Again, for the back row, fiscal dominance is when the monetary authority can't run an independent monetary policy aimed at its mandate and has to subjugate its mandate to fiscal objectives. If this were the case in the US the Fed would have never been able to raise the policy rate by 500bps in 12 months and reduce the balance sheet (ie push Treasury ownership into the market) by nearly $2T.
@mark_dow @LynAldenContact I’ve watched a lot of interviews with you speaking on fiscal dominance. Would love to hear your thoughts on this post. Thank you
Fed had to pivot from QT to QE in 2019 in response to the repo spike (a key funding source for Treasuries). Fed had to bail out the Treasury market when it went illiquid in 2020. Fed had to provide liquidity to banks underwater on Treasuries in 2023 despite trying to tighten. Fed balance sheet will bottom higher this cycle amid unusually large fiscal deficits, whether CPI is on target by then or not. #FiscalDominance
@LynAldenContact @DerivativeYield @bitlinc @mark_dow They have lots of levers they can pull as long as there is no systemic event. Here is one example: Collateral prepositioning + BASEL rules + SLR relief = considerable Bank demand for UST.
@Stimpyz1 @DerivativeYield @bitlinc @mark_dow I'd argue that SLR relief, especially if done when price inflation is over target, would be an example of the Fed having to shift policy around the fiscal issue. The chain of collateral prepositioning + BASEL rules + SLR relief is similar to the 1940s playbook.
@LynAldenContact @Stimpyz1 @DerivativeYield @bitlinc @mark_dow They have no intention of doing SLR relief such that banks will be able to punt medium and long term treasuries. To think otherwise is being tone deaf to the HTM situation today and the SVB caused regulatory barn door shutting that will discourage duration buying.
@dampedspring @Stimpyz1 @DerivativeYield @bitlinc @mark_dow I agree with your point, but the volatility on duration treasuries is a lot less at 4-6% yields than at 1%, so especially with various standing facilities to ensure availability of liquidity between Treasuries and reserves, SLR relief could be an option for Treasury warehousing.
@LynAldenContact @Stimpyz1 @DerivativeYield @bitlinc @mark_dow This isn't Japan or China. Banks are private entities in the business of making money. They won't warehouse shit at these levels of yields, carry and term premium.
@dampedspring @LynAldenContact @DerivativeYield @bitlinc @mark_dow The degree of existing regulation on banks (running to millions of pages) would make Mao blush. They will do what the rules tell them they have to do, just like you and I do Andy.
@Stimpyz1 @dampedspring @LynAldenContact @DerivativeYield @bitlinc @mark_dow Play Argentine fiscal games, win Argentine "bank regulatory suasion" prizes. US TBTF banks will come to find the full price of Uncle Sam saving them in 2008; IMO they probably won't like the terms (on a real basis at least):