Does anyone know what we are going to get when the Fed begins the downsizing of its balance sheet in earnest?We have gone through this about five times in our history, government goes broke and we do regime change. There will be bond defaults. The Fed has a large balance sheet filled with government debt because the senate entered bankruptcy in 2009.
The answer is no.
No economy has ever been through this. It is a massive unknown.
At the same time that the Fed is reducing its balance sheet by not renewing its ownership of bonds as they come due over the next two years, it is also embarking on a process of raising interest rates back to more normal levels.
The result is well predicted. A new monetary regime and defaults in the process. And, thinks to my quick wit, we can construct the default machine using the new regime, the sandbox. The only thing we fear is fear itself, mainly a bunch of hysterical MIT basket weavers.
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