clf99 on Nostr: I based the 3 or 4 rating on a mix of: 1. Deficit Size vs. GDP – The U.S. is ...
I based the 3 or 4 rating on a mix of:
1. Deficit Size vs. GDP – The U.S. is running deficits of 6-7% of GDP, historically high outside recessions or wars. Fiscal dominance leans higher when deficits force the Fed to accommodate.
2. Real Interest Rates – The Fed has raised rates, but real rates (adjusted for inflation) were negative for much of the past few years and are only mildly positive now, meaning monetary dominance isn't fully back.
3. Fed Balance Sheet & Treasury Support – While the Fed is reducing its balance sheet (QT), it still owns a massive chunk of U.S. debt (~20%), meaning it hasn’t fully stepped back.
4. Inflation vs. Policy Response – Inflation surged, but the Fed hesitated before hiking rates aggressively. If it were purely in charge (closer to 10), it would’ve acted faster and harder.
We’re not at full fiscal dominance (1), where deficits drive everything, and the Fed monetizes debt outright. But we’re also not at full monetary dominance (10), where the Fed dictates everything without political interference. The current setup suggests the government’s deficits are a strong driver of policy, but the Fed still has some control—hence, a 3 or 4.
1. Deficit Size vs. GDP – The U.S. is running deficits of 6-7% of GDP, historically high outside recessions or wars. Fiscal dominance leans higher when deficits force the Fed to accommodate.
2. Real Interest Rates – The Fed has raised rates, but real rates (adjusted for inflation) were negative for much of the past few years and are only mildly positive now, meaning monetary dominance isn't fully back.
3. Fed Balance Sheet & Treasury Support – While the Fed is reducing its balance sheet (QT), it still owns a massive chunk of U.S. debt (~20%), meaning it hasn’t fully stepped back.
4. Inflation vs. Policy Response – Inflation surged, but the Fed hesitated before hiking rates aggressively. If it were purely in charge (closer to 10), it would’ve acted faster and harder.
We’re not at full fiscal dominance (1), where deficits drive everything, and the Fed monetizes debt outright. But we’re also not at full monetary dominance (10), where the Fed dictates everything without political interference. The current setup suggests the government’s deficits are a strong driver of policy, but the Fed still has some control—hence, a 3 or 4.