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The Fed has a dilemma, almost a race, between two things as they raise rates here.

1) Raising rates generally results in tighter borrowing standards on a lag. This can reduce lending-driven money creation and lead to disinflationary demand destruction around the margins.

https://void.cat/d/LciK171UhVRj6yZuNHk2u7.webp

2) At high public debt levels, raising rates also increases federal interest expense, which increases the fiscal deficit, which is a source of ongoing inflationary stimulus into the economy.

https://void.cat/d/FX7vWUrUF4kiNidN1g5PQ3.webp

In the 1940s, inflation was fiscal-driven and public debt was high.

In the 1970s, inflation was mostly lending-driven and public debt was low.

Currently, the Fed is using a 1970s-style playbook to deal with 1940s-style fiscal-driven inflation.

https://void.cat/d/CJDEwxkbWBj3zqyq4i9rW1.webp

https://void.cat/d/UQ2mm8e1cHXEjJiypg79Eu.webp

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Discussion

DETERMINISTIC OPTIMISM 🌞 2y ago

Great stuff ⚡️

BitBurn 2y ago

Nice to see her over here. She's a boss...

Andruw 2y ago

Popcorn

ryanjordan 2y ago

Awesome ⚡️

R̸̘̰̘̈́͑̚e̶̪̥̲͖̊̽̈́͒d̷̨͉̯̀͌̈́̚a̶͕̖̿́̏̏c̸͖̫̋̆̈́ť̷̛̖̜̼̘̍e̸̳̯͋̀d̸̠̳̖̣̤̋́̈́͝ 2y ago

I just wanted to say I love the longer post format here compared to Twitter. Thanks lyn!

RamenCoffee 2y ago

I don't understand how higher debt service is inflationary.

Lyn Alden 2y ago

A fiscal deficit is a surplus for the private sector. Higher debt service results in a larger deficit, which means more money will enter the economy through the interest rate channel.

The Bitcoin Commons 2y ago

Basically, the treasury, which already runs a fiscal deficit, to pay the rising interest on its bonds and other debts, needs to issue more bonds, which, if they are bought by the FED, is basically money printing. Correct?

RamenCoffee 2y ago

I see, if the money doesn't come from taxes.

However, in the aftermath of 2008, they did QE but didn't lead to inflation because the $ went to rich bond holders (that's my probably flawed understanding). In 2020 the money went to plebs which led to inflation.

So, like, if you pay higher debt service, doesn't that repeat the 2008 model ?

***Disclaimer*** I'm an irredeemable idiot.

pierre97 2y ago

Great explanation thank you

someone 2y ago

Is there a solution to this situation then? Or is the gov going towards debt spiral and hyperinflation?

Lyn Alden 2y ago

The 1940s solution was 1) hold rates low despite high inflation to inflate the debt away, 2) ban gold and do other capital controls to reduce speculative attacks on the currency while rates are below inflation and 3) perform fiscal austerity after the war.

Good luck if they try that today.

nostr.build 2y ago

= rekt

Charlie 2y ago

Lyn, based on what you’ve said, is the obvious playbook for todays inflation just inflict war for a rearranging of resources & IOUs, if increasing rates only exacerbates inflation? Obviously if we become more productive and cost effective that would be the ideal scenario.

What is stopping us from creating goods and services more productively today?

Tom Samuel 2y ago

Ignorance and arrogance cannot be cured.

R_tour 2y ago

It looks like it’s all down hill from here. Better negotiate the terms of surrender with #Bitcoin

Bitcoin_Rising 2y ago

Off topic but thanks again for the Will Durant reading suggestion. From there I went to his Western Civilization, our Oriental Heritage, on Audible. Magnificent reminder of how history should be written, whic contains a wonderful discussion of Egypt.

Michael R. Sullivan 2y ago

Guys, we are so fortunate to have Lyn on here, let's zap her into oblivion to make sure she knows how grateful we are for the value that she produces 💜⚡️💜⚡️

BilboBigBagz 2y ago

Yikes what a shit show

Riley 2y ago

The Fed wants to inflate the debt away. It's quite simple.

They're going to inflate it away and harm the little person in order to maintain the status quo. The little person should be exiting the USD. Vote with your money and don't hold dollars.

Blue Collar Bitcoin 2y ago

Awesome Feb letter Lyn.👊

zach 2y ago

Great post. Quite a dilemma. Does anybody have that copy of the 2023-style playbook laying around? We can send it off to them so they don’t go and do anything stupid!

oobiyou 2y ago

Spot on analysis of the current US fed playbook.

#[0]

Brunswick 2y ago

The "true inflation" adjusted interest rates would consistently be below zero, possibly by as much as 5%. This means the banks are effectively giving dollars away and they who can lend huge amounts of credit are relying on the cantillion effect to fund their growth and expansion abroad.

Moss 2y ago

Inflation is fatal, just because the rate hike slowed down in February, and now inflation has rebounded again. Monetary policy has done its best, but fiscal policy has not played a greater role. Too much reliance on monetary policy will lead to economic imbalances, and inflation will rebound if you are not careful.

Len AKA The Lengend⚡ 2y ago

The Fed have painted themselves into a corner. And on top of this, the debt ceiling needs to be addressed and when it is raised, Congress will use that to go further in debt.

Default of debt will happen by the end of this decade.

QW 2y ago

Doom Loop imminent

edifyr 2y ago

Two ways to pay the debt. 1. Inflate our way out. 2. Default

Global sovereign debt default imminent.

TeamBitcoin 2y ago

🤙🏻⚡️

Thank you, Sir. 2y ago

Thank you for the note, Lyn.

Why did tightening lending standards front-run the effective interest rates this cycle? If one feeds the other, could they ever even out like they did in years past?

CHS 2y ago

#[0]

DaKicksta 2y ago

Worst of two worlds..

dcorrelate_ 2y ago

Great Summary!

Erik The Decentralist 2y ago

⚡⚡💪🏼⚡⚡ 🙏 TY Lyn

HashTrash4Cash 2y ago

I was thinking about this the other day. I wanted to know something like how much will interest expenses on the debt go up every quarter for the next few years assuming rates stay high and the duration mix stays the same. i.e. what does the cash flow pain curve look like for the next few years. Has anyone written about this?

Grand 2y ago

Nice Lyn, you brought your data to nostr :D

MSTR383 2y ago

You have literally been saying this for at least a year. It’s so simple, yet many can’t grasp it. Humans are wild. Good stuff as always, Lynn!