nothing) Pre-GFC the Fed's balance sheet was ~$800bn US Government t-bills (Assets) ; Liabilities were Federal Reserve Notes in form of cash + Equity. Bernanke ballooned the Fed balance sheet to support debt assets that the Fed considered "money good" - Fannie/Freddie MBS (and expanded the loan limits) & Bernanke promised that the Fed would allow those asset to mature. Jeff Gundlach 10 years ago said QE is not inflationary because The Federal Reserve is buying paper (debt) representing money that was already spent. In April 2011 in his Deja Vu presentation - Gundlach laid out that people were confused because QE increased US government yields because money would flow out of US govies & into riskier paper & instruments (so long as the market believed the Fed would continue QE) ; as soon as QE ends then risk spreads begin to widen & money flows back into US Govt paper & rates begin to fall again (signaling deflation) The game is up when the Federal Reserve Act gets amended to allow financing of state & local governments directly (the Fed has started buying some debt already e.g. Illinois on a "temporary basis"), but a bill has been sitting in the Congress courtesy of Senator Robert Menendez since March 20th to make the changes permanent here: https://www.congress.gov/bill/116th-congress/senate-bill/3550/text?r=24&s=8
    • DS
      David S.
      31 August 2020 @ 16:31
      Peter P. - Thanks. Good comment. DLS
  • EM
    Eivind M.
    31 August 2020 @ 15:14
    This is the best video in a few weeks! Thanks a lot guys :)
  • MB
    Matthew B.
    28 August 2020 @ 22:29
    The description these guys give of the way the money system works is wrong, which means the rest of the conversation is pointless. I don’t blame these two. For one thing, the subject is very complex (much more complex than it needs to be). For another, the functioning of the system is almost never correctly described. And finally, we have a number of pictures in our head of how it all works which seem irresistible – but are completely wrong and very misleading. I tried to post a correct description here but it was just too long. So I created a blog and wrote it up there. The link is below. https://themoneyprogramme.blogspot.com/
    • vt
      vadim t.
      28 August 2020 @ 22:46
      I've done till the end. it was wrong at the beginning but by the end it becomes just unbearable. I even had to check if it's still RV, or I was watching kind of "how the world really works" youtube channel.
    • DP
      Don P.
      29 August 2020 @ 00:01
      i surely don't know anything about the subject, but how can these guy be so wrong, as well as Raoul, whom i'd assume reviews so that wrong info isn't being released..
    • DY
      Damian Y.
      29 August 2020 @ 01:59
      If Steve and Brent are wrong on how the money system works then Dr Lacey Hunt and Jeff Snider are also wrong. Dr Hunt and Jeff say exactly the same thing about how QE works. As Jeff Snider said "if you think QE is money printing then you don't understand QE". Dr Hunt has said in many interviews that QE is not money printing. The Federal reserve cannot create legal tender money, only the banks can create new money by creating new loans.
    • JR
      Jeremy R.
      29 August 2020 @ 03:25
      @Matthew I'm not sold on your final conclusion. You've re-iterated the idea that QE is not money printing, yet it is, because money "goes" into financial assets/stocks. Jeff Snider would counter that by saying no, swapping bank reserves for bonds hasn't resulted in a "doubling" of bank balance sheet assets, and it hasn't encouraged banks to "double" the number of loans they make to hedge funds and investment banks. The Fed, through Open Market Operations, transacts with Primary Dealers simply to buy bonds. It doesn't set out to credit the account of Aviva (using your example) to specifically take bonds off Aviva's hands so Aviva can then buy stocks or other assets. Jeff Snider says rather, that QE is a form of theatre, or puppet show, for finance industry professionals and for portfolio managers. The message says "act now, because inflation is coming, we're going to let the printer run hot." Funds already managed by the industry are deployed into assets like stocks, hence resulting in asset price rises. QE is a kind of pop psychology - if people believe central bankers, then they will act in an inflationary way to carry out the policy.
    • pp
      peng p.
      29 August 2020 @ 04:21
      thank you. I was quite puzzled by the first 15min also
    • KM
      Kirill M.
      29 August 2020 @ 06:26
      @Damian Y. Don't matter who is saying, what is being said matters only.
    • MS
      Mark S.
      29 August 2020 @ 07:05
      The craziest part was when they said that reserves cannot be used to buy Tsy secs and the other guy then claimed that banks are taking cash out of the economy to pay for them... Almost as weird as claiming that banks can „lend against reserves“ — that‘s not even possible in the real world
    • MB
      Matthew B.
      29 August 2020 @ 22:37
      Hi @Jeremy I’m a little confused by your comments. I didn’t say (much less ‘reiterate’) that QE ‘is money printing but it isn’t’. I said that – contrary to the opinions of some commentators, including Jeff Snider – QE does result in the creation of real money in the form of deposits. The issue is that the money created thereby lands in the accounts of investors, who simply reinvest it in financial assets and do not spend it. So it boosts the prices of financial assets but does nothing to generate real economic activity – and therefore cannot be inflationary. I also didn’t say anything about ‘encouraging banks to “double” the number of loans they make’ to anyone. I very explicitly explained that banks don’t need reserves to make loans. And as far as I can see, under the present regime there is nothing that the Fed can do to compel banks to lend more. (Professor Richard Werner has lots to say about this topic.) I also explained that, yes, central banks always deal directly with banks (in the US, primary dealers), but that often they indirectly buy financial assets from non-banks, by using banks as intermediaries. I nowhere said that the Bank of England ‘credit[s] the account of Aviva’. Rather, as I set out in some detail, when the BoE buys bonds from Aviva, it credits the account of Aviva’s bank at the BoE, and this allows Aviva’s bank to create a deposit in Aviva’s account at its bank. This is the only way the BoE can buy financial assets from non-banks. Jeff Snider is very good on many things, and I know he is tremendously popular among RV-ers, but I am afraid he is wrong about this key issue. I would be grateful if you could disregard his comments on the ‘puppet show’ long enough to reread my post. I have also written a second post explaining the relationship between inflation, taxation, bank notes and gold. You can find it at the link below. I’d be even more grateful if you could read this too. https://themoneyprogramme.blogspot.com/2020/08/how-monetary-system-works-part-2.html
    • JR
      Jeremy R.
      30 August 2020 @ 00:21
      @Matthew, thanks for taking the time to reply. My main issue is still with your contention that central banks target specific non-bank investors to put more newly created money in their hands. Because the new deposit funds aren't added, without subtracting something from that non-bank or institutional player's balance sheet. Using your example again, Aviva has *lost* title to the bond through a sale transaction. It sold it to a primary dealer. It doesn't concurrently own both the bond AND the newly created deposit funds. The bond's title is now with the central bank, and left on its balance sheet. That is the inflationary condition I'm challenging in your argument. Unless both items - the bond, and the deposit funds - are available at the same time to transact with, then this is simply a swap. Which is what I'm referring to when I say nothing has "doubled". When we think of historical inflation, we think of a profligate government literally giving its soldiers or cronies new paper currency, without subtracting old currency to match. The primary dealer banks buy bonds in advance of QE from the market by bidding them up, knowing the fed will pay a higher prices to take them. Aviva stockpiles bonds understanding the central bank will buy them, and a primary dealer will buy them - but it cannot transact directly with the Fed. Aviva, yes, has had its bank account credited - and this account could be a chequing account, which it could then theoretically be used to buy things in the real economy, but most likely it will buy something in the financial economy. But it has come at the expense of selling that original bond.
    • MB
      Matthew B.
      30 August 2020 @ 00:59
      Hi @Jeremy. I’m even more confused by your comments now. I make no ‘contention’ that central banks ‘target specific non-bank investors’. I don’t even know what that could mean. I certainly do not suggest that in my example Aviva ‘concurrently own[s] both the bond AND the newly created deposit funds’. That would be utterly bizarre. How could Aviva both sell something and keep it? That would be nonsense. I don’t understand what you are suggesting. All I am saying is that when the central bank buys financial assets from non-banks, both reserves and deposits are created. I have set out the mechanism in detail in my blog post. In that event, Aviva has sold the bond. Now it has a deposit. There are fewer government bonds in existence. Aviva has to buy something with the deposit. The stock of financial assets has fallen. The stock of deposits has risen. Asset price inflation is inevitable. It’s pretty simple. Once again I would urge you to read what I wrote.
    • JR
      Jeremy R.
      30 August 2020 @ 02:23
      @Matthew Could you please clarify the below paragraph from your first post - you've specifically said "the BoE wants to buy from": "Let’s say the Bank of England wants to buy £10m of gilts from a financial institution that is not a bank – Aviva, for example. And let’s assume Aviva has an account with Barclays Bank. The BoE wants a new deposit of £10m to arrive in Aviva’s account at Barclays. So it directs Barclays to credit Aviva’s account." Aviva is what I would call a non-bank investor, which to my understanding, you're staying above, the BoE wants to specifically replace its bond holdings with cash. I'm familiar with Richard Werner's work of deposits novated "from nothing" though Daniel Lacalle would argue that the loan is originated on the back of the borrower contracting to make payments on the loan i.e. the borrower trades on his credit (from Latin - belief or trust) or promise to pay.
    • TN
      Tim N.
      31 August 2020 @ 13:28
      Thanks Matthew. Very clear explanation of how QE works and why it has inflated asset prices without increasing CPI.
  • dd
    david d.
    31 August 2020 @ 12:28
    Brent, could you please recommend books to understand the world of finance?
  • dd
    david d.
    31 August 2020 @ 12:03
    Steven Van Metre could you please recommend books to understand the world of finance?
  • AK
    Alex K.
    28 August 2020 @ 19:07
    This is a deeply flawed argument, almost fatally flawed, on multiple fronts. First, low rates are not deflationary. They are the milestone of a deflationary environment. Persistent low rates are a sign that deflation is present, but for other reasons -- like high levels of debt, low productivity, financialization, technology deflation, and so on. We have persistently low rates because debt-to-GDP and financialization are out of control. Low rates are a symptom, not a cause. Same thing with high rates. Symptom, not cause. If high rates are sustained, it's because inflation levels or high or growth is booming. High rates are a sign the economy is hot, not a cause of the economy being hot. Now, to some extent low rates contribute to a deflationary environment by propping up "zombie" companies and discouraging lending to high growth entities. And to some extent high rates contribute a growth environment by focusing lending on high growth businesses (because low-growth businesses won't borrow at high rates). But those impacts are marginal. In reality low and high rates are signs of a deflationary or inflationary environment, not causes. Next, the bond market short squeeze: Never gonna happen. Why? Because Mnuchin, or whoever is Treasury Secretary under Biden, could stop that instantly. "Oh, bond prices are spiking? Here, have $5 trillion in new treasury issuance. In fact, have $10 trillion. Short squeeze over." A bond market short squeeze would dare the US government to just borrow trillions more on the spot. The US Treasury would just be like sure, here you go, we're borrowing trillions. Thanks. Next, this whole argument is missing two huge, huge pieces: Fiscal policy and the global reserve asset mix. Having that whole conversation without talking fiscal is kind of crazy. The US govenrment is likely to have massive, massive fiscal issuance over the next few years. That means trillions upon trillions in new bond issuance, much more than any other country. That will have a huge impact. This is why the dollar can't catch a bid. The market is anticipating huge, huge treasury issuance. And the market is right to do so. That's fiscal. This argument completely misses the fiscal side. Also, global reserve asset mix. Dollar assets are hugely overweighted in reserve manager portfolios. If reserve managers decide "Hey, instead of 60% dollar assets we only want 50% dollar assets," guess what happens. They have to sell the heck out of treasuries. Next, on the thing with the SNB printing Swiss Francs to buy US equities. Yeah, it's not like lots of countries can do that. The balance of payments accounting doesn't work. A capital account deficit has to be met with a current account surplus. Either that, or new debt has to be issued. Here is what that means: If the SNB issues $100 billion in CHF to buy US equities, then someone in the US now owns $100B worth of Swissie. They will do one of three things with that Swissie: Buy Swiss debt, buy Swiss stuff, or sell the Swissie on the open market. If they buy Swiss debt, that means the printed currency came home in the form of debt issuance. If they buy Swiss stuff, that means the printed currency came home as export revenue. If neither of those happens, the $100B in Swissie gets dumped on the currency market and crashes its value. TL;DR the Swiss bank can only "print currency to buy US equities" because the Swiss economy is strong enough to absorb the currency that comes back in the form of either debt issuance or export revenues. If a weaker country tries that, they crash their currency pretty quick. Also, printing currency to buy US equities is a really dumb idea when US equities are highly overvalued. That is because, if you issue debt to absorb the currency when it comes back, the equity needs a return that beats the yield on the debt. Or, if you are investing profits from export surplus, you could probably have done better buying assets that aren't wildly overvalued. Nice think piece, but you guys are wildly wrong I am afraid. Technically correct in your description of bank reserves, but so what. The key pieces of the puzzle are: 1) The market is anticipating massive, massive US fiscal issuance over the next few years. It is not about current US Treasury supply, but anticipate future supply. 2) A bond market short squeeze, LOL. The Treasury department could squash that with a phone call via trillions in new issuance. 3) The printing currency to buy equity thing doesn't work. Unless you have a strong and robust economy that can handle debt issuance, in which case you can invest in better things. Pay attention to the charts, gentlemen. The dollar is weak, picking a bottom is folly, and the arguments presented here are wrong, wrong, wrong. The stuff about trader sentiment is also a red herring. Why? Because if reserve asset managers are in a historic shift moving away from dollar assets -- again, just going from 60% to 50% or whatever -- then whatever traders are doing with respect to the dollar is the sparrow on the hippo's back. The sparrow has no say in where the hippo is going. The trend is your friend. The dollar trend is down. It could stay down for years via historic shift. I just explained why. You guys are good guys, but wrong wrong wrong. Cheers.
    • ao
      andreas o.
      28 August 2020 @ 22:30
      Very interesting comment, thank you for taking the time to articulate your view so clearly. Would love to see Brent or Steven dive into the points you made!
    • CD
      Chris D.
      29 August 2020 @ 01:02
      "Oh, bond prices are spiking? Here, have $5 trillion in new treasury issuance. In fact, have $10 trillion. Short squeeze over." This doesn't make sense, firstly Congress can't agree on anything at the mo... And if Biden is President and GOP has Senate it will be the same still. The only way they could act fast is if DEMS controlled House, Senate and Presidency. Which is possible, but it's far from certain, and it's not happened yet. Bond squeezes happen incredibly quickly when they happen, you are talking a few days. Even if DEMS controlled everything, it's hard to move that quickly. And they don't control everything (sure they MIGHT, but that's just a probability at this moment)
    • AK
      Alex K.
      29 August 2020 @ 01:54
      p.s. Re countering a bond short squeeze, and the question of congress having to authorize new borrowing: First, the Treasury has trillions in leeway via the ability to change the maturity mix. That is to say, if the squeeze happens at the long end, Mnuchin could issue new trillions to refinance existing borrowing at the short end or in the middle. Because this would be retiring shorter-term debt by financing it with longer-term, presumably at better rates, Treasury could do this instantly without having to invoke congress. Second, Treasury could easily coordinate with the Fed to do something on the spot involving a supply-generating exercise via the Fed's balance sheet. This might be totally legit to do instantly or it might involve a little bit of gray area, but in case you have noticed nobody is penalizing the Fed's foray into gray areas. Has anyone stopped them, or even really admonished them, for buying junk bonds yet? Third, even if Treasury did have to go to congress, the pitch would be fairly simple, even easier than Paulson's down-on-one-knee ask for $700B. The pitch would be something like "You guys need to borrow X trillion immediately, at basically zero cost, to keep the whole economy and global financial system from being wrecked again. You good with that?" It's not like the pols would say "No, we don't want to borrow at null cost in order to save the economy from being destroyed by the bond market killing off key participants." There are quirky angles, but again, the bond market short squeeze doesn't play. There are things they can do legally to move maturities toward the long end of the curve, there are coordinated Fed actions they could take just as fast, and in terms of gray areas is is Calvinball, they have a ton of leeway to make up the rules as they go.
    • NR
      Nathan R.
      29 August 2020 @ 16:39
      There are so many errors of omission and commission in this response it’s hard to know where to begin. That this is the top comment is even more hilarious.
    • GG
      Gordon G.
      29 August 2020 @ 18:22
      WooOoOo too many treasuries WoOOooO
    • AK
      Alex K.
      29 August 2020 @ 18:53
      @Nathan R -- Ad hominem doesn't help anybody. If you don't like the critique, point out the flaws and add to the knowledge base. If you've got a multi-point rebuttal, deliver it. I was actually hoping for some well-considered pushback to the comment, which might in turn sharpen my own sword and improve my framework by demonstrating the weak points. Clear thinking and rational understanding are the goals here, for the sake of practical flow-through into trading and investing decisions.
    • NR
      Nathan R.
      30 August 2020 @ 20:39
      Alex, I encourage you to go study Milton Friedman, Lacy Hunt and Jeff Snider’s writings as well as the Fed Reserve Act. More urgently, that you read Brent’s Twitter unroll from today that should help answer your objections. For posterity, I attacked the omissions and commissions in your response. I’m afraid that leaves poor old ad hominem out in the cold. Best of luck in your studies.
    • AK
      Alex K.
      31 August 2020 @ 00:00
      @ Nathan R -- you sound like an acolyte who lacks the intellectual confidence to deploy the arguments of the masters at whose feet he sits. I am well familiar with Friedman, Hunt, Snyder, and the Federal Reserve Act, and do not see where the views and teachings of those individuals conflict with my critique. I again invite you to serve up a multi-point rebuttal. If you refuse to do it, there is reasonable grounds for suspecting that you can't.
    • TS
      Timothy S.
      31 August 2020 @ 01:14
      The indicator for the treasury or fed to act is spiking prices. This in itself negates your argument. Even if they act within an hour of their alarm going off, I made money. Also, please follow jeff snider.
    • NR
      Nathan R.
      31 August 2020 @ 01:26
      Alex, Your paragraphs on rates and inflation/deflation strike me as a chicken-and-egg problem and I confess I am bewildered by your explanation. As to the impossibility of a bond squeeze, your explanation is sheer fantasy. So $10T can be conjured at the drop of a hat? And the market is anticipating that as a first salvo. And the DXY is at 93?! Are you kidding? DXY should be 85 and plummeting to 70 right quick. Oh, wait, maybe the bond market knows spending doesn’t work like you say it does. Curious. Our buddy the 10 year UST at 0.72% “anticipating huge, huge issuance.” Wow, what a huge jump in yields. AHHHHHH! 1980 here we come! I guess the bond market is “completely missing the fiscal side.” Perhaps you’re unaware, but the USD is the oil of global trade and reserve managers need that oil. Oh, they may trim here and there but to expand balance sheets and facilitate trade requires USD collateral and lots of it. On the CHF deal, I have no clue but your explanation sounds cogent enough. So super job. 1. Maybe. Yields disagree with you and banks are scrambling for pristine collateral, cutting credit exposure and raising loss reserves. 2. Sorry bro, you are 110% incorrect. The Treasury Secretary cannot issue debt without Congressional appropriation. We aren’t a banana republic quite yet. I’m also assuming you missed the bond squeeze last summer where the government issued $10T in new....oh, wait, they didn’t. 3. I’ll take your word for it. “Pay attention to the charts, gentlemen. The dollar is weak, picking a bottom is folly, and the arguments presented here are wrong, wrong, wrong.” Really? Charts are screaming there is high UST demand even with “fiscal” looming. Every USD chart besides the DXY is unequivocal that USD demand is steady to robust. There will be very, very transient pockets of inflation with unemployment this high, zero wage pressures and rents falling like a stone. And finally, our friend Timeframes. Mine is 12-18 months. USD steady to up, UST yields way down, stocks...who knows...when the fever breaks it will be a sweaty mess. This time next year, no idea. Will let the price dictate.
    • AK
      Alex K.
      31 August 2020 @ 04:01
      @ Nathan R -- Okay. First, thanks for taking the time to actually engage versus merely talking smack. Something like that is what i was anticipating in the first place. So, here we go: My paragraphs on rates and inflation / deflation were very simple. About 5 minutes into the interview one person said "What I like to say is that low interest rates are deflationary..." and the other responded with "Well, it's funny because I've always said that low rates are deflationary as well." I was pointing out that low rates a sign of a deflationary environment, not a primary cause. They contribute at the margins as I noted, but they aren't the big drivers, which are things like overburdened debt-to-GDP and financialization (along with other things like technology deflation, offshoring, wage stagnation, etc). That shouldn't be hard to understand, so I don't buy the fact you were bewildered. As for the bond squeeze -- you miss my point again, and it seems deliberately so. I never said bond prices couldn't spike, my point is that the issue could be taken care of very quickly via Treasury actions, or coordinated Fed-Treasury actions. In order for a bond market short squeeze to wreck the system and cause massive dislocation, it would have to be more than a one-off spike that was handled quickly. And if so many players were in dire trouble, handling it quickly is exactly what Fed and Treasury could do. There are so many ways they could do this it makes one's head spin. They could change the maturity mix as I already explained, which would solve the problem immediately if there was enough volume there. You aren't authorizing new borrowing if you are just changing the debt mix from shorter term maturity to longer, this is basic. They could do something with the Fed's balance sheet, where the Fed does some kind of conversion that allows the Fed to sell trillions worth of assets all at once which the Treasury puts in some kind of escrow and then sells new USTs against it. That might be a gray area thing, but again, you don't seem to understand, this is Calvinball. It is all Calvinball. The financial crisis of 2008 was essentially ended, in a way, because not only did the Fed absorb the banks' bad assets, they suspended mark to market accounting for bank balance sheets. Then, too, congress, that is still an easy thing. The Treasury Secretary calls congress, says please borrow a trillion, and by the way, if Republicans balk at this, promise to put it in a safe account and only spend it on social security or something. The point is that, the powers that be, who are tasked with keeping the system afloat, are not just going to sit back and let the players in the system get trashed, particularly when the powers that be 1) have lots of leeway and 2) have a primary interest in keeping the systemic players happy. So, again, a wrecking squeeze is not plausible. Spike? Sure. But the spike would be dealt with quickly, that is guaranteed. They would move so massively fast it would be over within days if not 24 hours, precisely because trillions in new UST supply is something they can find a way to supply if they have to, no prob. Re USD being the "oil of global trade" -- Well, perhaps YOU are unaware that 1) monetary regimes don't last forever, they go for a few decades and then die 2) US Treasuries have negative real yields now 3) US Treasuries are likely to have negative real yields for years, maybe decades 4) All of the global reserve asset managers sitting on huge piles of USTs, which are costing them money as a result of negative real yields, are already starting to feel stupid 5) Russsia, a major oil exporter, and China, a major oil importer, are already taking deliberate steps to move commodity pricing away from dollars, for obvious reasons 6) In a world of negative real yields, where USTs are negative proposition after inflation and where the USD is weak, it makes more sense to have a smaller pile of dollar assets on the books 7) The dollar doesn't have to be abandoned for the USD to enter a multi-year decline, it just has to see reserve managers want to make their big dollar piles somewhat smaller, e.g. going from 60% to 50% which is exactly what I described As for yields disagreeing with me... you don't understand financial repression and fiscal dominance. Look them up. Of course UST yields are low, and will stay low. -- UST yields are low right now because what's being described is anticipatory, we don't have inflation in the system yet, but markets are anticipating its arrival within a reasonable time frame, e.g. 12 to 18 months out (anticipating is what markets do) -- UST yields will also STAY low because the Fed LITERALLY will not let them rise, the Federal Reserve will buy however many USTs as it needs to, when the time comes, to avoid letting interest rates spike too much, because spiking rates would kill the US economy Ever heard of a guy named Ludwig Von Mises? Austrian economics? About 70 years ago Von Mises wrote that if a government drives a boom via massaging the credit cycle, it will ultimately have to choose between destroying the economy or destroying the currency. The reason the choice came down to the CURRENCY is because the bond market can always be supported by the central bank, meaning, the central bank can buy all the bonds that get sold -- but it will have to flood the system with currency in order to do that. And that is another factor in this whole argument, by the way, because the market is not just anticipating big supply of USTs down the pike, it is foreseeing those USTs getting monetized, in a sense, by the central becoming the buyer of last resort as supply outpaces demand, in part because of massive issuance and in part because global reserve managers will be noping out. On charts -- dude, come on now, look at the trade-weighted US dollar index via FRED: https://fred.stlouisfed.org/series/DTWEXAFEGS Slide the marker out to 2007 and look closely. Or actually look at it from across the room because it's so big you can still see it. The trade-weighted US dollar index has broken a TEN-YEAR TREND. Again, this whole bullish thing is just wrong. Not only is it wildly against the charts -- look at that FRED chart -- it makes a massive miscalculation about supply versus demand. In very simple terms, a huge amount of treasury supply is going to come from 1) the US government and 2) global reserve managers who are sick of holding treasuries that are giving them negative real yields, as such resulting in 3) the Fed having to buy the USTs nobody wants in order to keep yields low, which adds more currency to the system And then ON TOP OF THAT add the point that 4) We are heading into a world of reduced dollar trade by design, as political forces and pandemic forces result in a lot of reshoring and winding down of supply chains 5) The next administration may actually WANT AND FAVOR a weaker dollar anyway, to help with exports and improve the outlook for the US manufacturing sector So yeah, again, this dollar bull theory hinges on one very big thing -- an assumption of a dollar shortage -- and the markets and the charts are saying that big assumption is massively wrong. Got any more ammo, or was that it?
    • NR
      Nathan R.
      31 August 2020 @ 11:15
      That was it. I’m out of ammo. Seeing Alex’s electronic legions cresting the hill, Nathan accepts his fate. The stark light of day shows Alex victorious and triumphant. The purple of his robe dark and terrible against the dawn sky, his keyboard well-worn and blooded he delivers the coup de grace. Nathan’s limp corpse slumps and it is finished. Alex, my friend, you and I are clearly on two utterly separate intellectual planes; never the twain shall meet.
  • MH
    Michael H.
    29 August 2020 @ 16:31
    Great conversation. Pls indulge me with this dumb question. Many claim that all this money Printing has gone straight into the stock market which appears to be a direct contradiction to your conversation. So, who with what money has been buying up stocks?
    • jc
      james c.
      30 August 2020 @ 14:09
      That's what I want to know ?? Maybe the big boys re-balancing their portfolios after equities crashed, ie selling bonds and buying equities.
    • JB
      James B.
      30 August 2020 @ 14:31
      Yes my question too. Is Steven saying that after the fed buys these treasuries that the banks then just sit on their hands and do nothing with the reserves? I watched an interview where Stan Druckenmiller was saying that when the fed purchases the treasuries from hedge funds and banks etc they then move out the risk curve into equities...which would explain the meteoric rise...
    • SB
      Stewart B.
      31 August 2020 @ 10:15
      When the Fed prints to buy assets (eg Treasuries), they keep them for themselves. In exchange they are injecting money into the banking system. Assuming there is no new issuance of securities, QE removes assets from the investable pool. In doing so they displace existing asset holders. Each displaced asset holder will tend to compete to buy other investor's assets rather than sit on cash. Think of it as musical chairs. Think of every assets (eg treasuries, MBS, ETFs, stock, gold etc) as a chair. Each time the Fed does QE, they remove some chairs. So, the Fed may buy a Treasury from a broker dealer. The broker dealer then has cash and must go out and buy an asset to replace it. Perhaps they buy a MBS from a family office. The family office needs to replace their asset (rather than hold cash), so they go out and buy something else, which could be SP500 stocks.
  • RD
    Russell D.
    31 August 2020 @ 09:23
    Brent, I view Steven less like Mr. Rogers and more like the Bill Nye of the macro world, also intended as a compliment. Interesting interview! Thanks Real Vision!! Still, there are parts that went pretty fast, and I feel like I'm missing a couple dots to make all the connections. Steven said, "Now, the banks want to get more reserves off this exchange, they're going to flip to the Fed for a profit. As a result, they're going to drive interest rates up on top of the fact that the Fed is actually reducing supply." But he also talks about a potential plunge in interest rates like what happened before in the GFC. Where does that come from, what is the trigger? How does this reconcile with the first statement? Steven talks about pouting banks intentionally tightening lending standards (after the Fed said no more share buy backs) and this eventually crashing the markets. How is that good for their business and executives? Wouldn't the crash offset the value of additional QE? What is the likely impact on gold and BTC through the theorized bond yield drop, dollar spike and beyond? Is it possible to see the changes coming clearly enough to time a "sell high, buy low", and if so, what should one look for?
  • DL
    Darryn L.
    30 August 2020 @ 04:13
    A few nitpickers commenting. I think you’re better off being roughly right than exactly wrong. I followed a similar path in trying to figure out why Lacy Hunt thinks the fed isn’t printing. Fwiw, I happen to agree this is actually the economic effect. The fed is not printing, it is borrowing. One contradiction in here is the discussion on the fed QE not being printing and then the throw away line that the Swiss are printing to buy US equities. I think the process is the same for them. They are borrowing money (capital) from their citizens and using that borrowed capital to buy US equities.
    • AC
      Alex C.
      30 August 2020 @ 12:22
      It seems a natural conclusion that this period of monetary expansion hasn't been particularly price inflationary. However QE has certainly increased money supply (https://fred.stlouisfed.org/series/M2) and fractional reserve lending is implicit in this, whether it's called printing or something else seems a little semantic. The question to me seems to be, why has the increased money supply not been inflationary and this is largely due to velocity IMHO.
    • PP
      Peter P.
      31 August 2020 @ 01:55
      The Swiss print in order to meet demand by outsiders for Swiss Franc Paper....so the SNB is selling the CHF as well as supplying the Swiss Franc paper, it receives in exchange from these foreigners foreign currency (U$) which it then invests in equities. The SNB is not borrowing from the Swiss people. Norway has saved proceeds of decades of petroleum reserves & bought global equities - now Norway is reversing this to support the Norwegian Krone & the Norwegian government spending (See Ben Melkman interview)...the Swiss were just printing money out of thin air to offset demand for Swiss Francs & buying Apple stock (until the US complained) and the purchases by the SNB then broadened to a wider swath of the US equity market -> but when foreigners eventually reverse, so can the SNB.
    • DL
      Darryn L.
      31 August 2020 @ 06:23
      Hi Peter, Thanks for the reply. I'd suggest having a look at the SNB balance sheet if of interest. FX assets have increased by about the same as bank reserves and equity since 2015 (as a random start date). It looks to me like they funded USD assets by creating reserves. The Assets then increased in value which they've taken to equity.
    • DL
      Darryn L.
      31 August 2020 @ 06:29
      Hi Alex, you would expect M2 to go up as the reserves that are created by QE are funded by deposits at the banks. So if you do a lot of QE in one hit and then stop, you should see a large increase in bank deposits (M2 rises) and then deposits will flat-line as will M2 (aside from natural growth due to bank lending). On the banks' balance sheets the high level of deposits (Bank Liability) fund the high level of bank reserves (bank Asset). Which gets back to the usefulness of these reserves. BTW this is a gloss over on many small points such as the mix of bank funding.
    • AC
      Alex C.
      31 August 2020 @ 09:07
      Hi Darryl, I think we agree but the dialogue in the video seems to be hung up on the word "printing". QE has led to increased money supply, this seems indisputable and the primary route for this is through fractional reserve lending. Lacy Hunt agree's that QE increases the propensity for banks to lend, whether they choose to accept risk premia or are efficient in doing so is another issue entirely. In allowing reserves to be substituted or by reducing reserve ratios the FED is increasing the propensity of banks to lend, which leads to an increase in money supply through fractional reserve. rightly or wrongly most people assume this is analogous to printing i.e. an expansion of the monetary base. As per my comment, in my mind, the real questions is "why is monetary expansion not particularly inflationary".... yet.
  • CD
    Collins D.
    30 August 2020 @ 01:07
    Alarmingly inaccurate. This should be edited or a followup video posted or something. Stopped watching after after the "Banks can't use their reserves at the Fed" part. Makes no sense to anyone with understanding of a bank balance sheet. The argument for deflationary QE by folks like Lacy Hunt below is not that proceeds of bond sales to Fed can't be accessed, but rather the reserves couldn't be used for productive loans into the real economy due to capital constraints. "When the Fed initiated QE1, QE2 and QE3, folks said those policies were very inflationary. There is a liquidity effect of what the Fed is doing, and the liquidity effect can be very powerful over the short term. But ultimately the increase in the money supply did not follow through after the rounds of Fed purchases of government securities because the banks couldn’t utilize the reserves, they didn’t have the capital base to make the loans, they had to charge a risk premium in an environment in which the risk premium was rising very dramatically and the borrowers couldn’t pay the risk premium. There was no secondary follow-through in terms of money supply growth, and the velocity of money fell and the growth rate fell back after a transitory rise. And I don’t really see this as any different." https://www.thestreet.com/mishtalk/economics/bond-bull-lacy-hunt-warns-of-a-huge-monetary-risk
    • JC
      Jason C.
      30 August 2020 @ 03:22
      So you're saying that it's not so much that commercial banks are unable to lend the money from QE, but that they choose not to lend the money because the risk premium is raised as a result of the same event that caused the Fed to start QE in the first place?
    • CD
      Collins D.
      30 August 2020 @ 11:40
      Absolutely. Borrowers couldn’t service the risk premium and banks were limited by leverage ratios.
    • BD
      Bryan D.
      31 August 2020 @ 01:21
      100% agree Collins this is alarmingly inaccurate. Having run bank balance sheets for 13 years in 8 countries including with access to the Fed the lack of understanding of how balance sheets work here is astounding but I don't have the time or patience to comment on everything in this video. As you and Lacy have mentioned the constraining factor currently on lending is capital not funding or reserves. Its going to take time for banks to work through their current loan books and increase in risk weightings and hence increased capital that has to be held against their back books let alone put these excess reserves to work in the short term for new business.
    • EO
      Elena O.
      31 August 2020 @ 08:07
      Yeah, they both lost me at the point that QE is in fact deflationary. What's QT then? Super deflationary? Does not make sense. CFA level 2 - bank reserves. Either they are in cash as others or primarily with the Fed - on the bank balance sheet they r still reserves against which banks can lend. The problem is normally banks will not lend if defaults are high and rising. They will in general tighten credit across the board - reserves or not. Guys, go study basic CFA concepts...seriously...it's all there in black and white.
  • FR
    Frank R.
    31 August 2020 @ 07:52
    Steve is the man!!! Most explanations I've heard about the economy form the "experts" never made much sense or their explanations never added up. Reminds me of a story Jim Rogers told one time of when he was a young trader, he just assumed the veteran traders knew how things worked, but they were so specialized in just a small part of the economy that they were clueless to how things really worked and couldn't see the hazards ahead. I've watched 100s of hours of real vision and youtube videos trying to understand what is going on in the economy very few people have made sense like Steve. Awesome job!!!
  • EC
    Earl C.
    31 August 2020 @ 05:36
    I wonder if Steven had been working the last time the US Gov't had blocked the banking system from cash starting in 2nd half of the 1960's, that he would think this is deflationary? I don't think so, I worked back in those days. Even if major war can be avoided ALL the worlds military will be spending & preparing for one just in case. And that is not deflationary I don't care how much less money the US banks have.
  • DY
    Damian Y.
    31 August 2020 @ 02:57
    Thanks Brent for bringing Steve on, I've been following Steve for about a month now and he has a great way of explaining things, I really respect his work, he has a great YouTube channel. There's only a few people I bother listening to in Macro, Dr Lacy Hunt and Jeff Snider and they have both been saying that QE isn't money printing for quite a while now. Steve explains what they have been saying in a more simplistic way. As Jeff Snider said "if you think QE is money printing then you don't understand QE". Jeff has also said that "QE is nothing more than a puppet show" and it's amazing how many people get sucked into the puppet show. The JCB has been doing QE since the late 80's, the ECB has been doing QE for about 10yrs and so has the FED. We haven't gotten all this hyperinflation and high interest rates that everyone was screaming about 10yrs ago. QE cause interest rates to go down and it causes deflation and we have a lot of QE history to back that up. I always listen to Dr Hunt's interviews at least twice and I recommend everyone to read his quarterly new letter https://hoisingtonmgt.com/economic_overview.html Jeff Snider has a great educational YouTube channel called Alhambra Investments which he explains how the system works. David Rosenberg is worth listening to also. There are some really good macro thinkers out there but most of the so called Macro experts on RV have no idea what they are talking about, that's why I rarely bother watching Real Vision anymore. Thanks Brent and Steve for a great interview.
    • DL
      Darryn L.
      31 August 2020 @ 04:17
      Definately some people worth paying attention to. I think the key is to ask yourself why they think what they do and then try and figure it out for yourself. Along with listening to Lacy Hunt, I'd also suggest reading this book which helped me realise the difference between 1920s Germany and modern QE and therefore the different outcomes we are seeing (I don't think it's the MMT reason that they just did a bit too much). https://www.goodreads.com/book/show/8567383-when-money-dies Reading the comments on this video and adding one myself earlier I can see that psychology plays a big part as well. It's hard to change your mind.
  • PB
    PHILLIP B.
    31 August 2020 @ 01:16
    Great conversation. I especially enjoyed the bit about how the banks are not receiving dollars from the Fed to go out and purchase equities. Still, seems that monetary and treasury machinations are purposefully opaque. Lacy Hunt is probably the best in describing to non insiders (basically everybody) what is going on. I imagine there are many, many, many, many people at the Fed, Goldman, etc, who also have no idea how this all works. Does any one really know? I suspect not. We are in a period where outcomes are indeterminant. It's going to be a while before we know how this is all going to play out.
  • mB
    marc B.
    31 August 2020 @ 00:34
    Steven was phenomenal. What happens to gold when deflation hits. Sounds like liquidation phase.2.
  • BP
    Bakulesh P.
    31 August 2020 @ 00:32
    Fabulously well presented interview with very significant fundamental piece of money printing that was widely misunderstood finally put to perspective that changes how one thinks about the Q/E and Federal balance sheet. I am so glad I found Steven Metre. RV must bring him more often and make him a core part of future interviews both as interviewer and interviewee. Be very interesting
  • BP
    Brian P.
    30 August 2020 @ 23:48
    I'll now be reading Lords of Finance every year.
  • DM
    Dominic M.
    30 August 2020 @ 23:45
    Going in for second watch ... thanks again, gentlemen.
  • hs
    hanumath s.
    30 August 2020 @ 23:34
    The setup seems to be there for a dollar spike, considering the insane equity rally and the November election fears. I think anyone in the traditional markets would be wise to sell before the election which could trigger this event. EM is also super stretched, the Indian stock market is on fire despite having a terrible ground reality and crippling shut down still in place. The question is if this EQ sell-off triggers a spike in the dollar, precious metals will crash and bonds are already a stretched trade at this point. So what would be the game? Cash-out? {Clearly UUP is a hard instrument to trade for a retail investor}
  • SG
    Stuart G.
    30 August 2020 @ 01:48
    Best video in months. Lucid thinkers and I really enjoy their rapport. Next time, have one of them face off against a person who disagrees.
    • JC
      Jason C.
      30 August 2020 @ 03:23
      Brent Johnson interviewed Peter Schiff a while back, but I don't recall them discussing the Milkshake for very long.
    • JC
      Justin C.
      30 August 2020 @ 05:55
      Please, anyone but Peter Schiff. Too many honest people have been hoodwinked by intellectually rigid and/or marketing narrative actors post-GFC. If you have a position, then you had better be able to defend it with primary sources and past/current data.
    • KV
      Keld V.
      30 August 2020 @ 22:34
      "Brent Johnson interviewed Peter Schiff a while back, but I don't recall them discussing the Milkshake for very long." Heh why would anyone interview Peter Schiff. Just look up an old interview from 10-20 years ago, he has been playing the same broken record forever.
  • RC
    Robert C.
    28 August 2020 @ 06:38
    Been following Steve on youtube as subscriber 668. It's been a great educational tool, and glad you've made it onto the big stage Steve. Totally agree with Brent's intro about Steve being data driven and fact based commentary.
    • DM
      Dustyn M.
      30 August 2020 @ 20:29
      Although Banks cannot spend money from Fed bond purchases, is that true of all primary dealers that the fed conducts OMO with?
  • AP
    AJ P.
    30 August 2020 @ 07:36
    Oh boy...this guy is wrong in quite a few places. Blind leading the blind.
    • sm
      sylvain m.
      30 August 2020 @ 14:12
      Care to explain where the mistakes where made? I would love to learn more
    • AP
      AJ P.
      30 August 2020 @ 19:09
      10 yr yield went up in prior QEs. To do fiscal at the scale US govt does, they need fed i.e. QE. If unemployment remains at 10%, you think fiscal will stay at the sidelines. No...not going to happen. Fiscal at large is inflationary. Yes, near term dollar can push higher. But it is a game of relative growth and policy expectations between a pair. Gerome has been scared. He will whatever needed working with fiscal. Not a case of sub orbital dollar. SNB doesn't print currency for export. It is considered one of the safest currency. Plus a few more inaccurate statements, but you get the idea. It was entertaining to listen to, but people should always homework. Get the ideas from real vision, but always think for yourself.
  • SG
    Skyler G.
    30 August 2020 @ 18:12
    Only halfway through... The fed buying treasuries deflationary... What about Main-street lending program or buying Bond ETFs? If the banks cant use their cash from bond purchases, how can "Main Street" and the sellers of ETFs be getting "liquidity"? They are obviously much smaller programs but is the fed doing something similar with regional banks/black rock for these programs?
  • CW
    CC W.
    30 August 2020 @ 17:38
    I think this may be one of the most important interview conversations on RV since its beginning. Whether it works out as prescribed is one thing. But its content is put together logically.
  • ER
    Ernesto R.
    30 August 2020 @ 15:47
    Amazing still a little confused if it is going to be inflation or deflation try to be prepared for both scenarios thanks Guys for the interview and all the knowledge
  • KC
    K C.
    30 August 2020 @ 15:00
    For anyone thinking thru the claim that QE is in/deflationary and that it is or isn’t “money printing”, refer to this clarification from Brent: https://twitter.com/santiagoaufund/status/1299969930087989249?s=21
  • GH
    Gloria H.
    30 August 2020 @ 14:38
    Hoo boy. I enjoyed the clarity brought by both Brent and Stephen; after reading EVERY comment in the thread, however, I have many more questions than answers on the Fed’s QE processes and how they may/may not affect the big banks’ proclivities to lend due to fractional reserves. I agree with someone upthread who suggested that a deep dive with SOMEONE WHO ACTUALLY KNOWS THE PROCESS FROM THE INSIDE would be extremely interesting.
  • HK
    Henrik K.
    29 August 2020 @ 10:01
    Thanks RV for another great interview and good to hear two Americans take a more positive view on the USD as most of the bears on RV recently have been very US centric in their views. This interview raises some super important questions and makes some quite controversial assertions which I am not sure I fully agree with. Whilst I agree that banks can not lend out reserves and that surprisingly many economists still incorrectly believe in fractional reserve banking and. the money multiplier theory; I believe it is INCORRECT to say that QE is not money printing and that it reduces liquidity. Surely QE forces banks to print money through the deposits they provide to the holders of the securities that the Central Bank is acquiring? This provides liquidity, as we have clearly seen recently, although I do agree that it also reduces the liquid pool of trade-able Treasuries which could have significant ramifications in another risk off move. I think it is crucial that we get all this cleared up. In Precious Metals week (which I very much enjoyed – thanks!) we heard 1000 different ways of experts saying “Central banks are printing tons of money, debasing the USD/fiat, ultimately causing inflation and therefore Gold is going to the moon”; it is very confusing to now hear Steven say that QE is not money printing and is in fact deflationary and rather bullish for the USD….. I would love for RV to more specifically try to clear up some of these issues over the coming weeks e.g. 1. Is QE really money printing or not? How does it really work wrt Reserves etc.? Is it inflationary / deflationary depending on the approach to QE and the related fiscal responses and how are different asset classes / sections of the economy affected? How much have QE reduced the trade-able pool of Treasuries and what are the potential implications in a risk-on / risk-off move? 2. Inflation: is there really no consumer inflation in recent years or is CPI/PCE just the wrong measure? Interesting alternative measures (SGS etc.) suggest there is lots of inflation but that the Central Banks use the wrong measure (deliberately?). If inflation is like a nuclear reactor that can be controlled when running lukewarm but goes out of control when it overheats then is there a risk that if the economy is being steered on an incorrect and underestimating inflation measure we could get a much more severe overshoot of inflation once the coming balance sheet recession is over and the recovery begins in a few years time? 3. Gold. Papers such as Harvey & Erb’s Golden Constant and the measured in gold website suggests that Gold in real terms ,either inflation adjusted or vs a range of other goods and services, is not undervalued at all at the moment. Can we see some proper analysis on the fundamental value of gold (rather than endless technical charts showing trading trends and channels that are backwards looking and only really work in the rear view mirror…)? And given that so much buying of Gold is not from the US is it really relevant to always compare Gold with USD money supply and US interest rates / yields? Do we need a broader more international data set? 4. USD. Can someone pull the actual data together and show the relative money printing, M1,2,3 increase and fiscal / monetary reactions to Covid for the USA and key alternative currency issuers e.g. EU, UK, Japan, China? The view that the Fed is printing like crazy and debasing the dollar seems to somewhat ignore what everyone else is doing and nobody wants a very strong currency right now…. I think it would be great to get Professor Richard Werner and maybe Richard Koo on again to clear these issues up as they seem to have the best grasp on how central banks work and the impact of QE. And perhaps they can explain why endless QE and Fiscal deficit spending in Japan caused no inflation at all (not even in asset prices / stocks and real estate), all while maintaining a strong currency which I just don’t understand! Finally, maybe RV could task Lyn Alden with doing some in depth analysis on these topics also, as she seems the most data driven and analytical of the recent speakers!
    • NS
      Nick S.
      29 August 2020 @ 15:02
      A week of coverage on this from RV could buy me another 3.5hr of sleep/night !
    • EV
      Eugene V.
      29 August 2020 @ 15:13
      These are excellent requests :thumbsup
    • BT
      Billy T.
      29 August 2020 @ 15:31
      Can we get Ben Bernanke on here? He's got nothing going on and he would be able to tell us what QE does. May be hook him up to a lie detector so he has to speak the truth.
    • gc
      guillaume c.
      29 August 2020 @ 18:56
      Agreed, I would love to see these questions answered.
    • LP
      Luke P.
      29 August 2020 @ 19:39
      Very good questions and points to clarify that would be helpful.
    • PK
      Prashant K.
      29 August 2020 @ 22:08
      You wrote "I would love for RV to more specifically try to clear up some of these issues over the coming weeks" - It's a wrong expectation of RV as its just a platform for different markets opinions and markers are nothing but the "play of probabilities". This is why no one can predict markets as definitive means but rather just as a play of probabilities and i hope RV continues to provide a neutral platform for all these probabilities rather than trying to re-define the narratives to suit the trendy arguments. Again, Prof Werner, Rich Koo, Lacy Hunt, Tony Deeden or Lyn Alden ...etc won't END these questions but instead give their take on such probabilities and we tend to agree or disagree depending on our acquired understanding/bias of economic theories. This is precisely the reason i enjoy hearing different takes to keep entertaining such probabilities
    • tb
      thomas b.
      29 August 2020 @ 22:48
      When someone says no inflation, it depends on what they are measuring. https://chapwoodindex.com/
    • TN
      Tim N.
      30 August 2020 @ 13:52
      This excellent interview between Lacy Hunt and Grant Williams clears up much of the confusion (https://podcasts.apple.com/us/podcast/the-end-game-ep-6-lacy-hunt/id1508585135?i=1000487560045) . Basically Steven and Brent are correct in stating the reserves printed by the Fed are not money - these reserves are not a medium of exchange as they cannot leave the Fed. However, the Fed may push for these reserves to become a medium of exchange in the next crisis, which will then cause the hyperinflation everyone has been expecting. Once you understand this it all makes sense.
  • RZ
    Richard Z.
    30 August 2020 @ 01:07
    Great interview, just don't understand, if the banks have cash and then buy bonds just to then sell them to the fed for a lower quality asset (reserves at the fed), why would they do so in the first place?
    • JA
      Joseph A.
      30 August 2020 @ 06:18
      I guess there are 3 parts to this: 1. They will be making a profit while flipping these Bonds to the Fed 2. There really is not those many places that they can lend to - making loans involves risking capital , and the value of a lot of the usual collateral like RE is rather suspect. The economic outlook is rather bad at the moment 3. Eventually , something will be done to deal with the crisis- Fiscal stimulus, Govt programs etc and inflation will come up one way or the other, and the current 0 reserve requirement will be raised back to ~10% like before. When this happens, the reserves will come handy.
    • jc
      james c.
      30 August 2020 @ 13:43
      Exactly !! Please can someone answer your question. I suppose there's likely a gain on the sale to the Fed that boosts the commercial bank's profit ? And/or is the commercial bank speculating it will be able to use its Fed reserve credit to buy back from the Fed a greater quantum of Treasuries in the future at such time as the Fed becomes a net seller of Treasuries thus depressing their price ?
    • jc
      james c.
      30 August 2020 @ 13:49
      Whoops. didnt realise Joseph had already answered.
  • JR
    Jacob R.
    30 August 2020 @ 13:19
    Very good description of quantitative easing: https://podcasts.apple.com/za/podcast/warren-mosler-what-do-central-banks-do/id1375093518?i=1000484976716
  • LH
    Luis H.
    30 August 2020 @ 09:46
    This was a nice interview with clear language but to be honest, in the end, I had more doubts than at the beginning (which is not necessarily a bad thing). I agree that if FED buys treasuries from the banks that were already in the banks balance sheet and the proceedings stay in reserves that might not be inflationary (depending whether of not the bank uses these reserves to make more loans) However as I understand it FED can create money to buy treasuries issued by the treasury. The treasuries will sit in FED balance sheet. The dollars will go to the government. The dollars will not sit still in a reserve. They will be spent in subsidies, roads etc. How come that is not inflationary? I suggest RV deeply coverage of this theme
    • DW
      Dean W.
      30 August 2020 @ 12:04
      I may not understand it completely but it’s the Treasury department that decides how much bills, notes are bonds to issue, not the Fed. The Treasury has limits on how much they can issue based on budgets passed by Congress and based on tax revenue shortfalls. Also once the money is in circulation it may also be used by people to pay down their debt, which destroys money and is disinflationary. Most money is created by the banks using the magic of fractional reserve banking. So if bank lending is not increasing, there may be little inflationary pressure even if fiscal deficits are increasing, Note that the Fed has been practically begging Congress to get busy increasing their spending and deficits.
  • BS
    Benjamin S.
    29 August 2020 @ 16:37
    Interesting but confusing. If banks can't use the money the Fed gave them to purchase bonds the bank held, isn't that stealing?
    • RC
      Romesh C.
      30 August 2020 @ 08:08
      It is not 'stealing' because the reserve account is still an asset to the bank . I think the controversial part which has created debate in the comments is that the Fed gives the banks a credit to a reserve account rather than cash - but I don't think this really influences whether a bank will lend or not. Hopefully this is not as controversial when you think about it in accounting terms. We know the Fed is expanding their balance sheet - ie. they buy bonds (debit assets) and credit a reserve account (credit liabilities), hence expanding their balance sheet. If they bought a bond (debit an asset) with cash (credit assets) they wouldn't be expanding their balance sheet. The point for debate is whether this expansion of the Fed balance sheet achieves its purpose.
  • RD
    Rawleigh D.
    29 August 2020 @ 20:32
    Hey guys, Could someone help me understand why the banks would want lower rates? I get that banks collect origination fees and the like, so they aren't necessarily worried about lower rates; but they still collect origination fees at higher rates, and higher rates should help net interest margins. So shouldn't the banks want higher rates to compensate for the increased counterparty risk? Thanks
    • DP
      Don P.
      29 August 2020 @ 21:42
      in know nothing, except to say, if there is minimal lending now at current rates and we are in contraction, they make little money... I cant imagine more loans being taken if rate increase... They have to first GET loans, then worry about the rates to make more money... They'll have to get their cake< more borrowers>, and maybe wait to eat it< higher rates>.
    • JA
      Joseph A.
      30 August 2020 @ 06:23
      In addition to Don P. 's point -, on a much shorter time frame, the banks have made some UST purchases in anticipation that they will sell them to the Fed when the next round of QE happens. So they would want to make the flip at a profit.
    • RC
      Romesh C.
      30 August 2020 @ 07:55
      In addition to Don's and Joseph's points it will also help avoid loan losses
  • YB
    Yair B.
    30 August 2020 @ 00:40
    Mind blown!!! This is an amazing interview with some surprising ideas about the plumbing of the fed. Enjoyed it so much and planning to watch it again.
    • AP
      AJ P.
      30 August 2020 @ 07:42
      Both are only partially accurate. Exercise caution.
  • AH
    Attila H.
    30 August 2020 @ 07:08
    This was a very good conversation, thank you
  • GB
    Griffin B.
    29 August 2020 @ 19:45
    Great interview! I just don't understand his rational for why the banks would want the economy to crash?
    • AR
      Anthony R.
      30 August 2020 @ 00:52
      Because a crash would presumably hurt the probability of re-election for the current President - and so the prediction that they would do this presumes that this is the outcome they want.
    • JA
      Joseph A.
      30 August 2020 @ 06:25
      They do not want the economy to crash , I guess only the stock market, so that the fed will resume doing QE and they can flip the bonds that they have accumulated at a much higher price in anticipation of this. Anthony R.'s point would explain why the Dems might not want to pass bills that provide fiscal stimulus anytime soon.
  • BA
    Bruce A.
    30 August 2020 @ 02:52
    For those interested in more (and in my opinion better info) on QE, have a look and listen to the following: https://youtu.be/P1A0PjvrJFE Kevin Muir/ Patrick Ceresna's Market Huddle on Youtube (just released). The guest is David Bezic and the discussion is QE, Money Supply, Fed Balance Sheet, MMT etc.
  • PW
    PETER W.
    28 August 2020 @ 08:45
    Fantastic to get such a contrarian view on here from time to time - thank you RV. @Brett and @Steven - following on from your thesis, it would seem to me that the often cited argument in support of Bitcoin: "that it should explode in the face of massive QE", is flawed in that balance sheet expansion (incorrectly viewed as "printing") is not actually inflationary and where it would force the dollar higher (as you suggest) Bitcoin (together perhaps with other commodities for that matter) would be repriced lower in dollar terms. Is that your view as well? That Bitcoin is incorrectly marketed as an inflation-hedge and the Zorro against CB fiat debasement when in fact it may not work as advertised? Basically curious as to your thoughts on this topic.
    • SS
      Sam S.
      28 August 2020 @ 14:20
      If central banks are indeed willing do anything to fight deflation, then they will likely go through the currency debasement route to do so. Which is to say, Gold / Bitcoin / hard-assets are likely going to be good choices over the long term, but perhaps a little more volatile over the short term if a deflationary bust / crash / correction occurs.
    • TM
      The-First-James M.
      28 August 2020 @ 17:05
      Here's Raoul's direct response to that question: https://mobile.twitter.com/RaoulGMI/status/1299149923691175946
    • CD
      Chris D.
      29 August 2020 @ 01:23
      I think you are missing a trick here. If the USD goes down and down and down, there will be inflation for US-based people, paying for stuff in USD. If the DXY was at 20, and not 92, of course there would be giant inflation. No matter what the Fed is doing, or what Reserves anyone has etc etc. Now i'm not saying DXY is going to 20, i'm just illustrating that many people (and I have discussed this with Steve many times over the last year or so) forget nothing else matters if USD tanks to oblivion. And in this scenario I am 99% sure you want to be holding hard assets (one can argue all day which ones...) Now, Steve and Brent's view is that USD will strengthen, and so then one can use the opposite argument, if DXY goes to 120 (to just make up a larger number) then when added to the argument about Reserves not being money, this means deflation (or at least disinflation) is highly likely - for US-based people paying in USD (could be very different in Europe as the Eur would have devalued). If DXY was at 120 that would likely be bad for hard assets (although Brent would argue differently to some degree, depending on timeframe, as he is also long gold atm) Point is that it's a complex system, yes velocity of money, M2 etc do matter. - for sure they matter. But ultimately the release valve is currencies, and that is a relative game too (USD vs EUR vs JPY vs AUD etc)
    • PW
      PETER W.
      29 August 2020 @ 06:16
      Thanks for the replies - however, implied in them in is this assumption that continued QE will be inflationary and I understood Brett & Steven's thesis to be that it would have the opposite effect coupled with a strong dollar. So I'm still curious as to their view on how bitcoin currently markets itself as an inflation hedge in the face of impending currency debasement. I understand the macro arguments as they apply to currencies generally but also understand that perhaps, in the case of the USD, the outcome will be different simply because it is a major global reserve currency. To be clear, my point is not whether BTC/XBT is a worthwhile investment - I certainly don't want to go down that rabbit hole with the RV community - my question is whether the presenters feel that perhaps the marketing strategy (or principal argument oft cited) in favour of BTC/XBT is inherently flawed.
    • JC
      Jason C.
      30 August 2020 @ 01:38
      Bitcoin is an inflation hedge, regardless of how it markets itself. Whether that is the best argument for Bitcoin bulls to push is another question. It is also a hedge against financial system collapse and bank bail-ins. If the dollar sky rockets then Bitcoin bulls will change the characteristics of Bitcoin that they choose to emphasize.
  • PU
    Peter U.
    29 August 2020 @ 15:40
    First garbage interview from Brent. Van Metre's comments are filled with inaccuracies. He is a lightweight on economics and monetary theory. If you haven't viewed this yet, don't bother. Expected more from you Brent.
    • DG
      Dave G.
      29 August 2020 @ 17:34
      Can you enlighten us on some of your grievances? Right now your contradiction has no weight as you have not backed it up.
    • AC
      Aaruran C.
      29 August 2020 @ 18:15
      which inaccuracies in particular?
    • RA
      Robert A.
      29 August 2020 @ 22:43
      Peter, I’ve been with RV almost since inception and after having watched hundreds of videos found this one to be one of the best ones I’ve seen. I also think Brent did a great job in both the curation of this guest and in conducting the interview. Perhaps you could enlighten me as to how my view could be so juxtaposed to yours?
    • VD
      Violeta D.
      29 August 2020 @ 23:16
      I thought it was a great interview and it made a lot of sense. There's are two other interviews that provide more light on the topic. If you are interested look up the Grand Williams podcast interview w. Lacy Hunt from August 6th and with Mike Green from July 6th. Both of them where very helpful to me to understand it. They also answer many of the questions asked here, ex... How liquidity flows to the markets? Here are the links to those interviews. https://www.podbean.com/ea/pb-jr3bt-e23cce https://www.podbean.com/ea/pb-w9ebx-e63066
    • AR
      Anthony R.
      30 August 2020 @ 00:55
      Peter.....
  • DS
    David S.
    30 August 2020 @ 00:34
    I am skeptical of the "The Banks Are Going to Crash The Stock Market" conspiracy as well. The thesis is a little too amorphous for me to analyze. The stock market may/should markedly decline, but there are many other good reasons including the pandemic effects on the world economy. The better a country handled the pandemic the sooner and better its recovery. DLS
  • SS
    Stephen S.
    30 August 2020 @ 00:23
    I hear this, but given the last couple months how comfortable are you really in betting against inflation at this point?
  • DS
    David S.
    30 August 2020 @ 00:07
    If you are already skeptical there is no need to read this! Economist are paid to analyze, predict, and evaluate possible interventions in complex macroeconomic systems. The more complex the system, the more possible interventions will be offered and the least likely any interventions will be effective. As time goes on the complex macroeconomic systems changes for many reasons including the specific interventions. Simple inflation is easily understood by Dr. Friedman's quote: "Inflation is always and everywhere a monetary phenomenon." It is easy to see single asset inflation or deflation. As we start to add additional assets to our example it quickly becomes overly complex. Even with a static money supply the complexity increases as human preferences arises. When we expand our example to be a large, multi-asset economy the ability to analyze, predict and evaluate possible interventions is impossible. Outcomes are just a throw of the dice. Each intervention has intended and unintended consequences. If we reduce corporate taxes, how will the increased cash flow be spent? If we reduce taxes on the wealthy or the poor how will the increased cash flow be spent? (If I give $20 to a homeless person, I am sure it will be spent.) How will both affect government revenues? Politicians like the rest of us have agendas. What economic theory or pandering economist will help implement the politician’s agenda? The system is just too complex. To analyze, predict and evaluate future inflation, disinflation, or deflation of the whole US economy much less the world is impossible. All this rambling is to emphasis as an investor, I know no one else knows either. Look at the Feds history of predictions. I will not get caught in betting on one complex theory or the other. As an example, I will not get caught up in predicting the real return of a bond. I can guess, but I cannot know. I either buy or pass. I will not get caught up in the theory that the Fed does not enable inflation if the banks can increase loans. The next year looks to be very volatile. Be careful with your investments and safe with your health. DLS
  • MD
    Matt D.
    29 August 2020 @ 23:57
    I enjoyed this interview thanks Brent and Steve. The interesting thing is that STILL - there is quite stark disagreement in the comments section, some without reason, some with explanation. Funny that considering the supply of money should be a basic, well understood principle ? What are the assumptions I wonder? The starting point often is the FED - assumed to be the best place since they "print" or supply the money - but then they are reactionary. I notice Raoul starts at the business cycle and I believe JSnider at the Eurodollar, which could be bank or non-bank - that might make more sense? It seems too that people disagree on the facts - so not on second order effects (lending, inflation, purchases, etc etc) but on the first factual steps of credit or money creation. A side point I just thought of - globally emergent properties in a complex system. I better think that through and keep it for another day. Anyway - perhaps someone needs to work this out. You'd think someone on the inside would know - not a Fed official (the interview of Bill White earlier in the year was interesting) ? Someone could track one USD - from the Fed (or from the US Govt) to a US Prime Dealer to xxxxx to an Aussie bank to an AUD to me here about to go buy a paper.
  • ac
    adam c.
    29 August 2020 @ 19:51
    I hope this is not a stupid question but what happens when the bonds on the Feds books mature.
    • MS
      Mark S.
      29 August 2020 @ 21:04
      balance sheet shrinks (unless they buy a new bond)
  • WA
    Wissam A.
    28 August 2020 @ 09:38
    Great discussion Brent and Steven. So if the "Reserves" are not fungible, or not re-used as cash to monetize UST's, and they are not allowed to leave the vaults of the FED then I have two questions: 1) From 2008 until today the FED has accumulated 5.5T in UST's plus MBS. During that time bank reserves increased by 2.7T. If the FED buys 100% through the banking system, and the "Reserves" are not fungible and never leave the FED's vaults, then how did the FED accumulate more than twice bank reserves worth of UST's plus MBS? 2) In march of this year the FED in two weeks bought $1.4T in UST's from the primary dealers to open up balance sheet capacity on their books so they can buy UST's as they were being sold. If the FED did not do this you would have more selling in UST's and rates would have spiked more. The primary dealers ran out of balance sheet capacity to buy treasuries so the FED came to the rescue so it looks to me it is monetization. Can RV bring David Andolfatto and Lee Adler who show that "Reserves" are indeed used to monetize debts. Also bring in Ray Dalio who is on the camp that QE is monetization of the debt.
    • CO
      Craig O.
      28 August 2020 @ 15:41
      I have the same question. So does Lyn Alden.
    • AB
      Aditya B.
      28 August 2020 @ 17:47
      I too have this question. 10 min into the interview and the discussion is that "FED buys bonds from banks". huh? I thought Fed bought bonds directly from the GOVT. I agree that more recently it may have been buying commercial bonds from banks , but what about before that ? why do banks have to sell the bonds to their boss??
    • CW
      Collin W.
      28 August 2020 @ 18:24
      Agree. Please bring in the other side of the discussion.
    • CD
      Chris D.
      29 August 2020 @ 01:08
      Aditiya - the Fed 100% for sure does not buy DIRECTLY from the US Gov (i.e. Treasury) at the moment. This is very clear, and as per the Fed Reserve Act. Now the Fed DOES buy bonds from banks (who own most of the PDs, e.g. JPM, BOA are PDs too), who may have only held that bond for days, but it's still not direct from the Gov. There is a market pricing event. There is no debate on the above, it's incredibly well documented on the Treasury website with all the bond auctions. Honestly there is 0 debate on this. Some people say that the 'few days' that go by before Fed buys the bonds mean it's monetising debt directly, but this is forgetting that there was a market pricing event. The confusing parts (and there are many) are not this part. Put the time in to research properly, all the info is out there.
    • WG
      Wade G.
      29 August 2020 @ 19:33
      Good back and forth... Chris D, I understand your point but I'm curious how you would characterize the "market pricing event" and resulting prices? I'm not being flippant. I understand your point of clarification but I myself wonder how to think of the prices? If the FED is undertaking big QE and they announce their intended time frame, amounts, and maturities targeted for purchase, isn't that just a look thru for the PDs and they become prince insensitive buyers. Anything u can say to give this some color would be appreciated.
  • MH
    Muddshir H.
    29 August 2020 @ 19:05
    Great work Brent
  • MH
    Muddshir H.
    29 August 2020 @ 19:04
    Outstanding interview
  • DG
    Dave G.
    29 August 2020 @ 17:19
    I have to say this was an absolutely fascinating conversation and makes a ton of sense. Brent asked all the right questions and the answers were concise and digestible. Thank you both for probably one of the best interviews I've seen this year. Cheers.
    • DG
      Dave G.
      29 August 2020 @ 18:28
      Steve -- What kind of time frame do you see this scenario playing out as we have already seen banks starting to restrict credit. 1, 2, or 3 years? Thanks
  • DB
    Daniel B.
    29 August 2020 @ 17:54
    Fantastic, we want more content like this.
  • MH
    Michael H.
    28 August 2020 @ 23:48
    I follow what you are saying... but I doubt banks are doing this in spite.... Maybe they just realize lending is not profitable right now... at least risk is not worth the reward. They are going to find a new borrowing base just because rates are 25-50bps tighter? They are getting crushed on NIM, lower interest rates make that worse... they want to cause another meltdown for a treasury trade? Wouldn’t a sell off just make defaults worse and loan lose provisions to spike further? So they will just bank on trading vol and positioning post Fed to capitalize on historic FICC earnings every quarter? Maybe I missed something ... overall great convo, just got lost on some details
    • WG
      Wade G.
      29 August 2020 @ 16:39
      We'll never know. Unfortunately, I've concluded u can't trust them to be constructive for broader interests, only their own. So sure, a sweeping downturn is bad for business for a few quarters, and might risk additional regulations. But if they know they'll be bailed out, then the risk is not existential, and they make a killing on forced fire sales and collateral claims, and start all over again. First thru inflation, then thru deflation... until they own it all. I don't feel strongly about this. I genuinely don't know.
  • GK
    Gautam K.
    29 August 2020 @ 14:57
    Brilliant minds!
  • GB
    Gregory B.
    29 August 2020 @ 14:46
    I think you have left one piece out of the conversation that should be addressed: Banks have the capacity to lend, the problem is the pool of credit worthy borrowers. Companies, individuals and municipalities, etc. are carrying too much leverage and are not in my judgement attractive borrowers. In addition many are unwilling to take on more credit - it doesn’t help their economic situation. The way out of the current economic circumstance is through bankruptcy- across the board. Bankruptcy results in clean balance sheets and borrowers who have the capacity to take on credit and engage in new economic activity. Short of an accelerated bankruptcy process we will spend years de leveraging and as a result in a deflationary scenario. Allowing assets to get reconstituted and placed in the hands of entrepreneurs and businesses with new ideas on how to recombine them into productive operations i think is really the only policy solution that may ultimately lead us out of a grinding, enduring deflation.