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Peter Stella, a former head of the Central Banking Division at the IMF, shares insights into the relationship between fiscal and monetary policy based on his extensive experience dating back to the 1980s. He highlights the significance of fiscal dynamics in countries like Argentina where high inflation rates reflected underlying fiscal challenges rather than purely monetary factors. Stella's work emphasizes the pivotal role of fiscal policy in understanding inflation dynamics.
Stella discusses the fiscal theory of the price level, challenging traditional views that inflation is solely a monetary phenomenon. He explores how government fiscal policy influences the price level, suggesting that the government's ability to finance deficits through various means, such as issuing bonds, impacts inflation dynamics. By reconciling fiscal theory with traditional monetary views, Stella advocates for a comprehensive understanding that incorporates both fiscal and monetary elements.
Stella delves into the implications of central banks' unrealized losses, particularly in light of the Federal Reserve's substantial losses on its balance sheet. He critiques the Fed's balance sheet expansion post-global financial crisis and argues that earlier and more significant shrinkage could have mitigated subsequent losses. Stella also evaluates the Fed's response to the COVID crisis, highlighting the necessity of monetary support while cautioning against prolonged balance sheet enlargement.
The podcast delves into the Federal Reserve's accumulation of mortgage-backed securities (MBS) and its implications. In 2021, with house prices rising significantly, the Fed's MBS purchases primarily stemmed from reinvesting mortgage prepayments. This led to a scenario where homeowners refinanced mortgages at lower rates, causing the Fed to acquire new MBS. However, as interest rates rose, the MBS values plummeted, impacting anyone holding MBS, creating a wealth transfer from taxpayers to homeowners.
The discussion shifts to the fiscal implications of the Federal Reserve's actions, leading to a deeper exploration of central banking and fiscal policy interplay. Examining the Fed's sizeable balance sheet and payment of high-interest rates raises questions about the boundary between monetary and fiscal policy. Insights spotlight the ramifications of Federal Reserve's losses on inflation and fiscal dominance, emphasizing the importance of a country's ability to finance central bank losses amidst shocks.
Peter Stella, Former Head of the IMF Central Banking Division, joins Joseph Wang, former senior trader for the New York Fed and author at Fedguy.com, and Jack Farley for a wide-ranging discussion on:
-what really causes inflation
-monetarism, fiscal theory of the price level, and modern monetary theory (MMT)
-the unrealized losses on the Fed’s balance sheet
-why yield curve control likely won’t be necessary (or so Peter argues)
-the longer the duration of a governments’ debt, the less inflation is required to inflate it away
-when a central bank incurs unrealized losses, who “wins” and who “loses”?
Filmed on March 29, 2023.
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Follow Joseph Wang on Twitter https://twitter.com/FedGuy12
Joseph Wang’s writings: https://fedguy.com/
Joseph’s latest piece, “Ameridollars”: https://fedguy.com/ameridollars/
Peter Stella on Twitter: https://twitter.com/Stellar_Consult
Peter Stella’s work: https://www.centralbankarchaeology.com/
“Do Central Banks Need Capital?” by Peter Stella:
https://www.imf.org/en/Publications/WP/Issues/2016/12/30/Do-Central-Banks-Need-Capital-2260
Follow Jack Farley on Twitter https://twitter.com/JackFarley96
Follow Forward Guidance on Twitter https://twitter.com/ForwardGuidance
Follow Blockworks on Twitter https://twitter.com/Blockworks_
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https://blockworks.co/event/permissionless-2023
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Timestamps:
(00:00) Intro
(00:15) Peter Stella's Background At The International Monetary Fund (IMF)
(03:55) Joseph Wang On The Flaws Of Monetarism
(05:52) Milton Friedman: It's The Government That Prints Money
(07:56) The Fiscal Theory Of The Price Level
(13:38) Modern Monetary Theory (MMT)
(24:12) Real Value Of U.S. Debt Is Lower Now Than March 2020
(37:33) Permissionless
(38:38) The Fed Has Huge Unrealized Losses On Its Balance Sheet
(45:29) Details About The Fed's Mortgage-Backed Securities (MBS) Purchases In 2020
(51:51) Did The Fed Help Wealthy Homeowners Refinance Their Mortgages In 2020?
(54:21) Blockworks Research Plug
(55:22) When The Federal Reserve Has Unrealied Losses On Its Balance Sheets, Who Loses and Who Gains?
(01:13:50) Joseph Wang's Summary Of This Conversation
(01:15:08) Yield Curve Control and Potential Debt Death Spiral
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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