An interesting aspect of this is that the endless printing of money in the last few years was a sort of stress test of modern monetary theory, which has been seeing lots of discussion in those same years. I never quite understood how this theory would work while avoiding inflation, and what's happening now seems to at least be related - https://www.nytimes.com/2022/02/06/business/economy/modern-m...
Conceptually the answer in the theory is to suck up the excess money with taxes, which of course is not going to fly in the US. But maybe this inflation will make that more viable in the future:
"Ms. Kelton and her colleagues make clear that the pandemic relief packages did not follow one of M.M.T.’s key tenets — they did not try to account for resource constraints ahead of time. In an M.M.T. world, the Congressional Budget Office would have carefully analyzed possible inflation ahead of time, and lawmakers would have tried to offset any strain on available workers and widgets with stabilizing measures and tax increases."
An important point to keep in mind when talking about MMT in a policy setting is that the people who will implement it don't care about theory and will make a series of short-term politically expedient and/or vaguely corrupt decisions. If they implement MMT, there are good odds that it will just look like money printing.
It doesn't really matter what the academic plan is, the policy isn't going to follow it. Much like how interest rates were supposed to rise after being dropped to emergency levels a decade or so ago and instead a 25 bps rise is front page news.
All the politicians/relevant voters are looking for is a green light to hand out money and some buzz to say that it'll make everyone better so ignore the doubters. If they cared about good economic policy the last few decades would look very different. The dominant ideology is that centrally planned interest rates are a good idea, and that is questionable.
Yeah, happened with both monetary policy as you observe, and with Keynesian fiscal policy - deficit spend to cushion and shorten downturns, then contract govt spending and pay down the debt during good times, so that you can afford to deficit spend again in the next downturn.
Makes sense in theory, but the second half doesn't always happen b/c politicians like buying votes with govt spending (either via under-taxation or over-spending, to the extent those aren't the same thing).
Or alternately raise taxes in the good times (rather than interest rates) and pay down that debt... which at least in the US we've got one political party dead set against at all costs.
A generation ago, progressive cycles of deficit spending and taxation had put the top tax bracket in the US at 90%. Still, there was persistent inflation - and worse high unemployment.
The belief was that the Federal Government had grown too large in the economy and needed to be "starved". To what extent government austerity vs. new monetary policy moved the needle for the US economy is unknowable. However many Americans of that generation feel that the starve the beast approach was correct.
If you talk to Americans opposed to new taxes, their opposition is usually based on the idea that the government will waste the money in one way or another. Even those on the left in favor of taxes are often in favor of taxes for redistribution purposes. It's rare that anyone pitches the government as competent outside of military spending, and even then there are many asterisks on 10k light bulbs in submarines.
If you want Americans to agree to taxes you'll need to change the perception of government competence.
> A generation ago, progressive cycles of deficit spending and taxation had put the top tax bracket in the US at 90%. Still, there was persistent inflation - and worse high unemployment.
AFAIK the "90%" rate is highly misleading because at the time there were a lot of deductions that bring the effective rate much closer to today's levels. We can see this in the federal tax receipts as % of GDP, which remained mostly flat despite the top bracket dropping from "90%" to 37%
"A generation ago, progressive cycles of deficit spending and taxation had put the top tax bracket in the US at 90%."
This is incorrect.
The 90% tax rate (and other notably high tax rates from that period) were temporary measures explicitly enacted to discourage war profiteering:
"The crisis of World War II led Congress to pass four excess profits statutes between 1940 and 1943. The 1940 rates ranged from 25 to 50 percent and the 1941 ones from 35 to 60 percent. In 1942, a flat rate of 90 percent was adopted, with a postwar refund of 10 percent; in 1943 the rate was increased to 95 percent, with a 10 percent refund." [1]
These were not tax rates analogous to any of our normal, peacetime rates and they were not enacted as progressive policy measures.
It is misleading and disingenuous to make any comparison between the tax rates we choose in modern peacetime which arise from political decisions about relatively progressive vs. regressive rates, etc., and these administrative rates designed to combat war profiteering and other behaviors related to a wartime economy.
No, but there is a method to the madness. Military units are often given an allowance for the year. One of the responsibilities of a commissioned officer is to often manage the unit's finances. Being in the Navy, my Bosun manage my aviation fuel division's finances. The captain of the ship manages the ships finances. Or at least, they sign it all off. If units do not use their budget, their budget get slashed last year. Essentially money mismanagement comes down in many way to some rules implemented awhile back (80s I believe during the Reagan admin). If a government agency or group does not use the full amount allotted, then they are at risk of loosing some next time they are allotted money. What this has done is create a system that encourages government agencies and military units to use up the budget no matter the cost. You don't wanna be the guy who had money left over last year, so your budget got cut, not it is this year and you had 4 major equipment casualties and because your shortened budget, can't afford for the unit to buy parts. Then, this makes you looked incompetent and hurts your career.
This is why the fuels division I was in, we often bought new desk chairs every year and $500 pocket knives and parts we would never need. Literally had to throw parts away to make room for the new parts.
Nope, but the military gets a pass in most years as at least being competent. Most Americans believe that most government agencies are both incompetent and profligate.
That's too broad a brush. I'm against militarism, but what engagement against conventional forces has the US military lost in the last 20 years?
I can't speak to dealing with insurgencies but it's clear to me that a mix of various administrations policies was to blame more than military effectiveness.
I mean was it the military or Paul Bremmer and co who disbanded the Iraqi military and unleashed a lot of chaos?
I don't want to say yes but damn if we don't have a lot of military might, and as much as an American I want to say stop spending it who will fill the void? We're probably the least bad of all possibilities, and if you disagree, please teach me because I'm legitimately open minded!
The first is that other Western countries could pick up the slack instead of having it fall disproportionately on the US. It only got the way it is because the others were mostly bombed out after WWII and that's no longer the case.
The second is that if the US spent less and did less military interventionism, adversarial countries might not feel the need to spend as much either, and then the balance of power stays the same while everyone spends less money on bombs and warships.
The US is the only one who can initiate this because they're the only ones who can reduce military spending without being threatened even if others don't.
The perception is created by billionaires buying "news" media to spread propaganda to get people to vote against their own interests, leading to "hurts itself in its confusion" attitudes like "keep the government out of my Medicare".
The Kochs, leaders of the "small government" movement are the heirs of a billionaire whoade his fortune building oil refinery for communist USSR government. They only dislike government when it helps the people instead of the oligarchs.
Ironically the thing about the Kochs is a little bit reversed. They have their own agenda, to be sure, but the biggest players in the influence game aren't individual billionaires, they're corporations and government bureaucracies.
The media always dumps on the Kochs because, atypically, part of their agenda is anti-graft. Make the government smaller by reducing corrupt spending programs and regulatory capture. Most of the bureaucracies fight each other for resources but they're not trying to turn off the spigot. The one who does becomes a target for attack. So they're the ones you've heard of.
I assume you're taking a swipe at Team Red, but do remember that the recent TCJA had a provision that removed the ability to deduct state/local (SALT) taxes from your Federal taxes due, above a certain amount. One could consider this very fair: if you argue for higher (Federal) taxes, you should pay what's owed, regardless of what you paid to any local governments, especially since you have much more control over where you live and the taxation policies at the local and state level.
The uproar about this change from Team Blue was palpable; this was clearly a targeted attack on liberal, high-tax areas. The cutoffs for the changes were well above an income level of $150K, which meant it went after the 'rich' that Team Blue always positions as the enemy, but none of that mattered.
Nobody wants more taxation when it actually hits their pocketbook. If there's anything the constituents of the two major political parties can agree on, it's that.
It was a tax cut bill with tax increases targeted at political enemies. There are many other loopholes that could have been closed but Trump was all about attacking political enemies. The anger wasn't at the tax increases it was about the abuse of power.
Somehow the Red "cut the taxes and spending" never give back the net inflows they take from Blue states....
Blue states have higher taxes to care for their citizens so they have to take less in Federal handouts.
What's the distinction? I always assumed "blue states" meant a majority of voters in that state voted blue, likewise for red states. Otherwise you might as well say "there's no blue cities, only blue neighbourhoods" and keep getting more granular down to the individual voter.
The distinction is that cities are blue and non-cities aren't, as a rule. "Blue states" are just states where the majority of the population lives in cities.
California is a net recipient of federal money (though not by a lot). The biggest donors are the blue states in the northeast. But plenty of blue states are recipients and the biggest recipients are the swing states, because politicians shamelessly buy their votes.
And the reason the states in the northeast pay the most isn't because of state-level benefits reducing the need for federal programs (which rarely if ever happens). It's because those states are disproportionately the wealthy people who pay the most taxes.
But getting rid of the SALT deduction didn't care about that. Wealthy people in California lost more than equally wealthy people in New Hampshire, even though California is a net recipient and New Hampshire is a net donor, because New Hampshire has lower state and local taxes.
A state being a net contributor generally means they have a lot of high paying jobs and successful companies concentrated in their state. Michigan is actually a good example as you can see when the big 3 auto companies were at their peak the state was a net contributor, but it has been a receiver since their decline.
But that's not how the federal government is supposed to work? The whole point is for them to engage in redistributive policies, which means you inevitably have "never give back the net inflows they take". I'm sure economically unproductive areas (eg. rural areas) "never give back the net inflows they take from" economically productive areas (ie. major cities), but we don't give people living in cities a tax credit.
This also points to a weird but true situation: Many blue states would be financially better off (or at least neutral) to eliminate federal programs and replace them with state programs, because the smaller the federal budget, the smaller the net outflow from blue cities.
But then they weirdly push for the opposite to the financial detriment of their own constituents, including the lower income ones who could have higher state benefits than existing federal benefits if the feds weren't taking so much of their state's money.
Best guess for why this happens is that the blue team is more captured by government sector lobbyists at the federal level, who don't want to lose jobs to state level government workers.
Even the extremists admit (thought they try to hide it) the Bill Clinton paid down the debt by raising taxes and cutting military spending by not starting large new wars. Caro insulted Clinton for proposing a $200B/ye deficit, right before Bush 2 issued a one-year addition of $1T in new military spending for his personal vendetta against Saddam Hussein launched on false pretenses.
The 90's sure were great, I miss voting for Bill! But those days are long over, and most partisans today seem brutally disappointed in Biden because he's only spent $1 trillion instead of $3 or $4.
I'd highly recommend the historical fiction "Red Plenty" which followed the trajectory of Academics in the soviet union trying to compute idealized prices - meanwhile administrators, consultants, and realists had to just make the system work.
At one point a quota increase leads a factory to sabotage it's old equipment, so that they may get a new machine to hit the quota. The administrator in charge of approval determines as much - and arranges for a new machine. Unfortunately a pricing reform introduced by the same plan leads to an inability to build the new piece of equipment as equipment was priced by the ton. Requiring the intervention of "well connected" individuals to solve the problem...
Systems adapt - any reform will introduce exploits, and pathologies. To pretend that MMT based central planning yields a different outcome in the long hall is folly.
I mean it did make everyone better. The COVID pandemic could have really wiped out a lot of people and we printed money and it helped.
It’s the austerity people that have never cared about anything but their ideology. Austerity for austerity’s sake has caused unfathomable human misery in the globalization era.
Right now the labor market is good for workers. That is good. Getting there has always opposed by the ruling class interests though which is why we haven’t pursued it.
MMT at it’s heart is just an increasingly large number of voices screaming out “fucking STOP” and actually try to get to a relatively tight labor market, because on the whole doing so is better for most people.
Yeah sure inflation is an issue but as we are seeing now it’s always been something that can be addressed by putting on the brakes a little.
And for the record I have a degree in economics. I get the other side of the argument. My point of view is that the other side of the argument and elite economists have been fundamentally corrupt in their analysis for decades.
“I mean it did make everyone better. The COVID pandemic could have really wiped out a lot of people and we printed money and it helped.”
Well, let’s see:
1. I got maybe $3k from the government due to all that printing.
2. The price level is easily up 25% for things I need to buy, like food, fuel, computing equipment, and vehicles.
3. And I still got Covid, as did literally everyone else I know. My brother still can’t taste anything and a guy I work with died.
If that’s what you guys with economics degrees call a win, I will update my priors from “you guys are idiots” to “you guys are a cult that uses math to further the work of Satan.”
Do you have so little respect of your fellow man that you think they are incapable of thinking? A big part of the spending was designed to float businesses during lockdowns to “flatten the curve”. The idea being that paying people to stay home would reduce risk of infection. They are pointing out this outcome did not happen.
>Do you have so little respect of your fellow man that you think they are incapable of thinking?
Funny, I was thinking the same thing about the above comment I was replying to.
>They are pointing out this outcome did not happen.
Flattening the curve absolutely does not mean preventing people from getting COVID; it's about lengthening the time horizon in which the population gets infected to reduce strain on the health care system.
Moreover, a personal anecdote about getting COVID doesn't imply an overall policy failure. Just because someone let sick people cough in their face doesn't mean they should wax intellectual about macroeconomics.
I mean, did it? What evidence do you have for this claim?
Vaccines absolutely helped. But now everyone's wages are going down -- it was basically ~$3k stimulus checks that were actually loans with a 400% interest rate.
Real workers wages are falling. Inflation fundamentally increases inequality, i.e. people who own assets watch the value of those assets increase while people who work for income watch their income fall.
It is good _nominally_. Real wages are basically flat. Meanwhile, for everyone who didn't get a raise or can't currently find a new job for whatever reason, they're losing purchasing power. On top of that, the housing market has been completely destroyed by the Fed printing money and shoving it into mortgage backed securities. In many nicer areas of Southern California you used to be able to get a starter home for $600k (manageable for someone in a working class profession like a nurse or mechanic), now nothing on the market is less than $1.2M.
Also you forget that a big reason the labor market is so tight is because a couple million Boomers retired early during the pandemic.
Well I think a big contributor to the current inflation problem was the last round of stimulus passed right as the pandemic was starting to wind down. At that point unemployment numbers had almost gotten back to normal and most revenue numbers for things like restaurants, travel, etc. had recovered to at least 70% of pre-pandemic levels. And then some states like California dumped even more money into the economy through multi-round state funded stimulus checks over a year after the pandemic started. The unemployment programs also should have started winding down the moment vaccines were widely available rather than 6 months after the fact.
I personally know a lot of people that just dumped their stimulus checks on memecoins or wasted it buying spurious goods. I'm sure the used car and electronics market also was greatly affected by stimulus as well.
The Fed also should have limited its stimulus to buying Treasuries rather than MBS. It makes no sense for the government to buy mortgage backed securities (basically a freebie to homeowners/homebuyers who are already wealthy).
I expect it's years of money printing to avoid a dip in the middle of the largest demand drop we've had in a very long time, following by a resurgence in demand as folks get out and try to get moving again (resulting in them spending a bunch of that money all the sudden).
It's pretty predictable IMO.
Either we'd have to drop the economy during the demand slackening during COVID (which would have caused a severe recession, because it WAS a recession in activity, and then there would be a bunch of panicked people in the middle of a pandemic who also lost all their income running around and maybe setting even MORE things on fire), or inflate our way out of it.
Hopefully we don't see some crazy 25% inflation like the 80's, but I wouldn't rule it out.
I'd expect that in a few years it'll flatten out though.
I haven't seen the actual data, but a Stanford economist compared the stimulus payments with actual consumption and it's pretty apparent most stimulus dollars were not spent, but rather used to pay down debt or invest (hello r/WSB!).
Never said TCJA or the Bush era tax cuts were used for good purposes :) but it's probably better for the country in the long run to have excess money flowing into tech VC funds rather than being spent on memecoins and shitty electronics. That way maybe 1% of the funds will have positive returns rather than all of it being set on fire.
I'm just saying in the absence of any alternatives (which I'm sure there are), it's better to have 1% of trillions of dollars going towards advancing humanity and technology than 0%. I am fully aware that 99% of that money is going to be burned on WeWorks and the like.
Oh good. I was worried that there were still people earning income from exploitation, rent seeking, monopoly, cronyism, and leveraging principal-agent conflicts of interest but looks like that’s all over now.
Seems to me if real wages are flat or mildly increasing and it’s WAY easier to get a job that’s a way better world to live in for the kind of people who apply for jobs.
MMT is a bunch of emergent identities that get dubbed gospel which depend on the US dollar being a reserve currency backed by global economic imperialism. MMT died the day the US and EU froze Russia's reserves.
The exact same thing happened with Reaganomics/Supply Side Economics. The economic brains behind these ideas was Milton Friedman, and while he did strongly and aggressively advocate for supply side economics, he also had quite a lot about to say the consumer side of things and advocate for, among other things, a negative income tax [1] that in practical terms is essentially a basic income that solves many of the major problems with things like welfare.
I'm not advocating for a basic income (or supply side economics), but simply emphasizing that what you said is completely true and one of the many risks of MMT. Even if MMT might be theoretically viable, in practice it's going to be interpreted as something not far from a pseudo-intellectual justification for arbitrary levels of debt/monetary inflation.
I also don't see the positive result to be honest. We will get high prices and high interest charges? That is only a beneficial development for a very select group of people.
So if that is the result of such a monetary theory or not, maybe it does not have beneficial goals?
Yeah, MMT basically asserts that the separation between fiscal and monetary policy is artificial, and that the only real constraint on “fiscal” policy (tax and spending) is monetary effects, not the metaphorical limited purse (“fisc”) that must be filled with revenue and borrowing to allow spending.
It is not “Congress can spend willy-nilly” but “Congress needs to stop thinking about fiscal balance and start thinking like the Fed.” (Or, perhaps, “Congress needs to define fiscal policy with movable levers which it gives control of to the Fed or a Fed-like body.”)
Irrespective of its economic merits, any policy which depends on a competent and upright Congress does not inspire confidence. It feels like it's bound to be one of those "True MMT Hasn't Ever Been Tried (TM)" things.
MMT isn't a thing to try or be tried: it's not an ideology or set of policies or even policy goals (there is a very loose correlation between adherence to MMT and certain progressive policy goals, but they aren't the same thing.)
MMT is an understanding of factual nature of the environment in which government operates. Reduced to one sentence it is “the entire concept of fiscal balance is play-acting as if the government was using commodity or externally-controlled fiat currency, rather than it's own fiat and a distraction from the real constraints on government finance, rather than something which reflects, or even loosely guides policy makers towards, the real constraints.”
Factual is class of statements, opposed to normative statements.
> MMT is an old lie
It can't be that old, since it only describes the constraints on sovereign finance of entities functioning in their own pure-fiat currencies, which isn't a subject that has been of interest for very long.
MMT is not based on facts about the world as it is, but on conjecture, ergo it is not factual.
The old lie is that sovereign entities (note the deep and old roots of that term in feudal societies) can debase their currencies with zero consequences.
Usually this works well for a long time, until all of a sudden it doesn't.
dragonwriter seems to have meant "factual" in the sense of "concerned with questions of fact", "is" rather than "ought", and was not intending to claim (at least in that statement) that the answers MMT provides are correct.
gray-area seems to have interpreted "factual" as "accurate" or "truthful", and was objecting that defining a theory as "concerned with things which are actually fr-reals true" is cheating.
To be fair to gray-area, "true" is probably much more common a use of "factual". On the other hand, the broader context was that dragonwriter raised the point in objecting to argument about what MMT purportedly says we "should" do.
MMT is not evidence based, it is in no way factual (it is neither backed by facts, nor is it concerned with facts) - it is a conjecture about what might happen in the best of all possible worlds based on abstract arguments about perfectly spherical economies in a vacuum.
Factual is entirely off base as a descriptor and has been picked here in an attempt to make it seem grounded in reality and without challenge.
I expect at this point you're actually disagreeing in some sense with what dragonwriter believes but I don't know and I won't speak for him.
My point here is not to defend MMT but the quality of the conversation.
If someone comes along and says Modern Moo-netary Theory says we should to build too many catapults, and another someone points out that the theory doesn't address questions of "should", pointing out that the theory talks about spherical cows in space doesn't rescue the original objection.
That a theory makes unrealistic assumptions is absolutely an appropriate objection to raise, but it belongs upthread. Otherwise it won't be seen by people who've already decided what they think of the narrower topic of this subthread, and we'll get more repetition of worse arguments.
There was an obvious implication that it made recommendations (in order for it to have "been tried") which I still believe is what dragonwriter was objecting to.
My objection is to people talking past each other rather than engaging (whether intentionally or unintentionally) and remains as relevant as ever.
> it's not an ideology or set of policies or even policy goals
That might be true in the academic sense.
But in reality, the only people who talk about MMT are people who just want to spend money infinitely and claim that there is no negative consequences to doing so.
Which of course, doesn't make any sense if you know anything about MMT in the academic sense, which absolutely admits that there is negative consequences to spending/money printing.
Mainstream economists don't really think MMT has much to say, TBH, and few professionals care about it.
As someone who took a lot of political science and economics classes once upon a time, and has an ongoing amateur interest in these things, MMT is the first time I've looked at one of these macro-level explanations/descriptions and not felt like I needed to ask a bunch of stupid questions that are (inevitably) going to be dismissed with a heaping dose of condescension. Finally, something that makes total sense when I look at how real world systems (and especially governments) behave.
It's less that it's simple (it doesn't really seem simpler to me than any other fundamental approaches to macro, no?) than that at least real-world behavior of governments, and changes in the world as a result of that behavior, doesn't all seem to point strongly in the direction of something about it being wrong or badly incomplete. It's simple like universal gravitation is simpler than epicycles.
Ok and the fact remains, that the vast majority of experts in the field dismiss MMT as something that doesn't provide much of value to the field.
Thats the important part here. Whatever your opinion is on any of this, basically all the actual people who know what they are talking about, disagree and think that MMT is basically valueless.
The world isn't that complicated. Its brutal and uncaring. We make up complicated systems beacuse we'd rather not face the pointless brutality of it all. Contrast the complexity of religious faith in life after death to the biological reality on the ground for the best example of this.
Similar background. MMT, for me as well, is the first comprehensive explanation of money that just fits everything and makes complete sense without any glaring holes.
All other theories feel like yeah... but how does it explain this phenomenon or that
Not-quite Fiscal Theory: the fed mints a $1 trillion dollar platinum coin and lends it to congress to allocate the year's budget. The coin may not have any value beyond spot, but everyone can see that congress has a rare piece of metal!
An issue with using fiscal policy this way is that many of the things that are worth spending money on aren't easily movable levers, they are long term projects.
If inflation is accelerating and we need to cut spending to fix things it may be difficult or inefficient to cut the budget of a 10 year infrastructure project. If we need to spend more one year, do we just flood the healthcare system or military with money temporarily?
Changing tax policy frequently creates uncertainty for people investing in long term projects, which increases risk and cost associated with funding them.
I like that there is an academic debate going on about MMT, but there are practical challenges in implementing it. While far from perfect, the current monetary policy approach is easier to implement and change, while outsourcing capital allocation decisions to the banking system.
Here are the first two paragraphs on the MMT Wikipedia article:
> Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox[1] macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.[2][3] MMT is opposed to the mainstream understanding of macroeconomic theory, and has been criticized by many mainstream economists.[4][5][6]
> MMT says that governments create new money by using fiscal policy and that the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector.[7] MMT is debated with active dialogues about its theoretical integrity,[8] the implications of the policy recommendations of its proponents, and the extent to which it is actually divergent from orthodox macroeconomics.[9]
Regarding this being a "test" of MMT, I don't see why. The first part of the first sentence of that second paragraph, MMT says that governments create new money by using fiscal policy and that the primary risk once the economy reaches full employment is inflation, which seems to be precisely what has happened, no?
Unemployment < 4% is basically full employment. People that are changing jobs are temporarily unemployed. Another metric you can use to reach the same conclusion is that # of job openings > unemployed work force
How is "unemployment" defined in the US? Take those numbers with a grain of salt.
In France, you were counted as "unemployed" if you were registered with the national employment agency and actively looking for employment according to their criteria.
If you didn't find anything (for example because the opportunities on offer were too far away, or various other reasonably human reasons) after a certain time, the agency dropped you, and you were no longer part of the "unemployed" statistic. Unemployment went down!
I've also seen the government there change their criteria for unemployment (for example dropping you after 9 months instead of 12), to make it seem like unemployment went down.
(I'm a big believer in statistics-driven policies, but statistics, like anything involving humans, can be corrupted)
That's very astute of you. The GP was talking about a rate called U-3, but the U-6 rate is far more descriptive. U-3 is what is generally used as the quoted rate, because it severely minimizes actual unemployment, allowing the Federal Government to use false statistics. [1]
It's extremely meaningful. It measures those who are unemployed. U-6 counts underemployment and people not actively searching due to an "economic reason".
The US uses a large-scale survey for unemployment rather than tying it to the unemployment process. The official definition most people quote is based on responses to the survey of "have not worked recently, have looked for work recently" but there are also broader measures of unemployment that count people who want to work even if they haven't looked, as well as people working part time who want to work full time.
Using even the broadest measure of unemployment[1], numbers are back down where they were before Covid. The labor force participation rate is still down though[2] which means that about 2% of US adults aren't looking to go back to work at all- many of them are likely now retired, students, or stay-at-home parents.
That's U-3. U-6 is at 7.2%. In general the claim that many people are not returning to work after COVID lockdowns is true. The reasons are up for debate, but that's not the point. The U-3 rate is an artificial rate to claim as the truth. That's moving the goal posts in order to get the win.
Plus there are a record number of unfilled job openings.
U-6's 7.2% is compared to 7.0% in February 2020 and 8.1% in February 2007. So even that is similar to pre-Covid levels and better the the peak before the last recession.
The 5% = full employment threshold has always been calculated based on U3. That's what they measured to come up with that estimate. If you want to talk about how U6 is better, then you need to compare it to previous U6 measurements, not previous U3 measurements.
If, as you were implying, U3 was hiding extra unemployment right now but U6 was more accurate, then it wouldn't be so closely tracking U3.
For something to be a non sequitur, it must be a non sequitur to everyone, not just to one. This is not a non sequitur for two reasons.
1) The sentence you quoted was not intended to be a
consequence of the earlier statement. Unemployment rate
and number of job openings are connected, but not as you
believe. Correlation is not causation. You are drawing
inferences without cause.
2) Full employment depends upon the number of job openings as
well as the unemployment rate, which you ignored from
my comment.
> Yes, which would basically imply that it's incredibly easy for anyone who wants a job to get one.
No. That is your inference but is clearly not implied.
Inflation has many inputs and looking at inflation strictly through a monetary lens will provide a distorted picture as to why there is inflation.
Additionally, MMT states that it needs to use taxes to manage inflation, which the US federal gov't is clearly not doing, which undermines the testability of the theory.
> How do you define full employment? The unemployment rate in the USA is currently 3.8%.
3.8% is near historic lows.
More importantly: "full employment" doesn't mean unemployment is literally 0% - in fact, an unemployment rate of 0% would be actively bad, because it indicates that people are unable to leave their jobs (even temporarily) to seek better opportunities or life changes - usually because inflation is too high.
There's no strict definition, but an unemployment rate <4% almost certainly corresponds to full employment, as frictional unemployment can be expected to be ~4%.
BLS defines full employment as an economy in which the unemployment rate equals the nonaccelerating inflation rate of unemployment (NAIRU), no cyclical unemployment exists, and GDP is at its potential. [1]
MMT has seemed to me to be an academic fig leaf over the indirect taxation which occurs when more money is printed. MMT is fundamentally wrong, and everyone smart knows it is, but you as an individual can't make any sort of "respected" career as an economist unless you say the right things or are stupid enough to believe them.
Wouldn’t it also suggest that the prescribed inflation antidote - raising taxes - would be impractical due to political opposition. Seems like a double win: stand strong against raising taxes (which is the heterodox position) while showing MMT “doesn’t work”.
A few years ago, Janet Yellen (testifying in congress I believe) called for more research into "hot" economies because presumably there was a lack of such research. We're now in a period of growth and basically full employment after a pandemic where the fed and fiscal policy decided to keep things "hot." There have also been supply and energy shocks that are contributing to inflation.
The remaining part of the MMT puzzle as I see it is: raise corporate taxes, and see if it helps bring inflation under control. If raising rates slowly doesn't quite do it, this should be the next go to for policy makers.
> and that the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector.
I don't understand this. Increasing taxes reduces the spending power of the individuals who pay the taxes. But that taxed money doesn't evaporate. The government spends it or redistributes it. It ultimately makes its way back into the private sector.
The key concept is that taxation is unrelated to the government's ability to spend (with fiat currency). They can tax $1T and spend $1T. Or they can tax $0 and spend $1T. Government is not constrained from spending whatever amount it likes—except in the spending's effects on money supply, inflation, et c.
From that POV, destroying money (or, if you prefer, reducing the rate of increase in the money supply) is exactly what taxation does.
All value is explanatory, that is, even if it has "intrinsic value" like carbohydrates in ATP in a cell, it is still knowledge instantiated for a resilient purpose (eg to power a cell to replicate its knowledge).
As explanations change, value changes, so anything can be a currency at the level of the individual--in this way, at least for conscious minds, a public monopoly on money is, while possible, morally wrong. It's a form of Marxism.
There's already been a solution the problem of state monopoly on symbolic abstractions for value (money), that started with Bitcoin and has been growing a new global economy since 2009.
What do you mean by, 'Try paying your taxes in BTC ...' ?
In USA, sales taxes are paid to government by the vendor. As just a typical person in USA who does not work for federal government nor reside in D.C., sales taxes and property taxes are all that I (implicitly) pay. The vendor and I determine amount and type of my payment.
Your comment had a threatening tone implying something bad may happen. What is the lurking threat?
Many people don't qualify to pay 'income' tax, but most people just think they have to do it. And employers withhold it from wage slave paychecks, which does make it challenging to opt out.
Definitely possible to not have what is known as wage income. Many do it. The super rich structure their affairs to avoid being in that system of voluntary contributions.
>>Conceptually the answer in the theory is to suck up the excess money with taxes
Govt spending is already 45% of GDP, so there's not much room to increase it more.
As for MMT, I think what the MMT crowd doesn't realize is that there's a lot of latent inflation coming. Asset prices and CPI do not go up in tandem. First Asset prices are inflated, then later for the next decade or so, as people slowly make withdrawals from those inflated asset prices, it begins to affect the CPI. And that's where we are right now, at the beginning of the CPI impact.
I am by no means a fan of mmt, but I think looking at government spending as a share of GDP misses the point mmt proponents attempt and often fail to make; which is that financial constraints are should not be the limiting factor of the economy.
A better indicator would be the price of labor and commodities since they better reflect the constraints of the real economy. Unfortunately for the mmt people, the prices are going nuts because we are actually dealing with real resource constraints now.
As I understand it taxes in MMT are just destruction of money, it's the essential counterpart of money creation used to balance supply. It's irrelevant to GDP and spending in that model, since in MMT the government doesn't need taxes to spend, it just print what it needs, that's the core idea.
Interestingly, the mechanics of this seem backward. A major problem with the Fed's operations is that operations on financial markets take 12-18 months to spread to the real economy, so they have to target interest rates now based on what they think the economy is going to look like in 12-18 months. Conversely, money going into or out of the average person's checking account now affects what they do in the real economy now, without a lag time. When we've recovered from significant economic crises (2008 and 2020), it's often been through direct fiscal stimulus.
It seems that the logical thing to do would be to put money into the economy through directly giving it to citizens, and then take money out of the economy through interest rates, by making it more expensive to borrow and reducing business investment. Typically you want to put money into the economy in a hurry, in response to a crisis, but you want to take it out gradually, so that businesses can plan ahead. MMT's framing of this still seems backwards, even if they've realized that fiscal and monetary policy are two sides of the same coin. You'd also get a lot less political resistance to the fiscal policy side if it involved giving people money rather taking money away from them.
I seem to recall that France used to do this -- create money for government spending, taxed money ceases to exist, no need for government debt. But I can't find anything about it, and I don't know if I'm just not using the right search terms.
Has this been put into practice in large countries before?
This points to why the EU will likely disintegrate - member countries can't print to monetize country debt. Either EU members split out to regain currency autonomy, or EU officially federalizes member country debt.
Obviously the latter will happen - it is in fact already happening, between eurobonds and recovery fund. We just don't make a big song and dance about it - quiet work is how the EU is managing to do the unthinkable of federating this anarchic and unruly continent.
The economic imbalances between EU states are nothing, compared to the ones between US states. Do you see the US "disintegrating" anytime soon?
I could see Illinois imploding due to retiree obligations and pieces of Illinois being absorbed by neighbor States. More likely for federal government to take over State pensions because federal government can emit unbacked money.
I can think of a few trillion in urgently needed money we could spend taxes on: renewable energy, batteries, retrofitting homes for chargers, resilience building (and paying people to move out of high risk areas), invest in carbon capture/moonshots.
> I never quite understood how this theory would work while avoiding inflation
I see this sentiment any time MMT is brought up. I think it shows a misunderstanding of what MMT is saying.
While I’ve got my own issues with MMT, it’s always been made clear by MMTers that inflation is an important signal to respect and that you can’t infinitely ‘print’ money due to the constraint of real resources.
You're correct, but I think the problem is that a lot of people who advocate for MMT, don't actually understand it, because many of the pro-MMT people I've talked to really do think you can print money forever.
It's not unique to MMT, the same thing happens with plenty of other subjects too.
I think people conflate what MMTers were saying post-2008, which was we had WAAAAAAAAAAAY more capacity to print money, especially from 2008-2014 or so, with we can spend literally infinite money. And so you get all of these people saying "MMT was wrong" with the pandemic inflation, when it's the exact opposite. We started running into real resource constraints (due to lockdowns, supply chain issues, etc) and inflation shot up exactly as expected. Now, even as an MMT fan, I'm perfectly willing to admit that predicting where the real constraint is is extremely hard. And that politically in the US raising taxes on a dime is basically impossible. But MMT wasn't wrong, for the parts that have been tested as much as they can be.
Where in the world would raising taxes on a dime be perfectly acceptable? Imagine you have a rent or mortgage payment, but inflation hits 10% so your taxes go up 10% month over month to counter it. Your costs were fixed, the inflation affected other things besides your long term agreements, and yet, you would default on your payments because you got 10% less that month after taxes. Who would not want to burn the whole system down after experiencing that?
> Where in the world would raising taxes on a dime be perfectly acceptable?
"Any place where..." Noted that you couldn't conjure a single example.
> If inflation is that high, the real cost of making your mortgage payment is shrinking in real dollars.
This assumes that inflation is evenly distributed in all sectors. It isn't. Your CPI inflation rate is a proxy, a rough index, an average, and a dubious one at that prone to all sorts of bad signals.
Tax rates are evenly distributed (even if a higher tax bracket results in a higher rate, it's still evenly applied across the population).
Inflation isn't. Wages don't move in lockstep with inflation, particularly across all sectors and across all jobs. It moves in fits and bouts, and a raise may only come once a quarter or once a year for many (since businesses need their expenses to be predictable).
This idea that taxes could be unpredictable based on some rough, government sponsored index of inflation is quite silly on deep inspection. It completely upends the predictability of doing business.
And the cost of that unpredictability would be a contraction in the economy from less spending to hedge against the uncertainty of income.
> everyone is working with wildly different and often contradictory definitions
I’ve found the main MMTers to be mostly consistent amongst themselves in their theories. Now, I think some ideas are wrong, but they do seem mostly on the same page. I agree MMT does an excellent job convincing laymen of some pretty wacky ideas and that’s one of my bigger complaints with it.
Also, I find the focus on mathematical models problematic in mainstream economics. It obfuscates a lot of erroneous assumptions. Models are great for testing, but words are useful for communicating ideas too and can sometimes be a better format, especially for wider audiences. To be clear, I’m not saying models are bad or that MMT shouldn’t use them, in fact I saw one MMTer post this paper recently:
http://www.levyinstitute.org/pubs/wp_992.pdf
I keep these things in the back of my mind when talking about economic theories:
- an economist is someone who can tell you today why he was wrong yesterday.
- the central bank of Sweden made up an award in the honor of Nobel. Twice the recipient made a point to remind people economic theory is not an exact science.
> an economist is someone who can tell you today why he was wrong yesterday.
Which puts them near the bottom as a hard science, but near the top of the social sciences. (I'm agreeing with you, but the valence of your observation depends on what reference class you have in mind for economics)
How is it a test? MMT doesn't say you can increase monetary supply forever without consequence. It says that you can increase monetary supply until you see consequences, at which point you need to start reducing it, mostly through taxation. Raising interest rates does reduce monetary supply, but I don't think nearly to the degree that MMT would call for.
Now, if congress immediately votes in a bunch of new taxes, it'll be a wonderful test. :D
MMT simply has currency scaling with the exponential utility of commerce. Value is created on both sides of each business transaction, not just for the recipient of the money. The money supply increases to reflect all of the new value created by commerce.
Even if we imagine MMT working perfectly — whatever that means — it represents a stealthy redistributing of wealth. The idea behind it is for the government to acquire and then redistribute goods and services from those in the private sector who would otherwise command that wealth, and do something else with it: in other words, give these goods and services to others.
And no one is going to notice this? The people who are used to enjoying some quantity of goods and services are not going to notice that they now enjoy less, because someone else is enjoying them?
Or, is this somehow supposed to "stimulate" the economy, so that more goods and services are actually produced, because of the extra money?
This is alchemy. Production comes before consumption.
Any theory of economics that only works if you can depend on an elected body to take quick and reasonable steps—like raising taxes—is one doomed to failure, and ought not be tried.
The problem is all that new wealth created, about 90% goes to the top 1% who can easily store it away in nontaxable assets (at least until said assets are sold) since generally the “buy tax” isn't all that high compared to growth in value of securities and real estate (at least good investments thereof). Just siphoning more money out of the poor and middle class will not fly in the USA you will be voted out and your policy rescinded within a couple of years.
You can expect inflation as you grow the money supply. Inflation is good. Runaway, uncontrolled inflation is not. We have not had, nor do we have now, runaway inflation. You have to grow the money supply as the population and productivity increases. Most of the talk and reporting on inflation is just silly.
"Conceptually the answer in the theory is to suck up the excess money with taxes"
Huh, why is that the answer? Why wouldn't the conceptual answer be "do the opposite", i.e. sop up the excess liquidity by removing money from the money supply, by doing things like raising interest rates, increasing bank reserve ratios, and selling some of the trillions of dollars of securities already on the Fed's balance sheet? The last thing anyone should want is the government to take a lot more in taxes so it can be squandered on foolish projects. Also, once government programs start up and build/lease buildings and hire a bunch of people, they are almost impossible to get rid of (the process of terminating a Federal employee is a Kafkaesque nightmare).
I would love more "foolish" infrastructure projects in my area. In my state/city, We are dealing with increasing flooding, overcrowded roads, and could always use more green space.
I get your sentiment, but the government could be using that money in positive ways that don't involve spinning up whole new organizations
You raise a good point that we could really reverse inflation by actually closing tax loopholes and reabsorbing the excess we printed and gave out to the 1%. . . but like you said, never going to happen unfortunately.
Most prices haven't inflated on supply constraints, they've risen on opportunism of profit margin increases by companies who were allowed to merge and grow with insufficient anti-monopoly regulation.
If we haven't devalued our USD currency against the EUR because we printed while they also printed, is there a currency that we did devalue ourselves against (or a country that didn't devalue their own currency through printing?)
Does printing always actually equate to devaluation?
This didn't happen in a vacuum, though. It was simultaneous (and, obviously, co-causal) with a very rapid economic contraction and a subsequent supply shock across a ton of industries. Any analysis of this situation that starts end ends with "the government printed money" is, IMHO, basically pushing an agenda.
What actually happened is that the device under control (the economy) had an excursion (picture a car blowing a tire and veering) and the government corrected rapidly (prevented it from entering another travel lane, say), but it was something of an overcorrection (the car ran off the shoulder).
Should we have "printed less money"? Probably yes, in hindsight. Was the alternative worse? Of course it was; we were looking at a huge jump in poverty. Was anyone unaware of the inflation risk? No, not really. Was anyone dead-on correct about the right amount of stimulus? Not that I can see.
I would encourage readers to also review this [1] document which compares and contrasts MMT and other economic theories. The author concluded that "MMT contains some kernels of truth, but its most novel policy prescriptions do not follow cogently from its premises. "
I haven’t studied MMT enough to be able to comment on it beyond a surface level, and the economists behind are smart, accomplished people. What I do know is that in the real world of policy, MMT will just be used as an excuse to spend limitless amounts of money by politicians that also don’t understand it.
the only long term sustainable economy is one that has a sound money where natural supply/demand laws govern it, not a central and politically motivated agenda where money can just poof be made from nowhere, people are falible and complex systems are impossible to control. Ultimately mmt is like relying on weathermen to be 100% on point. Mmt is just a boom bust cycle where debt is kicked down the road and the bubbles grow larger with a false sense of security.
MMT has all the same problems as Communism: nice in theory, but terrible in practice.
MMT proponents will argue that no one has ever properly implemented it.
However, an economic theory that is not effective in practice, given the realistic constraints of human nature and politics, is useless.
In theory the only way MMT works is to arbitrarily raise taxes to counter inflation. The Fed does not have the power to raise taxes, Congress does. But such a floating, variable tax rate is ripe for abuse of power and I don't know anyone who would not revolt under such a system.
It's like the anthropic principle in physics IMO in that it can be taken either descriptively or prescriptively, and while the former is almost trivial in what it describes, the latter invariably ends up leading to significant consequences far beyond the initial description.
The alternative is a static or deflationary currency. This leads to hoarding of assets which were originally intended to serve and increase commerce. Think Bitcoin. Without MMT, we would be falling from a skyscraper as you depict.
Bitcoin isn't static or deflationary. There is a schedule of inflation built in via the mining reward which is currently at 1.5% until the next "halvening" where it will become 0.75%. The mining reward will continue to half every 4 years until roughly near the year 2140.
You realize 2140 isn't that far away and that the cap is what is inflating current values (and coin hoarding) right? Just ask investors and they will tell you.
' deflationary currency ... leads to hoarding of assets '.
Someone owns every asset. By making it impractical to save using the fiat money, savings goes to non-fiat items like land, stocks, energy, and BTC. This harms the poor who are rarely able to escape into those non-money items.
It seems interest rates lower during recessions. Right now we are already low and are raising which seems to be a different pattern. Is lowering interest rates a method to overcome a recession?
Lowering interest rates makes capital cheaper, which does spur investment and thus economic development, so, it can certainly have that effect given the right circumstances. But keep it too low, too long, and you see money start flying around too quickly, getting a little too loose because everyone wants to get theirs, and then they start inventing things like mortgage-backed securities and everyone starts over-leveraging, because, why not, money is cheap! Then you get 2008.
It's important to separate out fraud from low interest rates. Low rates absolutely drive investment, and riskier investment at that. But the issue with 2008 was fraud in the lending market, not necessarily the low rates.
Risky investments aren't necessarily bad investments. Low interest rates give businesses more runway to operate investments that might take a while to show returns. A million dollar loan at 10% for an investment means that it needs to return into ~$80k a month to break even. At 2%, that same investment only needs a ~$16k monthly return. That's a huge difference in runway needed to start generating cash flow.
It makes for a good news story that regular Americans understand and frankly want to hear (the banks were bad). But if you really dig into the reports, e.g. Financial Crisis Inquiry Report, almost the only fraud comes from misreporting of income which is essentially consumers lying. There could be other documentation issues, but underwriting almost entirely depends on credit score + income, so they're fairly trivial.
"Money is cheap" yes, also "you can buy a house if you can fog a mirror". (Buy as in acquire a piece of paper that says you'll pay $$$$ per month to whoever holds the note.)
Yes, fortunately we've learned from that mistake and I don't think are repeating that this time around. People really are qualified to buy these days, and there just isn't enough supply of housing to go around.
> Lowering interest rates makes capital cheaper, which does spur investment and thus economic development
There are diminishing marginal returns to this, and when rates were already close to zero it is hard to imagine going to zero spurred much more than meme stocks and YOLO gambles.
Correct. It is surely a non-linear function, but the statement "lowering interest rates makes capital cheaper" is generally true, and used as an economic lever in monetary policy.
>> Is lowering interest rates a method to overcome a recession?
It is claimed to be. The idea is that with lower interest rate, companies and people will be more likely to borrow money to spend and that will boost the economy.
I for one do not really believe this to be true. I suspect it's the act of lowering rates that gives a temporary boost until things rebalance. In other words, economic activity has some dependence on the derivative of interest rates. This is why things were so good from 198x through 2003 or so, rates were dropping the entire time (filtered of course).
> economic activity has some dependence on the derivative of interest rates
If interest rates go down, it's easy to roll over old promises and make new ones besides. If interest rates go up, promises must be kept or the business will fold.
At the end of every business cycle, interest rates are low and there are lots of unprofitable "zombie companies" that operate by simply rolling over their promises. In order for the economy to grow, interest rates must be hiked to do a controlled burn and remove this underbrush. Zombie companies have to actually die. This is painful at the best of times.
Political will formation will be doubly hard this time around because A. there is more national debt (so we probably need to soft-default on it and inflate it down, first) and B. last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.
>> last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.
You are only the second person to tell me this story. I'm not doubting it, the first guy said it to me over 15 years ago right before the bust as he was buying 6 percent treasuries.
Probably the right time to do it would have been around 2000, the last time the government ran a surplus (last years of Clinton, first year of Bush jr.) but instead we heard: There's a surplus, we don't know why, but we don't think it will go away, so here have some money, and lets spend like crazy and have a war.
This isn't a rate-hike recession, it's stimulus withdrawal.
Rates are at 0.25%. Last time it took 20.00% to stop inflation. We haven't even started. We haven't soft-defaulted on the national debt, so we can't even think about starting. The Ukraine conflict will be dusty history by the time actual rate hikes and an actual rate hike recession come around.
I also personally think that high inflation is treated as bad axiomatically. This needs some justification if the only proposed solution is to intentionally cause a recession.
The system will seize up and collapse with anything close 20% interest rates. Look at what happened in September 2019. The rates shot back to 0 because there was a liquidity problem in the repo market. The system is rife with zombie companies servicing their debt with nearly free debt. This will not go like the 70s. When rates stop increasing and go back to zero within the next two years remember this comment
If rates stop increasing and inflation continues with barely a pause, then what happens? We have massive social instability? Retirees are screwed? Lenders will have to increase rates just to earn a real return.
The 1979-1982 interest rate spike was preceded by 15 years of faffing around, playing at raising interest rates, and then chickening out, with a backdrop of rising persistent inflation. I think it's likely to play out exactly as you describe, but that's exactly how it played out in the 70s.
I'm much less certain that it will end the same way, but there are big problems with all the alternatives too (yuan, euro, crypto, gold) so who knows.
Except it wasn't. Inflation was already high and going up by the time the first oil crisis hit. CPI was 5.5% in 1969, 5.8% in 1970, went down to 3.3% by 1972, and was 6.2% in 1973:
The biggest jump was 1.81% in August, 2 months before the oil shock. (Note that this is roughly double the monthly numbers we see now.) There was consistent monthly inflation 0.68%+ from January -> June.
The real reason for the 1970s inflation was Nixon monetizing the debt incurred by our Vietnam hangover, but in true Nixonian fashion, he found an external event to blame it on.
I think what you're describing is exactly what's claimed. /Lowering/ interest rates leads to growth, not low interest rates. I don't think many economists would dispute that.
The general model is that interest rates, lowering taxes, and increasing government spending are tools for shoring up the economy during a recession. During a growth period, interest rates should be raised, government spending lowered, and taxes raised, so we have room to adjust them for the next recession. This can, in theory, smooth out the boom-bust cycle which otherwise naturally results.
The problem is that we rarely raise interest rates, reduce spending, or raise taxes, since it's politically unpopular. Many of these tools are harmful; for example, outside a few domains like infrastructure and medicine, long-term high government spending tends to /harm/ the economy.
> The problem is that we rarely raise interest rates
Not really true; there was a long period of near-zero rates not moving during and after the Great Recession, but that was a unique event; from 2015-2018 there was a fairly consistent notching up of rates typical of an expansion with inflationary signals, then an ease back from 2019 until COVID hit at rates were cut sharply.
Looking at history there's a long run up in 2003-2006 after the 2001 recession, a run up 1992-2001 through the dotcom boom after the short period of easing from 1989-1992, a runup from 1986-1989, etc.
Throughout these time periods there was a dramatic increase in the money supply (from my view of FRED stats it doesn’t look like there’s ever been a contraction of the monetary supply), so we’re rate increases just offset by enough monetary growth to offset?
> Throughout these time periods there was a dramatic increase in the money supply
well, yeah, a hot economy means that borrowing even at high interest is attractive, which is why you are trying to constrain lending (money creation) with higher interest in the first place to prevent inflation.
>> I think what you're describing is exactly what's claimed. /Lowering/ interest rates leads to growth, not low interest rates. I don't think many economists would dispute that.
No, they treat is as if the steady state economy will be larger at a given lower rate. For example GDP = X+Y+Z + K/rate. What I'm saying is that GDP = X+Y+Z + K/rate' which is not sustainable at all and means existing policy is not at all the right way to handle it. Actually there may be some degree of truth and both terms should be present in the equation, but nobody talks or acts like the derivative term exists.
Yes, lowering interest rates during tough times has the effect of making borrowing capital cheaper, thus incentivizing people to take on risk via opening a business, investing, etc...
In contrast, raising interest rates is a way to fight a hot economic market. While in theory having massive growth might be ideal, it would be the equivalent of a sprinter using all of his/her energy in the first 100m while running a marathon...it needs to be a balancing act.
Lowering interest rates has been one of the major tools in fighting recessions, and one of the main concerns has been that lowering interest rates isn't possible(or effective) when they are already at such a low level.
The thinking is that lowering rates will increases spending (why save if you aren't getting much of return, you will find other ways to invest your money rather than have it sit in a bank account). So, if the economy seems to be in a recession central banks will often lower rates to encourage spending. But if you are already at near 0% for a record length of time, and have printed massive amounts of money, well friend we are in uncharted territory. What's better than do nothing? Doing something, we have this interstate rate lever, we can't pull it down, lets push it up!
It's being pushed up because we are not in a recession. We aren't even close to being in a recession. We need it to be raised in times like this so we actually have room to move it should things go south.
"It seems interest rates lower during recessions. Right now we are already low and are raising which seems to be a different pattern. Is lowering interest rates a method to overcome a recession?"
It used to be that you could lower interest rates and run up deficits during bad times with the intent of going back to normal when things are better. We now have kept low interest rates and record deficits during good times. When things blow up (as they always do after a while) there is almost nothing left that can be done to counter a recession. In the past going to war helped....
Yes, the common theory is that lowering interest rates encourages investment and growth, at the cost of higher inflation. This increased inflation is also generally thought to depress 'real' salaries, which further increases growth.
The last couple of recessions have placed a ton of deflationary pressure on the USD, and the fed has reacted to maintain a small positive inflation by both lowering interest rates and QE.
Now that inflation is rising and the economy is also at nearly full employment, its pretty straightforward for them to raise interest rates to rein in inflation.
Lowering interest rate to stimulate economy, increasing interest rate to lower inflation. Problem is we've got no room left to lower and asset prices have never been higher.
Yes, because it increases the money supply. We are supposed to tighten when things are good by raising rates. At this point they need to raise rates to pull money out of the system. Because with covid, not only did we cut rates, we put in a HUGE amount of money and that was really irresponsible. And now we are seeing the repercussions with inflation lowering the value of the dollar.
We should recall that not only did the US cut rates and spend a lot of money through the covid recession, when things were bad, it ignored that first bit of advice before Covid when things were good (it's hard to remember now how hot the economy was in 2016-2019, but it was really hot), by cutting taxes and continuing to print money and keep the rates low to cover it. As the tax cut detractors correctly predicted, those tax cuts (and the growth that didn't happen enough to cover them) reduced the US's leverage to respond when an actual crisis came up.
a) higher taxes enable the government to apply deflationary pressure on the economy (by removing currency from circulation)
b) Reducing taxes without cutting spending (because it will "pay for itself in growth") leads to a larger deficit, which requires increased debt to cover, which triggers the money-printers.
Your first point is only valid if the government doesn’t spend that money or uses it to pay down debt, a dubious assumption with the US federal government.
Your second point is wrong: you can continue to run deficits without printing money. You just have to find lenders in the marketplace willing to buy your bonds.
Yes, the Federal Reserve is buying vast quantities of US treasuries right now, effectively monetizing the debt, but the sequence of events you describe isn’t typically how things work.
Wasn’t that during Yellen’s term who was replaced by Powell in 2018? The same year the tax cuts went into effect. The following year the rate cuts started and then Covid hit.
I am not sure if it is really useful to evaluate what happened vs the other outcomes that we were not able to experience. We don't really even have that many precedents for the situation. It was, and still is, an extremely complex problem to address. Injecting large amounts into the system ultimately doesn't create long term wealth, but in that short term gap during the first 1 of the pandemic many people were undoubtedly pulled out of a hole.
We are not yet in stagflation, unless I really missed something. The economy is actually fairly strong by most indicators. The question is whether inflation can be tamed by the time we hit a recession(which we will, whether it is in 6 months, 2 years, 5 years, etc...)
These 6-12 month predictions for the next recession are always real popular 6-12 months before the next major election. I recall almost identical rhetoric in H1 2018, coincidentally the last time the fed raised interest rates.
Nobody has a clue when the next recession will be.
It's important to note that the Federal reserve normally controls the overnight rate, and let the market determines the interest rate for other durations (eg. 30Y). That changed with the introduction of Quantitative Easing where it reduces the interest rate over the entire yield curve.
In other words, even through the overnight rate is 0%, you could still push down the interest rate down for bonds of a longer maturity, and that'll further stimulate the economy.
We did waste the 3 yrs before Covid hit by not increasing interest rates and not reducing Fed's money printing. I don't know if it's the fed or if the government pushing to win elections, but feels like we didn't take care of the house in good times and we have led ourselves into this cycle.
Because Powell cares more about markets than the real economy or wealth inequality. Also they tend to care much more about the short term than the long term.
People will tell you that it's not in the Feds mandate to care about those things, and they don't actually care about markets, but it's clearly not true when cast in the light of their actions. Or to any rational observer that follows them closely.
Even in Powell's presser today he spent a lot of time talking about being sensitive to markets. Why didn't they raise rates in the entire year while inflation was increasing and the labor market already showed signs of overheating? That one's easy too. Because Powell's nomination was coming up and he wanted to maintain easy policy to boost his chances to get reappointed.
Why did they continue QE policy of buying assets to drive down interest rates while inflation was over 7%? Because he knew if he ended it abruptly it would cause a market selloff.
He cares about the real economy to the extent that their policy doesn't significantly impair asset pricing.
sad but true. The only thing that Jpow cares about is the markets. In his defence the economy is made of people and crashing the market/causing recession is going to cause more grief to the public that is already overwhelmed with covid.
Slowing down GDP growth or the stock market would have been political suicide. It would probably have been a good thing in the long-term but long-term planning is not feasible anymore in the current climate. Sadly it's a winning strategy to inflate bubbles.
IIRC the fed tried a few times to tighten and the market reacted badly(i.e. taper tantrum). Rather than focus on economic health, Powell chose to support asset prices owned by the upper half of Americans(and, by a huge majority, the 1%).
That sort of makes sense given Powell was a Trump appointee and Trump favored a weak dollar in order to boost American manufacturing.
Yeah no doubt about this. But its also important to remember we've been doing this non stop since 2008 minus a few months in 2018. So this is a multi president, both parties are involved in continuing this train.
People have been conditioned to believe it's either one or the other party's fault. And they decide whether things are going well or not so well based on whether their favorite president is in power. Nobody looks at the actual data.
It's not as dramatic as that looks. They changed the definition of M1.
From the same link:
Before May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions.
Beginning May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and OCDs (before May 2020) or other liquid deposits (beginning May 2020), each seasonally adjusted separately.
m1 graph is incredibly misleading because they changed the definition, and even before it was still quite limited. Here's the real money supply https://fred.stlouisfed.org/series/WM2NS
*Printing money, but in response to covid stagnation in 2020.
Printing and interest rates are separate. There was still a missed opportunity to increase interest rates while the economy was running hot prior to 2020.
It has been increasing since 2008, without Covid the same graph would look very different. Its just that the fed just increased the scale so much that the previous level seems puny now, even though the y axis is 1000s of Billions of dollars.
Not only that they increased the rate, but also they'll reduce the buying of securities:
"In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting."
IIRC they have already stopped purchasing them as of a week ago I think, they were supposed to announce their plans on quantitative tightening (selling the things they bought) which is what that quote is referring to.
> they have already stopped purchasing them as of a week ago
To clarify, they are still purchasing securities, but at a rate that does not increase the size of their balance sheet. As debt matures, they reinvest the principle in new securities to maintain the size of the balance sheet. When the Fed discusses QT right now, they’re talking about reducing these purchases, so the net impact is a smaller balance sheet.
As an aside, it’s possible to get a sense of how much the Fed intends to reduce the size of the balance sheet this year based on Powell’s comments today. He indicated the impact on financial conditions would be roughly equivalent to an extra rate hike. IIRC every $100B is estimated to shift rates by 3bps. At 25bps a hike, the balance sheet reduction would be roughly $800B.
It's worth noting that this is actually a rate target, not the rate. Previously, the rate floated between 0% and 0.25% based on a market. Now, it is going to be between 0.25% and 0.5%.
First I have heard of this and quite interesting to learn. Could you explain the difference ? Does this mean they are going to implement the rate increase some point in future ala target ?
As another reply indicated, the Fed doesn't actually set interest rates. That's a common misconception. Instead they purchase and sell treasuries to member banks, such that those banks' balance sheets change in such a way as to make money more or less expensive to trade amongst themselves, which has knock-on effects for consumers.
On the other hand, since there's no longer a reserve requirement since the start of covid, the mechanism that causes banks to have to borrow from each other (to meet the nightly reserve requirement, historically) is much less clear to me. Hopefully an economist can chime in.
It's not clear cut as to what degree interest rates are exogenous inputs that central banks respond to, but the Fed absolutely does set interest rates, allowing some variability between upper and lower bounds.
Today, Fed adjusted interest on reserve balances (IORB, formerly IOER/IORR) to 40bps from 15bps. This rate determines how much interest banks are paid for reserves kept at the Fed. In theory, this rate acts as a floor for the effective fed funds rate. In practice, it's somewhat murkier.
The Fed also sets the discount rate (now 50bps), which is meant to act as a ceiling on rates. Banks are able to borrow money from the Fed's discount window if they need it; however, there's a stigma associated with utilizing this facility. The Fed now maintains standing repo and reverse repo facilities to help banks manage liquidity.
These policies all target the front end of the yield curve, which is where Fed has the most control. To manipulate the long end of the curve, Fed implemented QE. Other central banks (e.g. BoJ) have gone further, using yield curve control to explicitly impact the term structure.
> Instead they purchase and sell treasuries to member banks, such that those banks' balance sheets change in such a way as to make money more or less expensive to trade amongst themselves, which has knock-on effects for consumers.
Repo rates are determined by the market, but are bounded by the rates at Fed's repo facilities. A catch here is that not all market participants have direct access to these. While repo rates may impact behavior, the Fed's intended mechanism is IORB, which (ignoring steepness of the yield curve) influences how attractive banks find loaning money to clients.
> the mechanism that causes banks to have to borrow from each other (to meet the nightly reserve requirement, historically)
This market used to be the Fed Funds market, which consisted of uncollateralized loans between banks. The fed funds market is basically dead, replaced by the repo market, which is collateralized. IIRC, the remaining participants are GSEs like Fannie Mae and Freddie Mac, which can't collect IORB. They sweep their cash to banks and split the interest (which is why IORB can act as a ceiling instead of a floor).
“ Adjustments to the IORB rate help to move the federal funds rate into the target range set by the FOMC. Banks should be unwilling to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Federal Reserve. As a result, an increase in the IORB rate will put upward pressure on a range of short-term interest rates. The opposite holds for a decrease in the IORB rate. Typically, changes in the FOMC's target range are accompanied by commensurate changes in the IORB rate, thus providing incentives for the federal funds rate to adjust to a level consistent with the FOMC's target.”
> As another reply indicated, the Fed doesn't actually set interest rates. That's a common misconception.
The FED absolutely sets the interest rates by controlling the federal reserve rate which is the interaste rate paid to banks every day for their deposits with the FED
The Fed (not FED, BTW) doesn't "set" the rates, but has policies (including IORB, or what you call the federal reserve rate) which guide the markets to arrive at their target. Maybe that's a small distinction, but I think it helps OP, because I labored under the same confusion for a while.
> The Fed (not FED, BTW) doesn't "set" the rates, but has policies (including IORB, or what you call the federal reserve rate)
The Fed does explicitly set certain interest rates. IORB is an interest rate that gets paid out every single day to market participants. “Federal reserve rate” does not exist; what you’re probably referring to is the fed funds rate. The Fed sets a target range for this, and, if the effective fed funds rate does not stay within the target corridor, the Fed will conduct open market operations to push it there.
You're talking past each other, specifically on what it means to "set interest rates".
GP is correct in that the fed funds rate (the one that makes headlines and is used for policy) isn't literally _set_ by fiat: the Fed just intervenes in the interbank money market to ensure it stays in a specified range. It has near unlimited capacity to intervene so the fed funds rate only ever strays a tiny amount outside that range, and even then it's an exceptional circumstance.
On the other hand the parent is correct in that the Fed literally sets a lot of other rates that are used for financial plumbing.
Nickles I'm sure you know this already but I'm trying to clarify so that others don't get confused by an already confusing topic.
Thanks, the more clarification the better. There are so many moving parts, many of which aren’t understood well, that it can be very difficult to explain exactly how everything fits together.
I always recommend the book Floored! by George Selgin for those who want to understand current Fed policy. It’s a few years old at this point but does a fantastic job explaining things.
"Federal reserve rate" is not my term. My parent comment coined it and defined it as "the interaste (sic) rate paid to banks every day for their deposits with the FED", which is the IORB.
I appreciate the thorough and accurate response you gave (and which I learned from). The distinction I've been trying to make is that the Fed has no mechanism to enforce the rate banks offer to each other or to consumers -- as in, there's no legal enforcement anywhere. Instead, they have various levers that predictably cause rational actors to voluntarily change their own rates. Maybe this has always been obvious to you, but it wasn't to me at some point.
If you still feel this is "blatantly incorrect information," I'm certainly open to learning more.
I apologize for my brusque response, it wasn’t constructive.
> the Fed has no mechanism to enforce the rate banks offer to each other or to consumers -- as in, there's no legal enforcement anywhere
The Fed can affect rates directly by transacting directly with the market (open market operations). Ultimately, all bond prices (and correspondingly yields) are driven by supply and demand. The Fed has unlimited capacity to purchase bonds (driving yields down) and currently has about $9T of bonds that it can sell (pushing rates up). The Fed doesn’t need to force any market participant to change yields, it can do it mechanically. The Bank of Japan explicitly does this.
The Fed also has regulatory authority over US banks, which conceivably can impact rates (think RRR and stress tests). It (along with other regulators like FDIC) can even specify the composition of bank portfolios (which determines where flows go).
> Instead, they have various levers that predictably cause rational actors to voluntarily change their own rates
Certainly rational actors respond to Fed actions of their own volition, but don’t underestimate the mechanical aspects of markets (e.g. dealers need to hedge risk and changes in rates change duration, risk parity funds and CTAs have mandates to follow, etc.)
The FOMC(Federal Open Market Committee) is the policy arm of the Fed. They can not and do not set interest rates directly. What they do is adjust the money supply to try to influence interest rates towards a target range. One of the tools they have to do this is the the federal funds rate which is the rate that banks charge each other to borrow money overnight in order to meet their reserve requirements. The Fed Funds rate is one of the tools they have their disposal. The FOMC meets 8 times and year releases this guidance.
As I mentioned in a sibling comment, there hasn't been a reserve requirement for two years. I'm not sure what's primarily driving the interbank borrowing now.
The Fed Funds rate is still the reference for policy but the Fed has been using a new framework called "ample reserves" since the latter part of 2020.
See:
"How Does the Fed Influence Interest Rates Using Its New Tools?"
> the Fed has been using a new framework called "ample reserves" since the latter part of 2020
It’s been using an ample reserve regime for much longer than that. The Fed received congressional approval to implement a floor system around 2007 (it had been seeking it since the 80’s, I think), and has used it since the GFC. Are you possibly referring to the average inflation targeting framework?
But doesn’t the Fed still pay on reserves held? Even if it’s not required, the Fed increasing the rate paid on reserves would put upward pressure on other rates, otherwise banks would just take the IORB rate.
I have no idea if any of this is correct, but my understanding is that mortgage rates are set, more or less, by the market. You have buyers(say, pension funds) with a lot of cash that they need to invest in a relatively safe way. They bid on mortgages and whatever they're willing to pay for those loans sets the mortgage rate. Up until(or maybe still including) now, the Fed has also been one of those buyers in an attempt to push down those mortgage rates.
Rates are low because there aren't a lot of alternatives for safely storing cash right now. Normally you could buy government bonds, but rates on those are also negative for the same reasons(demand along with fed buying).
When rates on government bonds rise, or when it's obvious we're back in a period of consistent inflation(likely, given the fed's weak move today), investors will have other options and the demand for cheap mortgage debt will dry up at the current price, pushing rates higher.
Have you peeled back the categories measured by the 8% inflation? This is stupid for me to say but, for example... Used car prices factor into that 8% number. But if you aren't shopping for a used car... it doesn't really affect you, right?
Housing affects mostly everybody. Same with energy. I don't truly understand the weighting or everything that goes into the 8% CPI getting tossed around and I understand that it comes out to "on average as a whole, you as a consumer are most likely seeing a roughly 8% increase in cost" but I wonder if it is worth calling out that "actual personally perceived inflation" might be less (or more) than 8%
My rent hasn't gone up, I haven't bought a different (new or used) car. Gas is more expensive surely but I think that's an extra $40/mo for me or so. I think Chipotle bowls cost about $3 more now... Not exactly life changing?
CPI only shows 5%, due to the lag induced by their rent counting methodology. So inflation as measured by CPI is understated if anything, not overstated.
Using the same formula as was used in the 70s would produce double digit numbers.
>CPI only shows 5%, due to the lag induced by their rent counting methodology. So inflation as measured by CPI is understated if anything, not overstated.
>Using the same formula as was used in the 70s would produce double digit numbers.
Can you elaborate on this? When and what was the methodology changed?
On point one, CPI uses a combination of "owners equivalent rents" and more traditional rent measures.
Owner's equivalent rent is basically just a survey where they ask homeowners how much they could rent their house for. So survey participants understanding of market rents may lag.
But more importantly, when they survey renters, they ask them what they're currently paying. So if somebody is in a one year lease, and gets surveyed in month 11, they will give a rent figure that's almost a year old. On top of this, CPI includes rent controlled units, below market rent units etc. In some sense this is "correct" because it reflects what people are paying... But the whole value of CPI is to be a forecasting tool. Using lagging metrics is bad design imo.
Finally, they only survey 1/6 of the housing stock each month. So the whole sample is not updated every month.
To your second question, the biggest change is that CPI used to use home prices rather than the OER measure. That metric would show 15-20% rather than the 5% we get from their current formula. Given that the shelter component is the biggest weight in the CPI, it would shift the number up a few points.
>But the whole value of CPI is to be a forecasting tool
Forecasting tool for what? Prices? Everything about the CPI is about measuring price changes that already occurred, not to forecast future price rises. If the price of widget goes up 10% year after year, that's all CPI is going to report. It's not going to report what the price of widgets are 10 years from now. If you want inflation forecasts, you look at TIPS spreads or the price of various swaps.
Once you understand that, most of the measurement choices make sense.
>Owner's equivalent rent is basically just a survey where they ask homeowners how much they could rent their house for. So survey participants understanding of market rents may lag.
That's fine because they're essentially insulated from the housing market, so the price they pay is effectively fixed for decades.
>But more importantly, when they survey renters, they ask them what they're currently paying. So if somebody is in a one year lease, and gets surveyed in month 11, they will give a rent figure that's almost a year old.
>Finally, they only survey 1/6 of the housing stock each month. So the whole sample is not updated every month.
Again, also fine because the point of CPI is to measure the cost of living for americans, and the cost of living for americans is largely fixed months in the past (or for homeowners, decades in the past). That said, I do think only updating 1/6 of the housing stock is a bit shady because it basically applies the lagged measure twice.
You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware?
The CPI is the primary tool the Fed uses to set policy, policy whose effect has a multi month lag of its own. So by using backwards looking metrics, we severely impair the ability of the fed to set appropriate policy in a timely manner.
If you think the backwards looking metric is still useful, then the Fed should create a new metric based off current market rates, and use that instead. it's intellectually dishonest to defend using backwards looking metrics in the CPI methodology as a forecasting tool for Fed policy. The current methodology clearly masks the actual current market rates for rent.
Including rent controlled units tells us nothing of inflation, by definition. So why does the Fed consider these?
Example: it took a whole year for inflation to be acknowledged as a problem, and rents have barely shown up in it at this point. There are a few percentage points higher on CPI to come from rent alone (assuming other factors stay constant)
Using current market rates is not forecasting anything, it's telling you what rents are today. Using rents from a year ago is backwards looking, pretty obviously. It's a current snapshot of what people are paying, not what price levels are. Which is a fairly useless metric, as the the intent of Fed policy is to influence market pricing, and the biggest use case for the CPI is to provide datapoints to help forecast the path of inflation.
> You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware?
Because I want to understand your position before arguing against it, rather than imagine what your arguments are and putting them in your mouth.
>The CPI is the primary tool the Fed uses to set policy, policy whose effect has a multi month lag of its own. So by using backwards looking metrics, we severely impair the ability of the fed to set appropriate policy in a timely manner.
It'll be nice if we had a forward looking metric, but that changes nothing about what the CPI is. The BLS publishes the methodology and/or goals of the CPI, so the fact that it's not forward looking isn't some sort of secret.
>If you think the backwards looking metric is still useful, then the Fed should create a new metric based off current market rates, and use that instead.
AFAIK they use a combination of present data + expert predictions to base their decisions. Using "current price for rent/housing" CPI might make it forward looking for rent/housing, but it does nothing for other components (eg. energy/food), because those prices aren't locked in for consumers. If you actually want a forward looking metric, your best bet are financial instruments linked to CPI and/or prediction markets.
> it's intellectually dishonest to defend using backwards looking metrics in the CPI methodology as a forecasting tool for Fed policy. The current methodology clearly masks the actual current market rates for rent.
I don't get it, is the CPI supposed to be the end all be all metric for interest rate policy? I don't think that's a position that I expressed, nor is something the fed holds.
>Including rent controlled units tells us nothing of inflation, by definition. So why does the Fed consider these?
>Example: it took a whole year for inflation to be acknowledged as a problem, and rents have barely shown up in it at this point. There are a few percentage points higher on CPI to come from rent alone (assuming other factors stay constant)
>Using current market rates is not forecasting anything, it's telling you what rents are today. Using rents from a year ago is backwards looking, pretty obviously. It's a current snapshot of what people are paying, not what price levels are. Which is a fairly useless metric, as the the intent of Fed policy is to influence market pricing, and the biggest use case for the CPI is to provide datapoints to help forecast the path of inflation.
I think the problem here is that rent, unlike most things, have their prices locked in months/years in the past. This is unlike most other things in the CPI. You don't lock in your gas prices 6 months in the past, nor do you lock in your supermarket bill. While it's true that prices in the present will eventually be paid by someone in the future, they're also not reflective of what the average american is actually paying today. If you use current prices for some goods, plus current prices for rent (rather than whatever BLS is doing now), then the CPI becomes a weird mix of current + future prices. Imagine a commodities index that is composed of 5 year futures for crude, 3 year futures for wheat, and spot prices for natural gas. What would that even represent?
By that logic we should use car payments from cars bought 5 years ago instead of car prices today. Why doesn't CPI do this?
We should use mortgage payments from house bought 10 years ago, not estimates of current rents.
If I buy 100lbs of canned goods from Costco 10 years ago, we should use that pricing instead of current price of canned goods too.
If you are arguing that using backwards looking rent levels make sense, surely you must agree with these changes too, which are 100% logically consistent with that viewpoint? Otherwise you are just being intellectually dishonest
To say that CPI reflects prices paid over market rates is not even accurate because we don't measure fixed costs for most goods in the CPI, only current pricing. Rent is the only exception, where methodology is not aligned with current market pricing.
The Fed uses CPI as their primary tool for gauging inflation yes, among many other factors such as labor market tightness and so on. Core PCE specifically. Their entire inflation target is built around this as a metric, if you weren't aware.
Why you feel the need to defend it is beyond me. Clearly from a pure statistical sense, using backwards looking data to assist with forecasting is statistical nonsense. You can try to compensate for the flawed metric, with your own forecasting, but why not fix the metric to begin with?
But think whatever you like. I can't respect your view unless you agree that we should use lagging factors across the board to make measurement methodology consistent. Otherwise what is even driving your view? Bias?
What you're describing is a consumer expense index, not what I would think of as a consumer price index. And looking at locked in expenses from the past is largely useless from a monetary policy perspective.
> By that logic we should use car payments from cars bought 5 years ago instead of car prices today. Why doesn't CPI do this?
>If I buy 100lbs of canned goods from Costco 10 years ago, we should use that pricing instead of current price of canned goods too.
Well wikipedia says it's something that economists are "torn" on[1], so maybe they actually should be doing it for consistency reasons! Searching around it looks like the bank of canada[2] and the imf[3] considered doing just that.
Also, apparently the whole reason the adjustment was put in place was because academics complained that the CPI was too biased in the upwards direction[4]
>We should use mortgage payments from house bought 10 years ago, not estimates of current rents.
1. Given that mortgage payments are fixed and housing prices have went up in the past decade, this approach would probably underestimate compared to OER
2. it still doesn't solve the issue that houses (or more specifically land), is an asset, not something you consume (the "C" in CPI).
>If you are arguing that using backwards looking rent levels make sense, surely you must agree with these changes too, which are 100% logically consistent with that viewpoint? Otherwise you are just being intellectually dishonest
Bold of you to assume that I'd disagree with it ;)
>To say that CPI reflects prices paid over market rates is not even accurate because we don't measure fixed costs for most goods in the CPI, only current pricing. Rent is the only exception, where methodology is not aligned with current market pricing.
Of the other goods in the CPI, how much % are durable goods? Of those, how long do people typically own those goods for? For instance, I agree that in in theory it's worth factoring this in for smartphones, but they make up such a small part of people's spending, and the time span is so limited (~2-3 years?) that it's not worth factoring it. This is as opposed to a house that costs hundreds of thousands of dollars, and people own for decades. In other words, maybe the inconsistency is there because they only bothered to adjust the biggest factor?
>The Fed uses CPI as their primary tool for gauging inflation yes, among many other factors such as labor market tightness and so on. Core PCE specifically. Their entire inflation target is built around this as a metric, if you weren't aware.
No, you're missing the fact that they have experts interpreting the metrics. They're not just applying some rule like "if inflation > 3 then raise interest rates". That's why there was the whole "transitory inflation" thing a few months ago even though inflation was way above the target. Given that, unless you think the experts there are totally incompetent and don't have this factored in, I don't see how it's really an issue. Presumably it's baked into their models already.
>Clearly from a pure statistical sense, using backwards looking data to assist with forecasting is statistical nonsense.
I agree that the adjustments are basically a smoothing function that make the CPI more "backwards", but removing it doesn't magically make the CPI not backwards looking. It's backward looking by definition. It's recording chicken prices collected last month. If you want forecasts the CPI is not it. You'll have to get them yourself (ie. experts and/or markets). See also "transitory inflation" from last paragraph.
>But think whatever you like. I can't respect your view unless you agree that we should use lagging factors across the board to make measurement methodology consistent. Otherwise what is even driving your view? Bias?
>What you're describing is a consumer expense index, not what I would think of as a consumer price index. And looking at locked in expenses from the past is largely useless from a monetary policy perspective.
I'll have to concede that CPI literally says "price", so therefore technically speaking you're right that it should consists of price first and foremost. That said, you failed to answer my question from last comment. If you had a commodity price index consists of a random assortment of future prices (of varying lengths) plus spot prices, is that something that people want? It seems at least somewhat reasonable to adjust the prices from the index so that they're all for the same time period, even if that did mean it wasn't following the "real" prices.
Housing mostly only affects renters (~40% of the market) and is also not evenly distributed geographically. While rents in Miami might spike 40% in a year, that affects only (0.4 * 900K)/100M of households in the US.
>Their estimates are calculated with a model that uses Treasury yields, inflation data, inflation swaps, and survey-based measures of inflation expectations.
So the data is partially based on market data (ie. implied inflation rate based on what the yield on TIPS is compared to treasuries). There's another data series for 10 year inflation that only uses market data and it tells a similar story: https://fred.stlouisfed.org/series/T10YIE. Since this is all market data, made by people who have skin in the game (ie. if they get it wrong they lose money), it should be less gamed the previous metric.
This is a common sentiment and credit supply is probably a contributing factor to the run up in housing prices.
However the value of the asset you’re buying is highly sensitive to interest rates in both directions. It is a bet on decade-long uncontrollable monetary inflation that will also push wages up so you can actually sell or rent the house to someone at the end of it all.
This was expected since at least December. The market is pricing in 6 more rate increases throughout the year. They simply can't afford to lag behind inflation too much for too long.
Federal Reserve receives but the payments are made as a share of the government’s budget, no? So the Fed is trying to balance inflation with effectively defunding the governments non-debt servicing initiatives.
Fed profits (after paying out their 6% shareholder dividend to banks) gets remitted back to the US treasury. With a captured Fed, this is nothing but the government printing money to cancel their debt, with an extra step where banks skim some of it off the top.
The coupon payments in the government’s existing debt are fixed and as such they are not effected by any changes. It will only affect newly issued debt while the debt is being rolled over which will take some time (the average maturity is around 5 years)
If you consider that the Fed should collude with fiscal policy makers, then you're right. The Fed is supposed to act independently, but Powell has thrown that out the window.
Fed tightening would force fiscal side to actually restrain spending which would help alleviate inflation. That's the whole point of tightening to begin with (tightening both public and private credit).
The reason the Fed is supposed to be independent is to avoid a Venezuela type situation where deficit spending is monetized through money creation. Well the Fed has been effectively doing that through QE for two years.
Probably not much. The only time the US had a major home price adjustment was 2008 and that was because the housing market was the problem. Currently the housing market is up but not a problem. There aren't crazy foreclosures and there aren't any expected. Tho that can change if we have a big recession absolutely.
Also home prices did not take a very long time to recover all things considered.
It's always different this time, until it's not. Foreclosure rates aren't high today, but the people who bought extremely expensive houses did so just this year and last. Demand for homes is very high, in large part because hedge funds are buying lots of them... if rates rise, or if prices stabilize, they will pull out, decreasing demand significantly. And will migration to smaller cities/towns continue unabated, (if you haven't moved to Austin/Vegas/Idaho/Montana yet, when do you plan to??) or will that reverse as companies want a physical presence again?
I will agree that last time, the recovery was speedier than anticipated, which only shows that irresponsible economic policy to avoid "economy will crash!!!" is overblown.
> And will migration to smaller cities/towns continue unabated, (if you haven't moved to Austin/Vegas/Idaho/Montana yet, when do you plan to??) or will that reverse as companies want a physical presence again?
Moved to Alaska last year. Not going back to city life - remote forever :)
No. In fact, Alaska doesn't have much net migration, not even the last 2 years. There's quite a lot of churn - people move up here, go through their first Alaskan winter, then move back to the lower 48.
It's not guaranteed and in fact, what you'll likely see is continued home price growth as people pile in the "now or never" mentality as rates increase and mortgages are harder and harder to get a the historic low rates (see Canada).
But in the long run, when mortgage rates go from 3% to 6% affordability goes down - people buy based on monthly payments, not the size of the loan.
Of course if wages drastically increase, the affordability issue could be blunted.
Obviously it is not guaranteed bro. We only have history to base these assumptions on. The history backs the fact that housing prices will not go down - unless there is another major issue like the fraud during 2008, which seems unlikely but not impossible.
Nothing is a guarantee. Silly to base your argument on that. Nothing is for certain.
Everybody “plans” on living in the same house forever. Unfortunately, life gets in the way. Job change, moving for a different school district, divorce, death, etc. Stuff happens.
We'll see. we didn't have inflation like this during the last big downturn in 2008. I also don't think the Fed is going to be able to raise rates as high as they did back in the early 80s.
Because interest rates don't immediately go up. Because the government has ways to ensure that they do not have to pay too much to service the debt. Because the government doesn't have to issue new debt to pay the old debt. Etc.. etc.. etc..
I don't understand these, let's look at them one at a time.
1)
>> Interest rates don't immediately go up.
But the ops question is what if rates did go up (wouldn't it be unaffordable for the government). So your answer seems to be a different scenario to the one discussed? What am I missing?
2)
>> Because the government has ways to ensure that they do not have to pay too much to service the debt.
What ways, specifically? There's just not enough information to be able to make sense of the answer?
3)
>> Because the government doesn't have to issue new debt to pay the old debt.
Can you explain how this works? If they don't issue new debt, where does the money come from the pay the old debt? It's not like they are going to suddenly come into massive surplus by reducing all other spending is it?
4)
>> Etc.. etc.. etc..
I'm seriously thinking about this question, if there's any real reasons, very interested to hear?
I admit I'm not an expert here - but unless someone comes to be with a really good argument why the US Government is on verge of collapse b/c of raising rates (they are the ones why raise rates!!!) I am not sure how much I need to prove the counterpoint?
The inflation in the 2000s was the needle that popped the housing bubble. It wasn't comparable to current levels, but it was high and the Fed tightened aggressively to fight it.
There were a lot of structural problems as well, but rising rates leading to foreclosures set off the chain of events.
I think I would've felt better with a half point raise.
Remember, the Fed called inflation 'transitory' for quite a while, even as others pointed out it seemed here to stay. They may not be giving it the respect it deserves.
I'd be delighted to be wrong, to watch inflation fall with the smaller raise. But if it fails, I hope they move aggressively against it soon to stop it.
The ONLY way for any government to escape their massive debt is inflation. The US is no different from other countries that used the pandemic as an excuse to prop all kind of businesses.
This is no different that real estate. If you have bought property at a fixed rate, then high inflation (= higher salaries) will make your loan look smaller year after year.
Of course the collateral damage is a weaker US$. But what is the alternative to the US$? Crypto? Yuan (see the recent move of the oil producing countries to accept non US $ payments).
The US knows that there is NO alternative to the US $, hence their reckless borrowing strategy (= issue more Treasuries).
But wait! Isn't what the HN is used to hear? "There is no alternative to the dominant position of Microsoft Explorer, Blackberry or anything else. Until THERE IS a replacement and a newcomer replaces the incumbant.
I am really worried over the long term about the so-called invicible US $ as a store of value.
Problem is that all central banks acted in coordination to print massively. So even if USD loses value in absolute terms, it doesn't in relative term.
You're right though, modern age monetary policy has been about inflating assets and monetizing fiscal deficit spending.
It's basically a big transfer of wealth from the younger generation to the older one (if you look at how lower interest rates pull forward valuations). When people talk about cheap housing or college in the 70s/80s, it was because the interest rate was over 10%. In modern society the best "mathematical" move tends to be to finance every purchase and pay them off as slowly as possible. I'd rather be debt free for peace of mind, personally, even if the math proves it to be the worse option.
here begins the process of the fed sllowwwwly raising rates, well behind the rate of inflation. Either buy stocks or lose $ due to inflation. NO way out
Which isn't what's happening. It's been months now that this was being floated, and the stock market has been volatile the last half year, an outright bear market in some sectors. Trillions in equity have evaporated already, and that's not even taking into account the wealth erosion of high inflation.
Now's the time to be skilled, but not the time to be a rentier.
Probably half of that selling is due to Ukraine . Also, a few months of weakness does not change the long-standing trend of stocks being a good hedge against inflation. Stocks generated real returns in the 80s, 90s, 2003-2007, 2015-2017 despite the fed raising rates.
Because valuations were low. Inflation is only good for asset pricing once that asset has been valued with an inflation appropriate discount rate.
e.g. a 100 PE stock that implies a 1% return/year logically should fall significantly in a 5%+ inflationary environment. Once bond yields adapt to this environment.
Overdo it and you crash the economy. On top of that, inflation is still likely going to fall back down in a year, so no reason to overcorrect now when the downside is so bad.
Or you could use your capital to invest in a business to increase the supply of goods that this excess money is chasing. That would help fight inflation.
I think you just have to really consider what items or services people (or businesses) might always need, or would be last for them to cut. I can't think of those immediately, but food is one example, though grocery, not fast food.
Recession is inevitable. If you’re only considering interest rates, you haven’t bothered to look at the Fed’s balance sheet or FOMC meeting minutes from 2020. We bailed out the world through currency swaps, corporate bonds, and MBS purchases and we’re still doing it to the tune of $120B per month.
Most surprising part of this FOMC had to be when Powell said "we would like to slow demand" during the press conference, you don't usually hear the quiet part out loud like that from this Fed chair. Also shift upwards in PCE in the SEP, plus the dots, all seems appropriately hawkish
> Most surprising part of this FOMC had to be when Powell said "we would like to slow demand" during the press conference, you don't usually hear the quiet part out loud like that from this Fed chair.
That's...not really a “quiet part”, it's the widely acknowledge, overt nature of managing inflation. That the Fed’s dual mandate involves employment and price stability, and that those are in tension because controlling inflation often involves mitigating demand, while promoting employment enhances demand is not viewed as a secret. It’s like Fed 101, and Fed board members (chair or not) very often do not walk on eggshells about it.
This is the first time labor has been making real gains compared to productivity in a long time. I don't think it's surprising that capital would prefer to layoff a few million plebs to remind the rabble where they stand.
> Powell is much more honest than his predecessors in this regard.
I disagree pretty heavily here. Yellen was always honest about the need for monetary policy which would be politically unsavory (which is why her term wasn't renewed). Her delivery was very much designed not to "spook the markets" but I think part of the reason she scared the markets was that she favored long-term stability.
Her words as Treasury Secretary aren't exactly sugar coating things. She's been saying that the impact of the Russian sanctions are going to hurt American as well, and that inflation is probably here to stay in the medium term at least (she's long held the belief that high inflation is an acceptable tradeoff for low unemployment). Granted, those statements are followed up with "we are working on a solution"-type statements, but I don't see many promises.
> Yes, the only way raising these rates could reduce demand is by increasing unemployment.
It could also reduce demand by making it more expensive to buy things. Sure, that will probably have a side-effect of increasing unemployment, but that unemployment isn't the goal. The goal is to make it cost more to do things so less people want to do them.
Increased costs lead to decreased demand, which ultimately will dampen further price increases. They're shifting the intersection of supply and demand.
Yes, inflation would burn itself out with permanent price increases in a world where the Fed wasn't holding down the print button.
The goal of increased interest rates is to make borrowing more expensive, which means business and consumers would cut down on investment or loans, since those are good mechanisms for money creation. It slows the velocity of money and therefore demand.
Of course, we also have supply shocks right now which are causing price increases due to scarcity as well.
> The goal of increased interest rates is to make borrowing more expensive, which means business and consumers would cut down on investment or loans, since those are good mechanisms for money creation. It slows the velocity of money and therefore demand.
And the business that don't get as easy credit will not hire as many people. Let's not hide behind the abstractions that exact causal mechanism here.
It's usually the same barely employed marginalized folks that are "last to higher, first to fire" too. This is empirically established.
Some service workers loose my job, but stupid investment still pours into blockchain bullshit? What a crude lever this monetary policy is!
It would be much better to adopt some new more precise levers. For example, the rules on the collateral for loans could be changed to pop a bubble. Or Gasoline prices should go up way more (with a new UBI to compensate) to encourage rationing of that key thing while not effecting demand overall.
Basically, the policy should match the underlying cause in the supply shocks. Treating all inflations as all the same is crude and punishes poor people extra for no justifiable reason.
They did the absolute minimum to appear to be able to say they are dong something. With official inflation nearing 8%, this is nowhere near enough. SO far equity markets agree this is effectively nothing
It is hard to define exactly what a "Eurodollar" is, but for now assume that a Eurodollar is a bank deposit in a jurisdiction not subject to the Fed's authority. ("Eurodollar" has nothing to do with Euro the currency. People are surprised that "dollars" exist outside the authority of the Fed.)
A Eurodollar future is a contract to borrow a "Eurodollar" for typically 3 months some time in the future. The price of the future is quoted as (100 - interest rate). For example, the Sep 2023 contract (called GEU3) is currently priced at 97.225, meaning that people are agreeing to lend money for 3 months in Sep 2023 at a 2.775% interest rate. Now to my point: the Eurodollar futures curve is currently inverted starting in Sep 2023. For example, the price of the GEU4 future (Sep 2024) is 97.50, implying a 2.50% interest rate, or a rate cut in GP's parlance relatively to Sep 2023.
Why would you pay attention to Eurodollar futures? For one thing, the notional value of all futures is about $12T. (This market used to be larger than the Treasury bond market until Congress fixed the problem.) Like all markets, it may be right or wrong, but if you strongly believe that rates will not be cut between 2023 and 2024, there is a ton of money to be made in that market. The curve started getting nervous, with small inversions of 1-4 basis points, in December 2021, and the inversion has grown larger since. The inversion peak-to-through was ~30bp yesterday and is ~40bp after the Fed's announcement today.
Good question. Those who understand this stuff (not me) are busy making money and don't write about it. Nevertheless, I think that these papers [1,2] by Pozsar offer a fabulous overview of the contemporary money market.
It's only nowhere near enough if you view the process as something other than a huge charade. Take a look at the predicted inflation to see how little the monetary policy "experts" have a clue.
They are going slow. It will take years to get back to pre-covid levels (2.5%-ish), which were low as it is. We haven't had a historically "normal" rate since the mid 2000's (4 to 5% ish.) There will no doubt be another crisis before we get anywhere near there.
That is silly. With mere speculation of interest rate increase, housing sales have already started to slow down. With every 25 bps increase, real asset interest rates will go much higher, causing much more slowdown in sales, GDP and inflation.
If fed accelerates rate increases, we are very likely to see a recession. Which will automatically reduce demand for goods and services and thus inflation.
But reducing inflation by causing mass unemployment will lead to other problems.
The exotic mortgage products (e.g. reverse ARMs) have essentially disappeared, people's homes are well capitalized, lending standards are much higher than they were, there's very low levels of home equity debt, overall debt payments as a percent of household income are at very low levels.
The people waiting for a housing crash are going to wait a long time. This one chart sums it up well:
Mortgage debt service payments as a percent of disposable income are near all-time lows and at roughly 1/2 the number of the GFC peak. Since the vast majority of home loans are fixed -- what's the mechanism for rate hikes to cause a housing crash?
Yeah but that's an overall lowering of debt servicing as a percent of disposable income. The only part that hasn't dropped much is consumer debt.
Plus while reverse amortization might be less common, ARMs generally are still very popular and you'll see a hike in overall debt service associated with rising interest rates.
I don't know what's gonna happen with the housing market and I don't think it'll crash either but I think part of the reason is because private equity has bought a huge amount of housing - BlackRock bought what, 10-15% of the houses sold in 2020?
ARMs actually aren't very popular - fewer than 15% of new mortgages are ARM.
> BlackRock bought what, 10-15% of the houses sold in 2020?
People vastly overestimate how large players like Blackrock are. There are something like 80 million single-family homes in the US. Of these, Blackrock owns 80 thousand. If they bought every one of those homes in 2020 (they didn't) - it would represent more like 1% of homes sold that year. And of course there are millions of condos not figured into my denominator. They're huge, but way under 1% of purchases.
Good point but it works against your overall argument - the investors who buy 10-20% of houses are far less sophisticated than Blackrock and far more likely to start panic selling when their Airbnb income can’t pay their bills.
Of the 80 million single family homes in the US, how many are sold each year? For your math to work (80,000 as 1%) it would have to be 8,000,000 or 10% of the overall supply.
I can actually answer for you - roughly 820,000 single family homes were sold in 2020.
So if BlackRock bought 80,000 homes then, that'd be about 10%.
The claim is that investors are buying nearly 20 percent of housing. Your refutal is that they only own 1%.
Both can be, and are, true.
"A record 18.2 percent of all home purchases were made by investors during the third quarter of 2021, according to a new report by Redfin. That was up from 16.1 percent during the second quarter of 2021 and up 11.2 percent from the third quarter of 2020."
If you change the statement from: "Blackrock bought 10%+ of the homes in the US in 2020"
To: "Various 'investors' (including personal trusts and other tax / estate shielding entities often used for people buying their primary residence) bought 10%+ of the homes if you restrict the data to 40 large cities" then it's mostly true? But that's a different thing than was claimed..
The Redfin data that WaPo is relying on accounts for 494k homes sold in Q3 2021, of which 90k were bought by their definition of investor. But they're missing another ~1 million homes that were sold in the US during that time period outside of the cities that clearly had the most investor interest...
So a sample size of 33% isn't indicative? You might be right here, I don't know for sure.
I think the main problem is that before 2020, nobody really cared who bought what.
Starting right at the beginning of 2020, inventory vanished, and is still vanished to this day. In most major markets, investors are snapping up everything which compounds the problem. Now people are pissed. And they're doing it in the hottest, most contested markets to boot.
I live in a pretty dumpy city, and blackrock has purchased more than 20% of everything on the market in the last 2 years. Homes have almost doubled in values.
Do you understand why people are pissed at that? Pointing out they own 1% nationally does nothing to help us.
I fully appreciate why people are pissed about the housing situation - I bought my first house last year and the process was a tire fire, we ended up offering on maybe 3 or 4 other places before this one? And it wasn't even in a "top tier" city.
I'm sure there's a ton of investor interest (which in my opinion, is "downstream" of the problem, e.g. the millions-of-homes shortage is making it an attractive investment which is bringing the investor money). But again, Blackrock is a very small player in this - I can guarantee you that wealthy boomers with one or two rental properties are a much larger ownership class of investment properties than any faceless PE firm.
Blackrock owns a few tens of thousands of homes in specific cities (https://lease.invitationhomes.com/search?_ga=2.31151100.2135...), and sure, they're causing more competition and higher prices there -- but it's a nationwide problem not so easily reduced to "private equity caused".
My (very amateur) understanding of the housing issue is that its primarily a problem of supply. Since houses have been redefined from a dwelling to a financial investment, there is strong pressure on political policy to encourage asset appreciation. That means NIMBYism and corporate REITs are acting as two wealthy and highly-motivated special interest groups in favor of making new development nigh-impossible.
Or at least, so I've been lead to believe. All I know for sure is I can't by a third of the sq. ft my older sibling could 8 years ago.
I would think a lot of people might be rushing to get a mortgage before rates go up.
Whatever the reasons, home prices are ridiculously inflated right now. They’ll need to go down for first time home buyers to have a chance, so at some point there will be pressure for home prices to drop. For what it’s worth I’m in a rural part of the country and it’s not just a city problem.
The people who should not have been buying houses are now renting. Home prices in my area are higher than they were in 2008. Prices will still drop when interest rates rise - that's how it works. It's good that people will be able to keep their homes this time around, but that doesn't mean it's not a bubble.
Every person in the US who has had their purchasing power destroyed over the past ~18 months.
Unfortunately, most people were/are too drunk on (maybe temporary) housing and stock market gains to care.
Cheap money, free money and rampant speculation could all have easily been cut off a year ago and we would have had a much “softer landing”. Now we’re in a much more precarious position and may end up fighting stagflation possibly causing years long general economic malaise.
I legitimately want my home value to tank. I'm sick of paying taxes on a 275k home value that will never, ever, ever sell for that much. I wish it could go back to 80-100k, regardless of whatever "equity" that costs me. I'm in my permanent home, not an investment property.
They are saying they will raise it several more times this year.
Inflation isn't the worst economic problem you can have, unemployment and deflation are. And raising interest rates risks raising unemployment, and even causing a recession if you're too aggressive.
The inflation could still be a temporary effect of the COVID years, so if you overdo it, you'll risk dampening economic activity too much when it was going to go down after a year anyways.
If the inflation falls later on, that 1.5 won't look so bad. No reason risk to crash the economy right when it's just starting to recover. Overcorrecting is bad.
It has been high for a year already and everything points to it worsening (the 8% doesn't include Ukraine, which will push both energy and food prices up). It is because it is not temporary anymore than the Fed is forced to act now.
Hello, I wonder, concerning unemployment stats, people are saying u-3 or u-6 etc. is there something like “full utilisation”? What would that look like? Say, assume drones/advanced future cyborgs are free and everyone works and likes it. It’s not going to be infinite growth since it would have to be locked to a pop and region. Simplify for example: it works out to be a Mac Donald’s every second street corner. How many jobs and res?
I also heard of a thing called money velocity. ~how much a particular dollar moves around. I heard it’s worth considering when understanding inflation stuff. I heard it said that recent stimulus has been like adding gas to a cold system (low velocity) where last time it was a hot system. The worry is we are going to explode if the temp goes up.
Have a nice day everyone.
We changed the URL from https://www.federalreserve.gov/newsevents/pressreleases/mone..., which is a slightly obscure press release, to what looks like an ok third-party article. If there's a better third-party article (that isn't hard paywalled) we can change it again.
Probably best to not let Wall Street gamble with boomer retirement money on when the debt bomb will blow up. Putting Glass-Steagall rules on investment vs. commercial banking back in place would probably make sense around now.
It will be interesting to see how the dynamics change as the USD loses its grip on the crude oil trade and possibly other commodities as well. Will the US keep doing these money-printing and interest rate interventions for the next shock?
Low interest rates, combined with printing too much money, is simply a tax on people who save money. It punishes the most responsible Americans, at the expense of the "how much a month" crowd who like to live in perpetual debt.
Higher rates won’t impact US as much as they will impact emerging economies. Those countries will face food crisis in addition to rapidly rising debt costs. Keep an eye on this because we are on cusp of civil unrests across the globe.
War in Ukraine will have a much larger effect. Something like ~25% of global wheat supply comes from Ukraine and Russia. There won't be any planting to speak of in Ukraine this spring. And Russian wheat is pretty much off the world market.
I’ve heard from Russian sources (so take with grain of salt) that they’ve avoided the center of Ukraine to allow locals to plant food. So maybe some planting may take place.
The Fed is trapped: It can’t raise too much since trillions of debt rely on very low rates. If it doesn’t raise enough then
inflation will cause a recession.
It is a position is of its own making. It shouldn't have allowed this massive debt to accumulate in the first place. Cheap credit and the massive debt that comes with it is the main cause of inflation. Now that the whole economy depends on credit and debt, solutions to inflation can't be applied since they negatively affect credit.
They've printed their way out of a recession since '08 by kicking the can down the road, and we can't kick it any further without creating a large number of losers.
IMHO, it's a sign that American innovation has peaked. It's also reflected by the markedly decrease in intellectualism (as if American culture wasn't anti-intellectual to begin with). When I see young students from other countries and compare them to Americans, there is very little valuing education in fact the antagonism is occurring.
For example, math is being scapegoated as systematically discriminating against the lowest performers while the highest performers are being subject to the equivalent of forced confessions, guilt and pushed ridiculous theories about race. Yet despite that camp's calls for equity, it is still okay for Asian Americans to be discriminated at academic institutions and various other fields while there are increased calls for virtue signaling towards other groups who do not get the same scrutiny and insanely high standards. Meanwhile the lowest end of the society are allowed to steal (as long as its under $950), commit crimes without consequences (take a trip to SF to see thanks to calls for community patrols post-Floyd) and descend into the inhumane (mental health issues from drug addictions and poverty being normalized) because there is now a sort of compassion industrial complex armed with the loudspeaker that is social media to manipulate opinions while cancelling out the rational as the enemy.
Meanwhile, the military are increasingly spending large amount of money in video games, making young Americans idolize military & war, if not evident from the war mongering cries out of America for a conflict that they largely put in the groundwork to trap their old enemy, censoring, cancelling any opposing view to their narrative. We are all confused, angry, quick to point fingers at one another, instead of nuanced takes, whatever narrative invokes emotions strongest drowns out other side, regardless of whether they are grounded on reality or outright fabrication.
This is the trickle down effect I notice also at YC, I see increasingly bad ideas being pushed like blockchains without any real adoption, trading of unregistered securities, and SaaS companies without real revenues raise ton of money but with no real business plan or use case. It's clearly a race to IPO and find exit liquidity. ex) Coinbase
This is all a giant mess and I ponder, how did America stoop this low, where did it all go wrong?
A lot of the problems of focusing on equality can be connected to internet media making visible a tremendous amount of previously hidden inequity, (literacy rates are highest ever right?), I don't see what it has to do with interest rates
I do see a separate parallel problem of too much dumb capital chasing returns that are in the past not the future, but that can also be connected to the maturation of internet/web platform and the rollout of 2010s web tech to legacy industries; applying web tech to healthcare and like Africa is low-risk high reward ... capital floods the low grounds first
My point was that wealth gap increased due to QE and a class war masked as racial equity is being waged amongst the 99% as a result (without any net benefit to society since the 1. source of wealth come from excess supply of money which makes debt cheap for those in position to take advantage of it vs those who are oppressed by it 2. increasingly diminishing to non-existent value added widgets and services being sold, see my coinbase example above), not between the actual winners or losers of the system but rather the professional advocates from both ends who are seizing the narrative to push their political views in all spectrum of American society, culture and individuals through that tiny screen we carry in our pockets.
It's over man. Just sit back and watch it hit the wall. Anyone who has never sat down and modeled out a DCF in excel can't tell the difference between your argument and the crackpot ones on 4chan about jewish illuminati. Half of the people who have modeled out a DCF have enough assets to maybe have a chair when the music stops, and they won't risk it trying to explain how the game works to anyone who doesn't already know.
"source of wealth come from excess supply of money which makes debt cheap for those in position to take advantage of it vs those who are oppressed by it"
You have to remember - someone who can make money at a risk is much more appealing if you can't make any at a low risk via bonds. Even people who have no business speculating on things get money thrown at them because borrowing money to fund these is also cheap, so there's two seperate forces squeezing a lot of money being thrown around. This can sometimes be a good thing - interest rates fell to these levels during 2008, because we desperately needed something to incentivize people to move money around and boost the economy. But we never raised it from those 2008 lows, kicking the can down the road - and cheap lending has made rampant speculation on both assets and securities much more common. This drives up the prices of both, leading to higher rents, impossible to buy cars, jobs at companies that are artificial pumped up by debt (think Silicon Valley stupidness, where money is being thrown at practically anyone who can breath), riskier and riskier business practices and investments (crypto!), and a lot of other really bad things. The Fed was too slow to raise interest rates and slow growth before it got out of control, and it's lead to very few people getting much richer off the ability to properly leverage these low interest rates, and that money has to come from somewhere - so it comes from the people too poor or unwilling to speculate on the price of houses or large companies.
That debt was already sold at low rates. Now it's going to get inflated away. New debt will be more expensive, old debt will be losing effectively 10% of its value as the price of everything else goes up.
It’s even worse - if the Fed actions tank the markets, then millions of retirees who have been enjoying high market values are screwed and have no other source of wealth or income.
On the one hand, retirees bring nothing of real value to the economy. We serve them because of the obligations they built up over their working careers. But, they get the focus of attention because a) they have all the money, b) they have all the time to be engaged in politics, and c) they vote. But they're purely an extractive cost center. A kind of economic parasite that keeps getting bigger and bigger with the magic of compounding interest.
On the other hand, the younger working class generations, who are the real engines of the economy that keep us all fed and served, are legitimately suffering and failing to acquire a significant stake in the economy. Sure, employment is high but pay is low compared to their parents. When shit hits the fan, the young generations are largely gonna shrug, because who fights to defend something they don't have a stake in?
You're talking about living breathing humans. "extractive cost center" is a weird way to describe "person who paid social security their entire working life". You're not wrong about what you're saying but fuck can you act like there's real people involved here and not just numbers? Are retirees _really_ economic parasites?
Let's not forget that consumption is bringing in revenue to _someone_ which does provide value to the economy. Unbelievable
If you want to work on and solve big hairy problems, you can't get caught up in the weeds.
We can acknowledge the humanity of the humans who make up the constituent parts of the colossus while also saying that the colossus, the sum of those humans, is a potentially negative force on the stability and sustainability of the system.
Sure it's not the most humanizing but it is valuable to disassociate oneself from our human side in order to analyze inhuman systems. The perspective isn't without value, and GP wasn't implying it wasn't, but to take the time to elaborate the point going through the motions to emotional pad it would have been time wasted for most of us.
It's something I appreciate about this community, that we can express ourselves in such ways in order to convey a point without any fat on it. I still assume the person making the point understands that there the fat is there without needing to explicitly mention it. It's a sign of mature dialogue IMO.
For a lot of people, what is even the point of living if there's no retirement to enjoy?
They are an extractive class insofar as their present contributions are net negative. But you are forgetting they likely spent their entire life building up that account, both in terms of an actual retirement and the broader accounting of total life's contributions. Indeed, it is something that hopefully you and I will enjoy one day, because we've earned it.
That idea reeks of short-term thinking, and a world of endless work for no reward as your worth goes to 0 once you stop contributing.
True, but almost every society expects its elders to still do some kind of work, usually house work and child care, which helps free the healthy adults to do the more difficult work. Those who can't do that are usually very close to death.
So then what is the complaint? They are indeed contributing to society. We enjoy the level of technological advancement that we do because our innovators are free to innovate, and not wasting their time on prosaic matters (because the elders cover that for them)
"For a lot of people, what is even the point of living if there's no retirement to enjoy?"
The point is you are supposed to be helping other people in some way. Not just being a useless turd and forcing young functional people pay rent to you so that you can do nothing but sit on your fat ass and shit in your diaper. They also lived in a society that was much more prosperous than any young person ever will. Considering that now everything is ruined, it's hard not to look at them and imagine they share some small part of the blame.
Maybe if people cared less about saving up a big sum for themselves to "enjoy their retirement", aka being a self-centered moron, then the world wouldn't be such a shithole today.
> forcing young functional people pay rent to you so that you can do nothing but sit on your fat ass and shit in your diaper.
They own the house, which they bought and paid for. It is their property to rent or not rent as they see fit. You pay money for said privilege. They are not squatting on communal property, and short of returning it to the market the property would otherwise sit unused and wasted.
Are you saying that young "functional" people should have free housing? Most of you had some for 18, 20, maybe even 25+ years with your parents. Is it that you want that to last forever? Do you guys think you are Peter Pan or somethign?
> Considering that now everything is ruined, it's hard not to look at them and imagine they share some small part of the blame.
Don't let generational nihilism color your vision so much. There is a world of opportunity out there, especially here in the US, but young people think said opportunity looks like Twitch streaming or professional influencing or pretending that are innovating, but it's not. If those kids would pull their heads out of their asses and start learning how to be boring they will find there is lots of ways to get ahead in life, and that there aren't a lot of easy answers on YouTube.
"Everything is ruined"... like, c'mon, if that's really what you think then you've barely even lived
> retirees bring nothing of real value to the economy.
Sure they may not be producing anything, but is there any value to the idea they consumers still? A lot of FIRE philosophy is you work hard so you can earn retirement early too -- people aren't going to work all their lives either, there has to be a light at the end of the tunnel. It is saddening that it may not be the case for many.
This is an incredibly bigoted screed. Describing human beings who were the economic engine for 40-50 years and paid in to the system as a "parasite" and a "purely an extractive cost center" is truly appalling.
>"It really seems like a powder keg for revolution."
I would argue your entire post seems like a powder keg for some self-reflection.
//On the one hand, retirees bring nothing of real value to the economy
Not true. If retirees have money, that's money they got paid for doing actual contribution. If you devalue that money that's devaluing their life's work and contributions.
Not an advocate for crypto etc, but it feels wrong that a bunch of folks like Powell etc get to decide the fate of whole generation's peaceful retirement.
I hope you never grow old or become wealthy, friend. It’d be quite the shame for you to become the very thing that you hate.
You’re living in housing built by someone in the past, driving a car engineered years ago, on bridges and roads built decades ago. You enjoy technologies that people even 30 years ago could only dream of, things you did not create or contribute to.
And then you have the gall to whine about those builders, savers, investors, and innovators who created those things.
Kind of sounds like you’re the extractive cost center, to be honest.
The point is, the things that make the economy work and grow is the production of things. Regardless of how many investments a retired person has, they by definition do not produce things.
Which supports the claim that they are low, and, consequently that young people (who often stand to inherit from their elderly relatives) have a stake in the investments of old people not getting wiped out.
I’m surprised this is top comment. Everyone ought to rebalance their assets as they get closer to retirement. If you are retired you should have a minimum of 3-10% of your portfolio in bonds, which typically fluctuate less than stocks. Then you draw from your bond assets to actually get money.
As long as your stock assets aren’t touched for 3-5 years it doesn’t matter what the market does in the next few months.
I think this particular advice from The Intelligent Investor is unreliable. Back then, bond yields were substantially higher, dividend yields were significantly higher, equity valuations we significantly lower, etc etc. The rest of the book is top notch though.
The Intelligent Investor was not written in a time when interest rates were zero (and real interest rates were negative).
Using the suggested approach would demolish a bond portfolio. Assuming Barclays Aggregate index as a proxy, if interest rates rise to 7%, then half the value of the bonds would be lost.
Note that correlation of rising rates and rising stock market exists until about the 4-6% rate region before the market starts to be truly negatively correlated with bonds above that number.
Based on all my reading over the past several years, this is the first time in history that so many bonds have been priced at or near zero (including below zero rates). I think Benjamin Graham would be writing a supplement to his book if he were alive today.
A typical retiree portfolio should have a significant portion in bonds (or more likely, bond funds). Initially this will hurt, but over time, higher rates mean higher bond returns
Equity markets can take a hit at pretty much any time for completely unforeseen reasons. This is expected and should be factored into a "safe" withdrawal rate (see Bill Bingham and the 4% rule).
Anyone who was relying on an equity market that never tanked, to survive retirement, was doomed from the outset.
1 - holding bonds versus bond funds are very different, as in the first case, you control the timing of the sale, and in the second, the fund does. That has all sorts of implications about losses (as well as capital gains) in any particular year.
2 - Interest rates have been at zero (ignoring this week's interest rate hike). Using the Barclay's Agg duration of 6.7 (as of this week), then you are just asking for pain in your bond holdings. Stocks may or may not go up or down, but bonds are either going to go down or generate basically zero cash flow. Many people have embraced TINA as a result. [0]
Let's not be naive. The Fed put itself in this position. You're correct. Most of the rest of us will - once again - take a massive shot to the wallet. But to The Fed and its "fan base" it's simply another cycle in the process of moving more from the bottom to the top.
Put another way, you or me are simply not The Fed's priority. I'm not sure why we voted for them.
Not once in my lifetime have I seen the fed tank the markets. It's more like the fed being tailwind. Since 2008 the pattern has been for the fed to be way behind the curve by keeping real interest rates negative and raising rates very slowly and with tons of advance warning even as the stock market and economy rips higher.
This is always the case though, there are always retired people. They have raised rates and damaged market values in past. Its a decision they are comfortable taking.
Plus, at least current US retirees have social security, which may not last another 20+ years in current form (unfortunately for people paying in today).
There is no reason the US federal government would have to nominally end federal social security benefits. The federal government has the power to simply create new money.
However, it would be prudent to assume that the social security benefits will have less and less purchasing power (since each USD will have less and less purchasing power), and the government will not increase the amount of the benefits sufficiently to offset the decrease in purchasing power.
Biden has attempted to cut social security numerous times.
The elite will eventually get their way because it represents such a vast source of untapped value to extract from. Will it be in my lifetime? (im in my 30s).
That I don't know but I do know that they are gunning for it as well as Medicare and Medicaid and if a US bankruptcy does not wipe it out then eventually they will find a way to take it.
If the federal US government is borrowing in a currency they control, I do not see why US leaders would choose to go bankrupt over simply issuing new money to meet debt obligations?
And Social Security and other government benefits/services are continuously cut, at least where I live as far as I am concerned since they never keep up with price increases for the things I buy.
>If the federal US government is borrowing in a currency they control, I do not see why US leaders would choose to go bankrupt over simply issuing new money to meet debt obligations?
To be clear I do not expect a bankruptcy to be a likely outcome. I just consider it a non-impossible possibility. The only scenario I can think of is if some event moves so quickly that the government cannot respond in time before its too late. Even then, I still feel they probably have options.
>And Social Security and other government benefits/services are continuously cut, at least where I live as far as I am concerned since they never keep up with price increases for the things I buy.
Yes they are being devalued and thats the constant battle that is being fought. While the US continues to print money to give to the rich, they sneak things in such as small cuts here and there as well as further taxes on the poor (ie. You now have to pay an additional tax on more than 600$ worth of ebay sales. This was snuck into the relief bill.)
> (ie. You now have to pay an additional tax on more than 600$ worth of ebay sales. This was snuck into the relief bill.)
No, that is not a recent addition to tax liabilities. You have always had to pay tax on income. The only difference is eBay (and other facilitators) are required to report it now.
Its still closing a unofficial loophole that lower income people relied on. That counts as part of the war to extract every last penny on the poor.
There are a lot of other nefarious things in the bill such as requiring manufacturers to install a device to monitor the driver if they are impaired(beyond 2026). This will lead to fines that will lead to further eroding of what little wealth the poor already have left. Was very smart of them to introduce it far off into the future so it can be slowly integrated into people new car purchases. This is why I believe the addition of the 600$ reporting requirement was no innocent ploy to just shore up this revenue stream. It was purposely introduced at an opportune time.
It's not a loophole it's tax fraud. Not reporting your income does not make it legal. In the end if your income is low enough you'll mostly be offset by the standard deduction anyway.
>In the end if your income is low enough you'll mostly be offset by the standard deduction anyway.
The point was that it is another barrier introduced to extract as much value from the lower classes as possible. In fact you had missed the original point completely.
Shouldn't there be an "invisible hand" at work to settle this problem automatically when Fed over-raises or under-raises? With the invisible hand and free market arguments, this should have been a non-problem at the first place. But... since the initial move was not natural (lots of cash injection), the natural final move has to be sudden and forceful. These analysis-paralysis rate hikes seem like lots of pawns to be lost before the final blow. It just opens a window of opportunity for ahead-of-the-curve retirees to save their wealth, not helping to avoid the final effect.
Only small fraction (2.5%) of retirees rely on their 401(k) plans as a single source of income. The majority relies on social security. High inflation will affect many more people, and not just retirees.
This literally could mean the difference between living independently or not for a lot of people.
Not to mention everybody working today with a 401k as their retirement plan will lose value no matter their age, which means they have to work longer than planned. This is a real life impact to a lot of people.
> This literally could mean the difference between living independently or not for a lot of people.
Given that quality of assistive care matters, it could literally mean the difference between living and not for people.
Of course, on the other hand, so could runaway inflation for lots of people into the same age group (not every elderly person is self-sufficient on retirement income; many are supported by younger, working family members.)
I have no idea why you thought that a subthread on estate tax and what it says about younger people's interest in older folks savings was the most germane place to post that, but I hope you feel better having gotten it off your chest.
Depends. If you plan to draw down your savings to 0 to survive retirement maybe. But if you have enough saved up for a safe withdrawal rate to survive retirement, why not keep it invested normally and have more for your inheritors?
Retirees who are fortunate enough to have substantial retirement assets should take precautions against risk. If they haven’t then that’s their problem. I’m retiring in 30 years, my retirement accounts are all stocks. If I was 65 I’d have my 401(k) heavily in bonds and fixed income.
That's a bit callous of you, not to mention shortsighted. If the Baby Boomer generation loses financial security, they will as a group A) tighten their spending habits and B) not retire.
Either of these effects on their own would hurt the younger generations, and together would make the already slow wealth building hit a brick wall. (I'm 25, for the record, and I don't expect to be debt-free or a homeowner until well into middle age)
While it really shouldn't be true, and at the level of financial mechanics probably isn't, the stock market has become the measure of the economy. Remember, pensions are dead and buried, and the nuclear family standard means that relying on your children (read: you and I) is not the bulwark it once was. That means 401(k) performance is really, really important, as terrible as that may be -- its just the reality right now.
It’s really not callous. If a boomer’s 401(k) is still heavy on stocks they’re being greedy! De-risk, people. I don’t want to let inflation tank my economy to protect a generation of greedy grandparents.
Generally 401(k) plan ratios are not managed individually. Most will have target date funds[0] that automatically transition in to progressively less-risky investments as you get closer to retirement.
The problem is... almost no financial instruments outside of stocks can provide a meaningful return any more, so even the target date funds are almost all stock.
I noted your other "time in the market beats timing the market" comment, which suggests you are an active investor. That's great! But very few Americans are active investors, and expecting them to become so is unrealistic.
Its a problem of realpolitik, which is why, going back to my original comment, you should still care, if only for how it will affect you.
[0]: Here is an example prospectus of a 2055 target date fund. Note the graph showing the changing allocation of stocks/bonds/money-market funds (or CDs). By retirement, nearly half the portfolio is still stocks. https://prospectus-express.broadridge.com/summary.asp?client...
Half stocks is a great example of diversification. If there’s a huge correction (say 20%) they’ll lose 10% — hardly something that would drop you from prosperous to poverty stricken.
If they are one of the lucky few with a defined benefit public pension, like my parents have, having your RRSP (401(k) in Canada) biased towards stocks is a sounds investment policy.
I’m actually quite impressed they haven’t started that push yet —- guessing COVID still sort of being a thing but no longer spoken about due to it polling poorly makes this a non-ideal time.
On the other hand, as there’s effectively no border enforcement during this administration, I guess they’re already accomplishing their goals without needing the media to ram “Americans can’t/won’t do the jobs” down your throat.
You are not looking at the reality of the situation if you think the average American has a "gigantic amount saved up". The average American is working paycheck to paycheck and is lucky to have a couple hundred bucks for a rainy day or unexpected car repair.
You've been played by a study designed to manipulate the view of American wealth. The median household has a gigantic amount of wealth, over $100k worth. Not having $1k in a checking account doesn't mean you can't afford $1k or even a $10k expense.
Sure if you define 'household' as home owners, of course their assets are well above $100k because of the hyper inflated housing market in the country.
I would _love_ to see how someone renting an apartment and working minimum wage with less than $1k in their checking account can get a $10k loan. What are they going to do, go to the check cashing place around the corner and walk out with 10 grand? (that's saracasm btw)
I don't. All households. Majority of households have > 100k wealth. Your claim is patently wrong, when taken against your citation which shows nearly everyone found _some_ way to pay the expense. Personally I would just pay with a credit card so I can let inflation shred away ~0.5% of the real cost, but I'd be tossed away with those who 'cant afford' it by your interpretation of the study.
I usually keep less than $1k in fiat accounts and I could easily have tens of thousands tomorrow if I like, and my household is far poorer than the median household. It's called selling (or borrowing against) assets. The median household can do the same thing. Only an idiot holds fiat in a savings account when inflation is raging.
I'm skeptical but willing to believe 56% of people can't find $1k on the spot in fiat cash because of the structure of their wealth. However statistically _most_ households have a hundred times over that in net wealth. Carefully reading the study, it becomes apparent the vast majority are able to alter the composition of their wealth or future spending to accommodate the expense. 59% were going to pay outright (if you add in the 15% that said they would pay and cut their budget), and if you add in people like me that would let it sit on credit to let some real value inflate away, it goes up to 79% who would pay it outright either by debiting from their fiat stockpiles or credit card. Only 4% actually needed to take out a personal loan, and only 10% would resort to family. Factor in that probably 14% of adults are 25 or younger or in school, and it starts to become apparent that the overwhelming majority of adults can afford a $1k expense.
> I'm skeptical but willing to believe 56% of people can't find $1k on the spot in fiat cash because of the structure of their wealth.
It's not too far fetched.
1. Buy a house in the 80s when they were like 60k-80k.
2. Work a normal'ish non-tech full time job where you make 35k / year.
3. Fail to pay off your original mortgage over 20-30 years and end up getting a 2nd mortgage.
4. Pay your current mortgage, property taxes and other bills every month.
Pretty sure anyone who is single in this position would have nothing left over per month and be living an extremely tight lifestyle with not much to spare a few days before their next pay check.
Throw in a couple of bad decisions over the decades and you could have no savings too. Something tells me a decent percent of 55-70 year old folks fall into this category.
You are living in a bubble. This may be true for you and the people you associate with, but for the majority of Americans, it's not true in the slightest.
The following source does indeed show a 50th percentile (median) household wealth of $100K, but if you read the damn thing it shows the median contribution from property is $120K, which presumably means, if you were to exclude property owners, the average would be MUCH closer to 0.
It also shows that 30% is contributed overall from property and another 30% from retirement accounts... Which can't be accessed until late in life and don't help you cover unexpected expenses.
> The assets with the highest median
values are primary home equity
and rental property equity. The
median value for home equity and
the median equity in rental prop-
erties, which are not statistically
different from each other, were
$118,000 and $120,000, respec-
tively
people say this every time rates go up. The fed is not trapped. Rates went up from 0% in 2015 to 2.25% by 2018 and nothing bad happened. Inflation remained low, bonds did well.
We had soaring inflation in the early 80’s, but at that time loan interest rates and certificate of deposit rates were much higher than they are now. Does anyone know why the difference?
They have been "expecting" to raise rates for years now. Most of the time, they chicken out, and last time they went through with it (2018), the Fed Chairman was replaced with someone who was well known to be "dovish" on rate increases.
I don't follow your argument, the feds interest rate consistently increased from the end of 2017 until Covid hit. When Powell started it was at 1.4% and got up to 2.4% in July 2019, more than one year after he took office.
House values are driven by what people can afford, which is heavily influenced by the interest. If you can afford $1k/mo and 10% of that is interest, 90% is going to principal and you can figure out the math on what your total principal would be. If 20% of that is going to interest, you're still paying $1k, but now your initial principal is much lower, which at scale will drive housing down to some equilibrium where, to be a bit reductive, average people can afford average houses.
My parents bought their house in 1979, for $33k. ~10 years later, when rates had lowered significantly, it was worth $150k.
Not 100% sure about cars, but houses were cheaper. Interest rates being higher means that the monthly payment on a given mortgage amount is higher, meaning the house price that an average buyer can afford goes down. Low interest rates mean that people can afford a more expensive house, and that causes prices to go up.
Anecdotally, my dad complains about paying an interest rate in the teens for the house I grew up in. My parents paid $69K ($188K in 2022 dollars) for the house, which was about a year old. Zillow estimates the same house at $457K today. Obviously not all of the price increase is due to lower interest rates, but the house _was_ much cheaper, so even with a high interest rate, the mortgage was pretty affordable.
Also, returns from other investments tied to interest rates were higher. I seem to recall seeing CD rates >10% in the '80s. I know I had a CD paying >6% as late as the mid '90s. This world where basic banking investments are pointless and pay ~0% is a historic anomaly.
tbh maybe it should stay like that, it's only an anomaly if you start your timeline at the advent of central banking. Interest rates on deposits are a purely mathematical fiction, creating no new value. If people would like to see their old tired moneys sprout new baby moneys out of thin air, they should convert their savings into capital, and effectively invest in productive enterprise. Any capital gain then is by market consensus that new value has been created by your investment in that enterprise.
From this chart(https://inflationdata.com/articles/wp-content/uploads/2021/1...) we can see that in inflation adjusted terms, housing was much more affordable prior to about 2001(give or take). I think generally speaking, housing changes hands now much more often than it did before the internet, and there is much more investment/speculation going on as well, which drives a lot of the additional cost nowadays.
I don't think mortgate rates ever broke 20% but were in double-digits.
At that time, though, you needed about 20% down payment to qualify for a mortgage. So you weren't borrowing as much, and houses were smaller and cheaper. It was very difficult for many people to buy a house in those years.
so many people in this thread will play the common HN intellectual and exclaim how the fed is obviously trapped, or what they did wrong to do get us here.
And in a different thread will trash bitcoin only focusing on its energy consumption and not its potential sound money properties.
If Bitcoin is bad, and the Fed (and every government ever) created a situation which will only lead to poverty & widening wealth gap, whats the solution?
The fed was able to maintain a functioning economy without major disruption in essentials (i.e. there weren't major shocks in being able to buy food or maintain housing) despite shutting down or significantly modifying large sections of the economy for a significant time.
They aren't "trapped" this is the natural and expected consequence of creating a lot more money to sidestep a temporary condition. Considering the US is the strongest-ish economy in the world and the rest of the world had to do the same thing, there shouldn't be terrible consequences as long as nobody does anything really stupid.
Bitcoin, gold, and anti-fed fanboys have a tendency to have a poor understanding at best of global economics with very basic misunderstandings like thinking that bumping the rate bumps the rates of all previous bonds.
Some people who do advocate for those things do know what they are talking about and can argue valid points which are up for discussion, but you don't actually see those very often.
Monetary policy in the US has made major mistakes, but it has been doing a pretty good job, and importantly has avoided the worst kinds of disaster for a long time. What it did during covid was essentially the only option, what a gold standard economy would have been able to do would have led to much worse outcomes.
People will complain about anything. The HN crowd generally overestimates its expertise in matters not related to startup tech (i.e. physics, engineering, economics posts often have pretty awful comments)
> Bitcoin, gold, and anti-fed fanboys have a tendency to have a poor understanding at best of global economics with very basic misunderstandings like thinking that bumping the rate bumps the rates of all previous bonds.
Discussion on this post is worse than the usual level of discussion here, and the usual level around these topics isn't great at best. Hard to discuss monetary policy with someone who doesn't know what monetary policy actually is.
Not trying to be a rude but why even make this comment? Just saying something is bad and inferring people are amateurs without offering any insight yourself is just as useless as the opinions you think are uninformed
Seems like the point of the comment is a reality check against hubris. This can have value to help people who don't know what they don't know begin to understand what the things they don't know are. Possibly the most valuable kind of learning at all.
Grocery stores were emptied but i'll agree that people weren't starving. Maintain housing? I am knee deep trying to buy my first house and completely priced out of my home state. We've had 5 offers on houses now go ~100k over asking. It is brutal out there on housing. Moving to another state means leaving my extended family and taking a pay cut due to company pay scale policies for out of CA workers.
25bps wont help 7.9% inflation. We cant substantially raise rates like the 80s because there is too much debt. The current war will cause trade & commodity issues that wont reveal themselves till late this year. The current admin just signed another 1.5 trillion. And they will keep creating money to finance war or bail out bad situations they themselves created. Middle class and lower are screwed
It's often different subsets of users in these threads. People tend to read and comment on stories they're interested in. Any bias in this interest can become amplified. For example, most commenters on stories claiming that low-level environmental pollution causes large socioeconomic effects believe the claim. Dissesnting comments are likely to be downvoted, so people with dissenting opinions don't bother commenting. Each topic becomes its own echo chamber.
There are discentralized digital currencies that don't require insane energy consumption. But since clean energy is essentially unlimited on our planet, this isn't a reason to avoid conventional blockchains (that reason would be their abysmal scaling behavior). None of them provide any price stability at all -- or wouldn't, if more than precisely zero goods and services were priced in one of them. (Certain DeFi markets have elements of a banking system that might, concievably, offer some price stability.)
The COVID-19 helicopter drops -- which were performed by the Treasury, not the Fed -- certainly could cause inflation. But this would generally be an inflationary shock, not an ongoing inflationary regime. Instead, it's the lockdowns (or hysteria more generally), which damaged the structure of the global economy. You can think of the inflation as the cost of rebuilding these networks, of convincing people to work together again. Simply put, things become cheap when they're produced by efficient networks. If those networks decay, things become more expensive.
The solution is to set interest rates to a historically reasonable level, say 4%. Then, accept you're going to have a recession as asset values reset to reasonable levels.
The reason you need a reasonable risk-free rate is, without that, almost any marginally profitable that you can finance with debt will get financed. This leads to malinvestment. You can see this all around you.
Asset inflation has the insidious side-effect of damaging democracy by producing oligarchy.
An alternative solution would be simply to declare a maximum net worth and set tax rates on income over, say, $1m per year to 95%.
The solution to bad governance is better governance, not utopianism. Problems like this are the entire reason that democratic countries have elections and peaceful transfers of power. Does it always work? No. But looking for a technical solution (short of all powerful general AI) to a human problem will only lead to pain when the human problems start creeping back in to whatever technical solution was designed.
Just look at the value of Bitcoin and try to argue that would create a better or more stable economy. Not to mention 99% of people are hoping their favorite coin is insanely deflationary so they can become rich, not to actually create any functioning economy.
i don't think bitcoin is the saviour it claims, especially now it's being used and swayed by all the usual suspects of the old monetary system. It's now just another bucket within sea of capital. Used to adjust and move capital around, ended up to be just another instrument....
Be nation. Mint money out of thin air. Prices go up for everything. Citizens sell stuff for other stuff. Because prices all went up, causes tax on "gains." But was no real gain. Citizen robbed twice. Once when all prices up. Once when taxed on fake gain.
imo this has been a comically glacial effort, and im not sure the feds 1.9% interest target by EOY is anywhere near aggressive enough to stave off 10% or greater inflation by Q4. What i really think are needed --Clinton era 4-5% rates-- are all but taboo to the market post-housing-collapse.
nearly a year ago the fed was cheerleading "transient" inflation in an attempt to avoid culpability for the corporate credit bubble it created during 2008's post financial meltdown. the article is pretty fixative about 2018 but IMO this goes a long way back. Quantitative easing measures from from 2010 lke low credit and bond buyback were still going on in 2021. The coming to jesus moment for the fed that july bond buyback cessation targets would be a disaster was likely the 2021 holiday shopping slump, and we didnt start honestly talking about raising prime interest until febuary.
the reason 1.9%, and the reason this is a desperate tightrope, is that the fed has the very real ability to blow up the corporate credit bubble with prime interest.
> imo this has been a comically glacial effort, and im not sure the feds 1.9% interest target by EOY is anywhere near aggressive enough to stave off 10% or greater inflation by Q4.
How much of the current inflation has anything to do with interest rates? You think oil/gas prices will care much about the Fed's action?
And we still have supply chain issue before all geopolitical problems even started: just try asking network vendors what their lead times are for switches and routers.
For consumers, Ford is shipping cars with missing functionality:
The amount of money being circulated absolutely does affect inflation (almost by definition). The Fed interest rate affects the amount of money in circulation because the Fed credit money is simply printed. This printed credit money gets spent and ends up circulating. The lower the interest rate, the easier it is to borrow, the more borrowing gets done, the more money is printed and enters circulation, which leads to inflation.
Theoretically, the money needs to be paid back eventually. But as long as the Fed interest rate is below inflation, paying back can always be put off by covering the previous debt with new debt.
> But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.
> The Fed interest rate affects the amount of money in circulation because the Fed credit money is simply printed. This printed credit money gets spent and ends up circulating. The lower the interest rate, the easier it is to borrow, the more borrowing gets done, the more money is printed and enters circulation, which leads to inflation.
Things do not work like this. Money gets created through private banks by credit creation, and the only limit on that is the the risk they see in their loans being defaulted on. The Bank of England put out a primer a few years ago:
> The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
Banks create (hopefully) viable loans first, and then look for reserves after—assuming reserve requirements even exist, as many countries removed them decades ago.
Sure, but if the interest rate is lowered arbitrarily rather than based on some market function, don't unworthy businesses get loans? Seems like we sacrificed efficiency and price discovery to keep employment numbers high.
This is the thing, the entire fiat currency system will at some point likely be recorded in history as the largest fraud ever perpetuated in civilization.
Moves like removing reserves completely just move us further over the ledge into the clear ponzi scheme that it is
If any private actor attempted to do what central banks do, they would be rightfully jailed. We should not allow central banks to do things private actors can not do
If they were higher, people would go bankrupt, not have money to drive, use less gas/oil, thus reducing demand, thus reducing price, thus reducing inflation.
It certainly does not have everything to do with it. The answer is somewhere in the middle. Cheap money absolutely causes inflation, but so do global supply chain breakdowns.
IMO rather than talking about ambiguous "inflation", one should be specific about what exactly is being inflated - "monetary inflation", "asset inflation", "price inflation", etc. Monetary inflation occurred when the Fed printed several trillions of dollars back in 2020, asset inflation occurred soon thereafter, and then price inflation took hold throughout 2021 as that new money trickled into consumers' hands.
It doesn't particularly make sense to call the current rising oil price inflation (that would make "inflation" just a synonym for price increases), but the price of energy going up will cause broad price inflation down the line.
Unless I know I'm talking to an economist I use inflation to mean price inflation, because that's what every non economist thinks it means. You are certainly right that it's ambiguous in a technical sense though.
i would believe supply chain issues were major contributors to inflation if wages were not rising. It seems to me a supply chain problem causes price to go up but wages would not. The price increase by the retailer is there to pay for their price increase to the wholesaler, not to increase employee wages.
> How much of the current inflation has anything to do with interest rates? You think oil/gas prices will care much about the Fed's action?
Yes. Oil/Gas prices are pretty determined by OPEC voting and production of their member countries in conjunction with other macroeconomic issues. OPEC adjusts their production to take into account macroeconomic factors. The Fed rate is one of those issues.
Hiring back 10 million laid-off workers is expensive and consumers are paying the bill. The problem is wage growth at the bottom is the last thing elites want.
It might possibly have an effect, in the same way that anything that causes more unemployment and increases the likelihood of a recession might have an effect.
Technically, it does not, raising 0.25% is always in relation to the existing value of the thing, so increasing a percentage by a quarter of a percent would mean increasing it by a quarter of a percent of its existing value.
On the other hand, "basis percentage points" means something absolute, not relative to the existing level.
It's very useful to know the difference between the two. It's similar to many other things where there are two concepts that people conflate into one word and then spend a long time complaining or creating humor about confusing the results.
If you know more than others do, that's great—but then you should either share some of what you know, so the rest of us can learn, or just accept that people are wrong on the internet. Posting supercilious putdowns doesn't help anything.
I think the problem is people who don't know who post anyway on HN. We'd all prefer the xperts get the most voice, and others mainly sticking to questions.
May I suggest the following addition to HN: Each post-requires a self rating 1-5 Likert on their expertise/experience in the topic, then allow a sorting feature of greatest to least expertise.
One of the most annoying thing about engineering (and smart people in general) is how they think because they are good in X field, that somehow translates into Y field with little training.
MMT: Enabling financial elites to plunder the peasants at ever-increasing rates until inflation kicks in, at which point you tax whatever wealth the peasants accidentally acquired during the run up until they are, once again, poor.
Rinse and repeat until the peasants have no wealth at all. We're already 60% of the way there—but those are rookie numbers! Look at certain South and Central American countries to see how far we have to go.
People look at the monetary policy side of things, but I think shortages have just as much to do with inflation.
If I see there are no eggs in the grocery store, I'm happy to pay whatever they cost next time I see them. If I can only get gasoline 3 days out of the week and I need gasoline, I'll pay whatever the asking price is for that gasoline.
Sure, maybe they flooded the zone with billions of dollars, but that's been going on for a long time. The difference now is that lots of stuff just isn't available.
Inflation is almost 100% caused by "too much money" chasing "too few goods".
"Too much money" is a condition almost always caused by the creation of too much "fiat currency" (ie a currency that is backed by nothing but the good faith and credit of the issuing government)
As we all should know, in the US, on 6/5/1933 FDR took the US off gold-backed currency and started the fiat currency situation we still find ourselves in.
This number represents the "too much money" part of the original equation, and to be honest I'm quite surprised that price inflation isn't significantly worse then what it currently is. This is almost certainly being caused by the fact that the US dollar is the world's Reserve Currency.
Looking at the graph, starting Aug 2020 the line is starting to approach vertical, so it should be completely unsurprising that price inflation is occurring.
Finally, a 0.25% increase in the Federal Funds Rate is laughably small, and will do absolutely nothing to help with the price inflation the US is currently seeing.
> "Too much money" is a condition almost always caused by the creation of too much "fiat currency" (ie a currency that is backed by nothing but the good faith and credit of the issuing government)
> As we all should know, in the US, on 6/5/1933 FDR took the US off gold-backed currency and started the fiat currency situation we still find ourselves in.
Except for the multiple decades post-WW2 with Bretton Woods.
Further, being on the gold standard didn't seem to help with inflation in the US during the 1920s:
I have no idea how anybody looks at Japan without realizing that the MMT people got it right.
Thought experiment: If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected?
If that community was then connected to the rest of the world, would the economic benefit be positive?
You can clearly see that the limitation on printing money is unutilized resources in the economy.
Then the unemployed people on uninhabited farmland move back to their home cities with all this extra money and buy a house for a couple million, sending prices skyrocketing.
This is literally what's been happening to the economy for the last decade. All the money that went into the economy from 2008 onwards ended up in the financial & tech sectors in NYC, Seattle & the Bay Area. As long as it stayed there, it only increased prices in NYC, Seattle & the Bay Area. Then remote work happened and these techie millionaires realized they could live anywhere. Or they just hit a threshold where they can retire. Suddenly those millions are ending up in places like Boise, Phoenix, Austin, Denver, Asheville, etc. and now we get inflation.
Quite the contrary. Japan's money supply has grown considerably more slowly than other countries - reinforcing the relationship between money supply, economic growth, and inflation.
> Thought experiment: If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected?
Sure, because those people can't actually spend the money they were given. But who would agree to be sent to said island? The incentive of getting paid is worthless if you can't spend your money on anything. If the government printed money to pay people to build wind farms with the restriction that they can't spend this money on anything, how many workers would accept this offer?
The government can and should print money to turn unutilized resources in the economy into utilized resources. What's best for the economy is for every capable person in it to be generating stuff. Everything else is an abstraction around that end.
In my thought experiment, there's simply more stuff in the economy because the government printed the money, and the whole is more prosperous for it.
Your thought experiment involves people working for free: being paid with money they can't actually use because they're isolated from the rest of the economy and can't spend that money. Nobody would agree to this. In practice, the people receiving the printed money would not be isolated from the rest of the economy and would be purchasing goods and services with their subsidies and driving up the prices of those products.
You're right that if spending printed money created gains in production to match the increase in money supply it wouldn't result in inflation. That's correct, but I seriously doubt that this is how MMT would work out in practice. Most MMT evangelists aren't trying to get a favorable return on investment. They're looking to fund massive social spending programs like UBI, government healthcare, or decarbonization of energy production.
To be clear, some of these are important projects but we shouldn't kid ourselves into thinking that printing trillions of dollars to pay for them isn't going to affect inflation. They're worth paying for because of the benefits they bring and disasters they avert, not because they're going to produce a return on investment.
> If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected?
First, this never happens, and certainly is not what's been happening for decades now in the US with the Fed printing money, so it's not a very relevant thought experiment.
Second, taking your scenario as given for the sake of argument, what was stopping the unemployed people from cultivating the uninhabited farmland before? Was it the absence of money, or the fact that they didn't own the farmland?
In other words, the real operative point in your thought experiment is not the government printing money, but the government giving tangible resources (uninhabited farmland) to a group of unemployed people, so that they will produce something of value from it. The money is really incidental: once they start producing more food than they can consume themselves, they will be able to acquire their own money by selling the excess. The initial printed money is really more like a one-time grant of working capital, so they can buy enough initial supplies to get the operation going. And money doesn't even have to be printed for that: the government could just allocate some tax revenue to it.
Third, in our actual system as it actually works, who does get newly printed money? Is it unemployed people who could be doing productive work but aren't? That was perhaps true for COVID relief checks--although those didn't really enable anyone to go back to work, they enabled people to stay out of work, not producing anything, for longer--but in any case those don't actually add up to a lot in terms of the total US money supply. The vast majority of the money the Fed prints goes to financial institutions, and the only thing whose "production" is increased by that printed money is loans. Those loans, since they are mostly mortgages, will certainly redirect productive capacity in the economy (so we build more McMansions and commercial office buildings that sit empty for years after being built, while our roads, bridges, drainage systems, electrical power grid, and other infrastructure deteriorate), but they don't increase productive capacity overall. In other words, they're just redistribution--and almost always (with the COVID relief checks being the only possible exception I can see) from the poor to the rich, since that's who the newly printed money goes to (financial institutions).
> You can clearly see that the limitation on printing money is unutilized resources in the economy.
No, we can clearly see that the limitation on printing money is how much redistribution from the poor to the rich the rich think they can get away with. Remember that the Fed was initially advocated to the US government by rich bankers who were tired of the government coming to them for bailouts whenever there was a financial panic due to stupid government interventions (the Panic of 1907 was the specific one that prompted the legislation that became the Federal Reserve Act), so they decided to put a system in place that would make it so the costs of the bailouts ended up being paid by ordinary citizens (who wouldn't get any of the money the Fed would print) instead of them.
The "uninhabited farmland" is just an analogy for some area of the economic landscape that when you spend money on it, can absorb labor and return a tangible benefit that is equal or more than what you spend. Maybe for example repairing worn out infrastructure or creating new infrastructure.
>The vast majority of the money the Fed prints goes to financial institutions
You maybe thinking of Quantitative Easing. In which case financial institutions are just incentivized to cash in their Government Bonds, whereby they need to look for some place else to put the money, hence perhaps asset inflation. The Government doesn't just print a whole lot of money and give it away to someone.
> The "uninhabited farmland" is just an analogy for some area of the economic landscape that when you spend money on it, can absorb labor and return a tangible benefit that is equal or more than what you spend.
Such areas aren't doled out by the government. They're invented by entrepreneurs. Your "uninhabited land" analogy obscures that vital point since uninhabited land is not invented, it's already there.
> Maybe for example repairing worn out infrastructure or creating new infrastructure.
As I already pointed out, if there are things like this that are worth doing, and there are unemployed people who can do them, the government can just use tax revenue to pay them to do it. There's no need to print new money.
> You maybe thinking of Quantitative Easing.
That's one way of doing it, which has been common in recent years, yes. But it's not the only way.
> The Government doesn't just print a whole lot of money and give it away to someone.
The government goes to great lengths to try to convince people that it's not doing that. But economically speaking, that is what it's doing.
When someone "cashes in" a government bond under "quantitative easing", the money they get is not taken from currently existing dollars. The dollars are newly printed money; they are newly created purchasing power that is given to whoever is "cashing in" the bond. That purchasing power doesn't come from nowhere: the purchasing power of a dollar is not fixed, it's determined by the total number of dollars in circulation. So printing new dollars and giving them to someone, even if it's in exchange for a "government bond", is still increasing the total number of dollars in circulation, and that means the purchasing power represented by the new dollars is taken from everyone else who holds dollars.
For a simple example, if there are a thousand dollars currently in circulation, and I "cash in" my government bond for 100 dollars of "quantitative easing", there are now 1100 total dollars in circulation, and I now have 100 dollars of purchasing power that was obtained by reducing the purchasing power of all other dollars by 10 percent. It's economically equivalent to taking 10 cents in tax for each dollar of the 1000 dollars that existed before, and giving it to me. Calling it by some other name doesn't make it something else. It just obfuscates what is actually going on.
(The Fed can in principle also destroy money, by selling securities and retiring the dollars that it gets for them, but historically it has almost never done this.)
> Except for the multiple decades post-WW2 with Bretton Woods.
Um, what? The Bretton Woods agreement was part of "the fiat currency situation we now find ourselves in" (just an earlier stage of it where the government was still trying to pretend to some sort of "linkage" with gold, instead of just dropping the pretense altogether as was done in the early 1970s when Bretton Woods fell apart). No US money was backed by gold at all (not even United States Notes, which were still in circulation) after the FDR administration confiscated all private gold holdings and suspended redemption indefinitely in 1933.
> being on the gold standard didn't seem to help with inflation in the US during the 1920s
To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913. A significant amount of that money was in circulation in the 1920s. Plus, even United States Notes, which were notionally backed by US gold reserves, were not expected to be redeemed for gold in any great quantities, since paper money was so much more convenient than gold for transactions; so the fact that those notes were notionally backed by gold did not have much practical effect on their exchange value. What did have a practical effect was the fact that United States Notes and Federal Reserve Notes exchanged at par (one dollar of each was required to have the same exchange value), so as more Federal Reserve Notes were printed, the exchange value of United States Notes dropped.
> Um, what? The Bretton Woods agreement was part of "the fiat currency situation we now find ourselves in" (just an earlier stage of it where the government was still trying to pretend to some sort of "linkage" with gold,
If USD was not linked to gold, why was a multi-country agreement needed to change the value of the US dollar to gold?
> To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913.
The Federal Reserve was limited to how much money it could "print" by the 1920s, which is why the article explicitly used that time period to make its point:
> It's not clear cut when exactly the U.S. was on or off the gold standard. We suspended it in July 1914 when the onset of World War I precipitated a domestic financial crisis. We then re-established the full gold standard in December 1914 after an aggressive policy response stabilized the financial system. This continued until we entered the war, and subsequently partially embargoed gold exports starting in September 1917. The gold standard was still in effect domestically -- meaning people could trade dollars for specie -- but not internationally. These restrictions on gold exports continued until June 1919, at which point we returned to the full gold standard. I have started from this last date, because there is no question that we were operating under the gold standard at this point. For more, read this superb Federal Reserve paper on the history of the gold standard from World War I through the Great Depression.
This limitation was one of the contributing factors of turning a market crash and economic downturn into deflation and the Great Depression. See James and Bernanke (1991):
> However, Temin (1989) argues that, once these destabilizing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the absence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.
The economies of most countries started to recover once they left the gold standard as they could pump money into their systems to generate economic activity.
If there's not enough money in one's economy you can't do business. There are historical periods where economies literally ran out of money:
Note in particular this at the end of the section on fractional reserve money:
> Before leaving the subject of fractional reserve systems, I should mention one particularly bizarre variant -- a
fractional reserve system based on fiat money. I call it bizarre because the essential function of a fractional reserve
system is to reduce the resource cost of producing money, by allowing an ounce of reserves to replace, say, five
ounces of currency. The resource cost of producing fiat money is zero; more precisely, it costs no more to print a five-
dollar bill than a one-dollar bill, so the cost of having a larger number of dollars in circulation is zero. The cost of
having more bills in circulation is not zero but small. A fractional reserve system based on fiat money thus economizes
on the cost of producing something that costs nothing to produce; it adds the disadvantages of a fractional reserve
system to the disadvantages of a fiat system without adding any corresponding advantages. It makes sense only as a
discreet way of transferring some of the income that the government receives from producing money to the banking
system, and is worth mentioning at all only because it is the system presently in use in this country.
(By "this country" he means the US, although the US is not the only country with such a system.)
> Note in particular this at the end of the section on fractional reserve money:
> (By "this country" he means the US, although the US is not the only country with such a system.)
Actually the US is a country without such a system, i.e, the US (and most countries really) are not fractional reserve systems, and have not been in decades. James Tobin called this "The Old View" in 1963:
Fractional reserve banking is a nice 'Econ 101' way of thinking of the monetary system, but in no way does it match reality. It should really be stopped being taught because people hold onto the paradigm and it causes faulty analysis:
By the simple definition of "fractional reserve"--that a financial institution only needs to keep a fraction of its total liabilities as actual currency in its reserve pool, and must convert other assets into currency if withdrawals exceed that reserve amount--it most certainly is. That is how all financial institutions in the US work, just as in other countries.
It would be interesting to see a debate between Friedman and the other economists you reference, who obviously hold very different views. I don't think we're going to resolve any such differences here; I would simply note that there are such differences, and that the views of the economists you mention are not universal, nor are they necessarily correct.
> why was a multi-country agreement needed to change the value of the US dollar to gold?
By that time, as the article you linked to notes, redemption of US dollars to gold at $35 per ounce had already been suspended by Nixon. I was in error before when I said there had not been any such redemption possible since the FDR administration suspended it in 1933; Bretton Woods did re-establish that in 1944 (though IIRC it was at a different conversion rate than before 1933, so it was effectively a devaluation of the dollar).
The Smithsonian Agreement itself was about exchange rates of other currencies relative to the dollar; it was made because those other countries realized that the US had already gone off the gold standard (when Nixon suspended redemption), and they were trying to make the best out of the situation that they could.
> This limitation was one of the contributing factors of turning a market crash and economic downturn into deflation and the Great Depression. See James and Bernanke (1991)
While this might be true given that the Fed had already been given the power to manipulate the money supply, that does not mean it would not have been better still to not manipulate the money supply at all, and for the government to have simply done nothing after the stock market crash of 1929--as it did after market crashes in 1920 and 1987, neither of which led to prolonged recession or depression.
As for the more general point that printing money and "pumping" it into an economy can generate economic activity, that is of course true, but that does not mean doing that is the best way to generate economic activity. Moreover, being forced to do it in response to a crisis that was caused by government interference in the economy to begin with, which has been the case in every instance I'm aware of where fiat money or paper currency was involved, is not a good argument for it being a good idea.
Inflation is money supply relative to the amount of goods and services. E.g. I have 500 cars in the economy and $1000 in circulation. Over time I grow the economy, and now I have 1000 cars, and I still only have $1000 in circulation. In this scenario we'd have deflation. To maintain an equilibrium I'd need to increase the money supply commensurately, to $2000. If I increased supply to $4000 I'd have inflation.
Japan's money supply growth is actually pretty constrained. From 2007 to 2017 it want from 713 trillion to 960 trillion as per the chart you linked. For the USA [1], money supply in circulation went from 7 trillion to 13.3 trillion and inflation is correspondingly higher [2]. Granted, this source doesn't include recent data around the pandemic, so it's of limited use for analysis existing inflation trends.
I think this group is afraid of hyperinflation, which is almost always caused by governments printing too much money. (And, if we're honest, hyperinflation is a scary situation.) The problem is that they then extrapolate and decide that nominal inflation must be the result of the same problem and that all government action will lead to hyperinflation.
Because velocity tends to return to historical norms in a functioning economy, and if velocity doesn't return to historical norms - say it goes to infinity, like in Weimar hyperinflation, or it goes to zero, like in Japan-style depression - you have bigger problems.
The "velocity is dropping so we need to print more" argument runs into scary problems if you make it without understanding why velocity is dropping. If it's because all the wealth is concentrating within a certain sliver of the population (like 2008-2020 U.S), that's a really big problem that's going to cause mass social instability. If it's because everybody's shutting themselves in their room and not spending money or engaging with society (like Japan), that's also a really big problem. If it reverses and returns to historical norms and beyond (as I suspect will happen), that's also a problem.
A big contrarian position in 2008 that I thought was nuts at the time but now think is very likely was that we were going to get "Deflation, then hyperinflation". I didn't understand the hyperinflation part then, but the argument was that deflation would lead the Fed to keep expanding the money supply, which would pool among a small number of people, until some spark triggered that group to spend money. COVID-related supply chain disruptions were that spark, and I think the hyperinflation case is increasingly likely now.
Velocity always seems to be treated as independent. When velocity plummets, Fed increases money supply. When velocity recovers, the money supply never shrinks. It is a one-way ratchet. Why is that?
People who enjoy the cheap capital afforded by the Fed increasing supply do not want to see their gravy train end, even if it is better for the economy as a whole to temper it while it's hot. See Trump et al gnashing their teeth at the fed for talking about raising rates back in 2018.
On 6/5/1933 the USA was also dealing with massive DEFLATION. Deflation is also a very bad thing. In fact periods of deflation correlate with periods of large economic slowdown. Now I know people who are against fiat currency enjoy deflationary fixed currencies like most cryptocurrencies, but the inability to control money supply leads to hoarding of money, and compounding economic problems due to the lack of money supply.
Hyperinflation is a terrible thing too. But that does not necessarily make gold backed or non fiat currencies superior as large deflation is very destructive as well.
Deflation is much, much worse than the inflation we are currently experiencing. The US was in a 50 year depression starting in 1860 largely due to ineffective monetary policy which caused deflation. Small amounts of inflation are in fact a good thing, as it encourages loaning money.
You shared my exact sentiment. 0.25% is far too small. The reason we even discussed negative rates when COVID hit was because the Fed was too afraid hike rates more rapidly, hence we hadn't gotten to a reasonable rate, before it called for being dialed back. This left very little "powder in the keg." At the pace we are going now I fear it's only a matter of time before the next 2008 hits, and we have nothing left to throw at it. It's a very delicate balance, and it doesn't seem capable hands are at the controls.
>> You shared my exact sentiment. 0.25% is far too small.
Most reports were doubling the rate to 4% or greater. I think after the talk of moving it up that fast and that drastically, a lot of investors started getting the jitters:
That change came after traders had been pricing a move double that size at the March 15-16 Federal Open Market Committee meeting. Central bankers have been dousing the idea of needing to go up 50 basis points at the meeting, with New York Fed President John Williams saying last week that there is “no compelling argument” for the move.
Still, it hasn’t made investors any less nervous about what the path ahead will look like.
“I’m not so worried about whether they do 50 [basis] points out of the gate or not. But I also think they shouldn’t overdo it here,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “You can do 25, and if you want to do another one soon, you can do it, rather than add additional disruption or uncertainty.”
I can understand the idea of going slowly and evaluating the effect on the current markets with inflation still going on. I like the cautious approach considering the massive fallout if it did suddenly jump up to 4%, you'd see a ton of money get pulled out of the market which could be disastrous.
But like you said, either way could lead to another staggering recession so I'm not 100% confident in either approach.
> I'm quite surprised that price inflation isn't significantly worse.
The one benefit of wealth disparity in the US and around the world.
I agree that if all that new money had been evenly distributed, then it would have most likely caused crazy inflation. But it wasn't. It went directly into the coffers of large banks, corporations and arms manufacturers, and eventually into the accounts of the 0.001%.
The supply of money has to be available to spend in order for it to affect the economy. With the top 1% owning 40% of the wealth, it means all that money is essentially locked away from the general public.
Gold would have been so outlandishly valued if we stuck with that. What is your solution to gold being worth astronomically more as currency backer vs it's day to use by people and industry? Just accept that you can't ever use gold again for manufacturing and let momma's wedding ring increase in value to ridiculous amounts?
I'll agree we probably need at least a 0.5 increase in interest and that's on hte low side. I see so many new land grabs around town and too many new businesses popping up because it's pretty easy to get a loan right now.
you're correct on the too much money, though it's not the goods that we're chasing, rather anything else that represents value.
The gold backed currency was limiting because it's incredibly hard to adjust for fast moving market. So by freeing up money supply, we can exploit the full extent of the market.
When US print money, since the world values USD, whoever buys USD will pay for that inflation. Since there're not better alternatives, they just kept buying, in a sense US is just exporting capital.
So it's no surprise that inflation will be absorbed by USD hoarding entities. say here..
Conceptually the answer in the theory is to suck up the excess money with taxes, which of course is not going to fly in the US. But maybe this inflation will make that more viable in the future: "Ms. Kelton and her colleagues make clear that the pandemic relief packages did not follow one of M.M.T.’s key tenets — they did not try to account for resource constraints ahead of time. In an M.M.T. world, the Congressional Budget Office would have carefully analyzed possible inflation ahead of time, and lawmakers would have tried to offset any strain on available workers and widgets with stabilizing measures and tax increases."