[HN Gopher] The Fed's Doomsday Prophet Has a Dire Warning About ...
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The Fed's Doomsday Prophet Has a Dire Warning About Where We're
Headed
Author : hodgesrm
Score : 34 points
Date : 2021-12-28 18:06 UTC (4 hours ago)
(HTM) web link (www.politico.com)
(TXT) w3m dump (www.politico.com)
| throwawaymanbot wrote:
| jdhn wrote:
| He mentions that asset prices (primarily stocks, but also
| housing) was rising during the earlier portion of the last
| decade, but I'm curious to know what is take would be on why we
| didn't see a lot of inflation outside of those assets until the
| supply chain issues due to covid popped up. Perhaps the supply
| chain issues were the match that lit the inflation fire?
| HarryHirsch wrote:
| I think the supply chain problems are a separate issue. The
| reason that the stocks-and-housing asset inflation hasn't
| spilled over into the monetary economy yet is that not much of
| it has been sold so far. God help us when the retirees will
| have to cash out.
| JamesBarney wrote:
| Inflation of assets and goods and services are two completely
| different phenomenon's with different causes.
|
| Inflation of assets are caused by lowered by interest rates,
| they don't spiral and they don't effect the cost of living.
| Just a straightforward result of net present value
| calculations.
|
| Inflation of goods is caused by a supply shock or too much
| demand (too much spending chasing two few resources).
| HarryHirsch wrote:
| Everyone needs a roof over the head, and the proportion of
| household income that went into housing has been steadily
| going up since the 1980's. So it's not correct that asset
| inflation does not affect everyday cost of living.
| JamesBarney wrote:
| We need to disentangle housing the good the thing you pay
| rent for, from a house an asset that produces housing.
|
| Why would low interest rates cause rent to increase?
| Intuitively I would think that low interest rates would
| make it cheaper to fund the creation of new housing
| lowering rents.
|
| I imagine the increase in rents is because we've made it
| more difficult to build things because of zoning,
| permitting etc..., and we're building better houses that
| are more insulated, fire proof, more outlets, etc...
|
| We also haven't made builders that much more productive
| over the last 40 years.
| HarryHirsch wrote:
| Housing prices went up 20 % between 2016 and now because
| zoning became more difficult? That doesn't compute.
|
| Clearing price is set by the maximum payment mortgage a
| household can afford, i.e. principal + interest. If the
| interest rate is lower, that results in a higher cash
| price, and that's what we see.
|
| Of course politicians at all levels and households who
| have already are uninterested in seeing a change to the
| status quo, so no surprise that there are supply
| constraints as well. All that started when housing became
| a popular investment vehicle sometimes in the late
| 1970's.
|
| The fact that entry-level housing is extra scarce because
| it's less profitable for the builder than a doctor's
| palace doesn't help either.
| JamesBarney wrote:
| I understand how interest rates increase the price of
| house. It's a fairly straightforward calculation.
|
| But what is your theory for the mechanism by which lower
| interest rates causes an increase in the price of rent?
| HarryHirsch wrote:
| That's households that are priced out of a mortgage, so
| they have no alternative but to rent. In emergencies you
| can go to a food bank, but you absolutely need a roof
| over the head.
| hodgesrm wrote:
| > Inflation of goods is caused by a supply shock or too
| much demand (too much spending chasing two few resources).
|
| It was my understanding that increase in the money supply
| caused severe inflation in Spain during the 1500s. [0] If
| true how does that square with the argument that goods
| inflation is from a supply shock or excess demand?
|
| [0] https://en.wikipedia.org/wiki/Price_revolution#Spain
| HarryHirsch wrote:
| There was also population growth as well as an increase
| in the velocity of money, compounded by the fact that the
| rural nobility was on fixed incomes, because taxes and
| levies were not adjusted to inflation. The inflation rate
| was 2 % or so, completely manageable with contemporary
| approaches.
| JamesBarney wrote:
| The money supply doesn't directly effect inflation. The
| money supply causes an increase in demand which triggers
| inflation.
|
| If you printed 10 trillion dollars and shot it into orbit
| around the Sun prices wouldn't change. People have to
| spend it creating increased demand. This is one of the
| reasons quantitative easing had little effect. They
| printed a bunch of money but it just sat in banks and was
| never spent.
| mwattsun wrote:
| This is a long read but worth it. I don't like to only complain
| but praise too, so good on the writer Christopher Leonard. The
| part about low interest rates causing a farm land bubble in
| Kansas was enlightening. I lived through the extreme interest
| rates of the late 70's and subsequent crash caused by the
| policies of Paul Volcker and it wasn't pretty, but then I was
| able to buy a house in the mid 80's at a decent interest rate.
|
| Edit: Volcker
| hodgesrm wrote:
| Agree. It had an unusually clear explanation of how different
| types of bubbles are tied to Fed policies. Pointing out the
| effect of shifting of assets from poorer to richer segments of
| society was another interesting point in the article.
|
| Hoenig's arguments are quite different from the "deficits don't
| matter" spiel of Krugman and others. Krugman's argument that we
| don't see ill effects of current policies could be just as much
| a failure of imagination as lack of data.
| uejfiweun wrote:
| Krugman is nothing but an idiotic hack. He has been so
| consistently out of touch and wrong about everything that I
| almost consider him to be malicious. He just blatantly is a
| spinster for the democratic party, but hides behind his
| pedigree and pretends like his opinion is _obviously_
| correct. It 's that classic snooty elitism, the
| grandstanding, the self-righteousness - the same things that
| alienate moderates from the democratic party.
| JamesBarney wrote:
| I get that Krugman can be shrill. But no one who wins a
| nobel prize in economics is an idiot.
| salawat wrote:
| Never underestimate the career trajectory of a well
| connected idiot in a soft science with a reproducibility
| problems.
| hodgesrm wrote:
| Agree. Krugman is really good on pure economic questions
| like trade theory. Unfortunately he is a lot less
| trustworthy on issues where economics and current
| politics intersect, e.g., NYT opinion pieces. I read
| those with a fair degree of skepticism though he has
| produced a few that were economic gems.
| HWR_14 wrote:
| Volcker is pretty much believed to have ended the periods of
| high inflation, so what makes you blame him for a "crash"?
| hodgesrm wrote:
| Well according to the article it destroyed a lot of banks
| when asset prices stopped rising.
|
| > "You could see that no one anticipated that adjustment,
| even after Volcker began to address inflation. They didn't
| think it would happen to them," Hoenig recalled. Overall,
| more than 1,600 banks failed between 1980 and 1994, the worst
| failure rate since Depression.
|
| I had not personally made that connection to S&L failures but
| getting out of a bubble has to impose costs to somebody.
| dvogel wrote:
| This glosses over the outright fraud within the banking
| industry that was at the heart of the S&L crisis. Without
| the fraud there would have been enough assets and financial
| incentive to consolidate instead of liquidations. The Fed
| policies only had the effect of forcing the industry to
| account for the rot within.
| HarryHirsch wrote:
| _higher prices for gas, goods and automobiles being fueled by the
| Fed's unprecedented money printing programs_
|
| Really? These are not caused by low interest rates. But the
| current housing prices are caused by low interest rates, and
| that's not even discussed in the article.
|
| But the government is missing in action.
| Robotbeat wrote:
| I think it's kind of silly to blame gas prices on Fed action
| since 2008-2011. Even in nominal terms, gas prices are lower
| now than the peaks of that time, and for much of the time, gas
| prices were FAR lower.
|
| Inflation was low for over a decade. We hit a huge pandemic and
| inflation ticked up. Let's not crown him vindicated about
| inflation like a clock that's right one or twice a day. He has
| a decade of low inflation to answer for first, and countless
| examples of monetary austerity giving rise to recessions in
| other countries as counterfactual.
| exceptione wrote:
| The article makes a point that Hoenig did repeatedly not
| mentioned inflation. Instead his main point is about the
| inequality as well as asset bubbles QE would cause.
|
| I think he is right, also about the point that you cannot
| walk back without causing massive pain in the economy. I too
| think central banks have painted themselves in a corner, as
| when central banks drop even a slight hint of changing
| course, panic in the markets follows.
| JamesBarney wrote:
| The Fed's mandate "so as to promote effectively the goals of
| maximum employment, stable prices, and moderate long-term
| interest rates"
|
| It does not mention asset price bubbles, or inequality.
|
| > stoke dangerous asset bubbles
|
| Maybe low interest rates increase the risk of asset bubbles, but
| there were plenty of asset bubbles when interest rates were
| higher than today. But are we willing to accept less than full
| employment for the risk of maybe causing an asset bubble that
| will lead to less than full employment? It's trading something
| bad today for a risk of something bad tomorrow. Seems like a poor
| trade to me.
|
| > enrich the biggest banks over everyone else
|
| Investopedia doesn't think so, but who cares if banks get rich if
| it means we have full employment.
|
| > that would deepen income inequality
|
| There is plenty of evidence that full employment helps reduce
| income inequality. Anecdotally the recent shortage of employees
| means I'm seeing gas stations advertising $15/hr instead of the
| $8 they used to pay. Meanwhile everyone I know who was making
| $100k didn't see a 100% raise.
|
| Research backs up that full employment reduces inequality [1].
|
| [0] https://www.investopedia.com/ask/answers/041015/how-do-
| inter... [1] https://equitablegrowth.org/wages-full-employment-
| reducing-i...
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