The COVID fiscal shock resulted in the US government issuing $4.4 trillion in new debt since March 2020, but the real market value of total US government debt is actually $400 billion lower in December 2022 than it was in March 2020, meaning that inflation and the rise in interest rates have effectively 'inflated away' all the new debt issued for COVID spending

The Federal Reserve had $1.2 trillion in unrealized losses on its balance sheet as of 2022, consisting of approximately $800 billion in losses on Treasury holdings and $400 billion in losses on mortgage-backed security holdings

During the 2008 global financial crisis, US government securities produced the best asset returns despite the crisis originating in the US, because global investors rushed to safe-haven dollar assets, providing exceptional demand for Fed liabilities.

Central bank independence should be defined as the ability to raise interest rates even when the government doesn't want rates to be raised; governments, as large borrowers, always prefer low rates, so true independence means resisting political pressure to keep rates low despite fiscal concerns

The Bush Administration's Housing Support Act of 2008 authorized the Treasury to purchase agency mortgage-backed securities, and this program was subject to Congressional oversight, political accountability, and limits on the amount that could be purchased; by contrast, the Federal Reserve's subsequent MBS purchases lacked these governance constraints and resulted in much larger positions with similar fiscal distributional consequences

There is a tipping point for every country—determined by the demand for central bank liabilities and the demand for that country's currency—beyond which large central bank losses require either monetary financing (printing money) or inflation to service the debt; the United States is 'very far away' from this tipping point due to global demand for US dollar-denominated assets

The market value of US government bonds has shifted from trading 8% above par (108) in March 2020 to trading 8% below par (92) in December 2022; however, these bonds will mature at par (100), so the current market losses are transitory and will be reversed as bonds approach maturity

Governments that lack credibility and reputation for fiscal responsibility will face much higher inflation and currency instability even at relatively low debt-to-GDP ratios, while credible governments can sustain high debt ratios with low inflation; the fiscal theory predicts this outcome because inflation expectations depend on whether markets believe the government will generate future primary surpluses

During the Volcker era (early 1980s), the US Treasury was issuing 30-year bonds at 12-14% coupon rates; if inflation came down to single digits as intended, these bondholders would realize 12% real returns, which no country could sustainably finance and would require either inflation to stay high or fiscal primary surpluses that would be impossible to achieve

Milton Friedman and John Maynard Keynes, in their popular writings on money printing, consistently described the government—not the central bank—as doing the printing; Friedman and Keynes were essentially describing a fiscal dominance scenario where the government forces the central bank to monetize deficits

If repeated shocks the size of the COVID shock were to occur, the US would eventually run into inflation problems as the fiscal adjustment capacity is exhausted; the current favorable outcome is partly a result of being able to absorb a large one-time shock, but repeated shocks would overwhelm the system

The demand for securities (bonds) in financial markets is fundamentally important for macroeconomic stability because it provides the 'lubrication' that allows financial markets to function; government debt serves as a benchmark for private corporate debt markets, expanding the ability to finance deficits without inflation

During the COVID crisis, the Fed reached nearly 2 trillion dollars in Treasury holdings on its balance sheet while the Treasury was building up deposits at the Fed rather than immediately spending money, effectively providing outright monetary financing until Congress was ready and tax dates had been postponed.

The Fed should have a governance structure that puts pressure on it to shrink its balance sheet when it is not needed, similar to how the Treasury faces pressure through the debt ceiling; without such constraints, the Fed's independence allows it to expand indefinitely without political accountability.

The real limitation on the amount of losses the Federal Reserve can sustain is inflation: once cash flow imbalances force the Fed to effectively monetize its losses, at some point people stop expecting the Fed to maintain price stability and inflation expectations unanchor.

In Argentina in 1988-1989, monthly inflation reached 195.5% (not annualized), demonstrating that high inflation is a fiscal phenomenon driven by government deficits rather than central bank money printing alone, since the government lacked a domestic debt market and was forced to monetize spending directly

During 2020-2021, the Federal Reserve's mortgage-backed security purchases functionally constituted a monetary transfer to wealthy homeowners: the Fed purchased MBS at high prices as homeowners refinanced into lower rates, with 44% of the Fed's MBS holdings issued in 2021 and a large portion bearing coupons of 2.5% or less, while the Fed will realize $400 billion in losses on these holdings when interest rates rose

If a price level jump occurred as predicted by fiscal theory following a major fiscal shock, prices cannot actually jump instantaneously because they are sticky; instead, inflation rises gradually over time due to the lags and inertia in how inflation is measured and how prices adjust

Renters bear the cost of Fed-enabled housing price inflation through rising rents, particularly in the latest CPI data showing rents rising at 8.8%, whereas homeowners benefit from asset appreciation.

Before the 2008 global financial crisis, the Federal Reserve's balance sheet contained only about $20 billion in bank reserves despite the banking system functioning normally, demonstrating that the supply of central bank money was demand-determined, not supply-determined; people who wanted physical dollars could get them at a price