[HN Gopher] The Case for Higher Rates
___________________________________________________________________
The Case for Higher Rates
Author : gw67
Score : 105 points
Date : 2022-05-06 13:07 UTC (9 hours ago)
(HTM) web link (thelastbearstanding.substack.com)
(TXT) w3m dump (thelastbearstanding.substack.com)
| mercy_dude wrote:
| Can somebody explain how raising rates can do anything to what
| really seems like a supply side problem due to COVID and war? If
| demand weakening by wealth destruction is the way Fed thinks they
| can get away with a supply side crunch due to years of offshoring
| then they are basically calling for a recession.
| whichfawkes wrote:
| The idea is that if there is less supply, you ideally want
| there to also be less demand.
|
| If supply decreases but there's also a ton of cash splashing
| around, then people try to use it to get things... But there's
| not enough things, so the price of everything gets bid up.
|
| More than 20% of all dollars in existence were "printed" in the
| last 2 years. This, on it's own, would tend to increase
| inflation. Combined with supply side issues, we can see how it
| has definitely increased inflation.
|
| Inflation itself is also an issue in terms of making sure the
| supply side works well. Prices don't go up smoothly and
| uniformly for everything at once, rather there's chaos and
| delays as every step of everything gets renegotiated, and a
| cascade effect from that that causes more disruption.
|
| So, you want to deal with inflation, probably. Increased rates
| mean less money being "created" in the form of credit, which
| means fewer dollars splashing around, which means fewer dollars
| to bid up the prices of short supplies, which means lower
| inflation, theoretically.
| jbay808 wrote:
| > Can somebody explain how raising rates can do anything to
| what really seems like a supply side problem
|
| When supply is too low, inventories are restored by producing
| more goods than we consume. That also happens to be the
| definition of saving. Higher interest rates incentivize saving.
| Therefore, higher rates create the correct incentives to
| resolve a supply-side problem.
| paulpauper wrote:
| _Per the Federal Reserve, total Household Net Worth before
| COVID-19 was $110 trillion. Two years later on 12 /31/21, it
| clocked in at $150 trillion - a 36% increase - the largest
| increase ever over such a time period._
|
| _Isn't it odd that during a period of economic turmoil,
| household wealth increased by the most on record? Indeed this
| strange dichotomy can be understood in large part by low rates
| and QE._
|
| What would explain the increase of household wealth pre-2008,
| before QE was even invented? The economy was in turmoil for a few
| months but then everything picked up again. GDP, corporate
| profits surged. Unemployment fell.
|
| Home prices and stocks surged in the 80s and 90s despite high
| interest rates.
|
| The fed raised rates from 0% in early 2016 to 2.5% by late 2018
| and the stock market and economy did fine.
|
| Correlation does not mean causation, as it's said. 0% interest
| rates forever didn't help japan until possibly only very
| recently. why is it suddenly different here.
| NovemberWhiskey wrote:
| The other thing about that chart is that is it's on a linear
| scale. If you have productive assets that compound returns, you
| should expect log structured growth.
|
| https://fred.stlouisfed.org/series/BOGZ1FL192090005Q
|
| You only get 36% if you measure from the bottom of the sharp
| V-shaped recession in 2020. If you measure from 2019Q4 to
| 2021Q4 you get something more like 29%. Still sounds like a
| lot, but compare 2002Q4 through 2004Q4 - that's also about 26%,
| it's just not so obvious on the linear scale.
|
| In fact, if you look at the percentage growth over a two-year
| look-back, household wealth has grown by at least 20% on
| multiple occasions on that time series.
|
| For comparison, this is what the same timeseries looks like if
| you plot it ending at the end of 2004:
|
| https://imgur.com/EehsZbs
| whichfawkes wrote:
| The M1 money supply increased by 40% during that time though.
|
| We've already realized a ~10% increase in the CPI.
|
| Presuming that houses are included in this metric, those are
| currently pretty inflated in value.
|
| As of December 31st 2021, the market hadn't even really started
| to pull back yet.
|
| If you say that household wealth has increased nominally, in
| terms of there being a bigger number of dollars, sure. But I
| think you have a pretty hard case if you want to argue that
| _Real_ household wealth has increased very much.
| rgrieselhuber wrote:
| I suspect we'll start to see more 40 year mortgages to keep the
| housing market going too.
| onlyrealcuzzo wrote:
| > What would explain the increase of household wealth pre-2008,
| before QE was even invented? The economy was in turmoil for a
| few months but then everything picked up again.
|
| The economy was in turmoil in 2007? There were problems at a
| few banks, but other than that, spending and investment was
| extremely optimistic.
|
| House prices hadn't started to decline, and they were coming
| off their biggest 6-year increase in a long time. HH wealth was
| at an all-time high for most of the year.
| paulpauper wrote:
| i meant turmoil in 2020 due to coivd.
| jgeada wrote:
| Nice, but aggregates like this hide the distribution: _who_ got
| that increase matters, and the distribution is likely extremely
| lopsided towards the upper extreme. The more you had, the
| greater your percentage increase.
| flenserboy wrote:
| Yeah, but that $150T is no longer worth $110T (and that number
| itself was illusory).
| AnimalMuppet wrote:
| Inflation ran more than 36% over the last two years? Sorry,
| no. It may feel like it, but still no.
| whichfawkes wrote:
| Because not all wealth is liquid, the future purchasing
| power of the money you'd get from the assets matters as
| well.
|
| We've seen about 11% inflation since 2019 already, but the
| m1 money supply increased by about 40% during this time.
|
| I have yet to hear anyone suggest reasons why consumer
| prices will not eventually catch up to that 40%. There's a
| big difference between it happening overnight versus
| happening over the course of a decade, but it still
| matters.
|
| On another thread:
|
| Presumably, houses are included in this metric. You could
| sell your massively overvalued house now, and realize that
| gain in asset prices... But then you're probably going to
| either be paying inflated rent or buying another property
| with an inflated value so it kind of ends up being a wash.
| jeffbee wrote:
| That is the curse of inflation. Your household is now worth
| millions but you can't afford a house. This has always been
| the lie of compound interest and savings. You're always told
| that if you don't buy a Big Mac and put the $2.99 in the bank
| instead, you'll have ten dollars in 30 years. But in 30 years
| a Big Mac is going to cost $12, so you just played yourself.
| The whole system is an illusion.
| thaumasiotes wrote:
| > You're always told that if you don't buy a Big Mac and
| put the $2.99 in the bank instead, you'll have ten dollars
| in 30 years. But in 30 years a Big Mac is going to cost
| $12, so you just played yourself.
|
| There's more to it than that. You also get to pay taxes on
| your $7 of capital gains.
| deathanatos wrote:
| You'll get to pay taxes on that Big Mac too.
| thaumasiotes wrote:
| The point here isn't so much that all taxes are
| unreasonable as that, in this scenario, there are no
| capital gains, but you're paying capital gains taxes
| anyway. You're paying a 10% tax (assuming capital gains
| tax rate of 15%) on an investment that is _down_ 17%.
| collegeburner wrote:
| It's on purpose. Consoom now, spend all your money on
| grubhub and funko pops and onlyfans and weed otherwise it
| will be worth less later. Just trust the government to take
| care of you. Poor people aren't allowed to get rich any
| more.
| throwaway0a5e wrote:
| It seems to me the only way to level up (without
| extraordinary luck) is say fuck the system and run an
| under the table business and hope you can get rich enough
| to pivot to something "legit" before the state comes and
| screws you.
| vkou wrote:
| It's not an illusion, it's doing exactly what it's
| designed, which is stimulating the economy by discouraging
| you from sitting on a dragon hoard of money.
|
| The more money moves around in the economy, the more work
| gets done. When money stops moving, people lose their jobs,
| productive output drops, etc, etc.
| deevolution wrote:
| https://wtfhappenedin1971.com/
| criticaltinker wrote:
| I'll bite. The data/graphs look suspicious and convincing
| enough, so WTF did happen?
|
| I was hoping for an answer but alas there was none. Anyone
| have plausible theories? Is this an unexplained mystery or
| just an artifact of S curve growth?
| lamontcg wrote:
| I think its more what happened in 1980 with Reagonomics and
| the Volker Fed followed by Clintonomics and the shift
| towards "third way" neoliberalism. We've actually had 40
| years of what I'd call Republican free-market economic
| policies and decimation of unions and the power of the
| average worker to get a higher nominal wage. Most of the
| trends start closer to 1980.
| everybodyknows wrote:
| > ... top marginal rates in the 1950s and 1960s were
| extraordinarily high by present-day standards
|
| > ... observers from the 1950s to today repeatedly noted
| that, at one time, social rules curbed CEO greed.
|
| https://corpgov.law.harvard.edu/2016/08/18/executive-
| compens...
|
| Other sources -- sorry no links -- ascribe the genesis of
| such "social rules" to a US WW II norm of austerity among
| elites, who might otherwise have found ways to seize a
| greater share of the economy's wealth for their own
| dissipative pleasures.
| AnimalMuppet wrote:
| Or the threat of Communism, which was still at least
| officially trying to inspire revolution around the world.
| If you have someone trying to inspire your workers to
| revolt, you'd better be giving them a better deal than
| the other guy is offering.
| bagels wrote:
| I always thought the site might imply getting off the gold
| standard.
| iso1631 wrote:
| Of course it implies it, but that's been debunked
| f38zf5vdt wrote:
| Nixon shock/move to fiat standard instead of gold
| convertibility.
| rcpt wrote:
| The website is a crypto ad making a big deal about the gold
| standard
| eli_gottlieb wrote:
| > I'll bite. The data/graphs look suspicious and convincing
| enough, so WTF did happen?
|
| Energy volatility and energy austerity https://pbs.twimg.co
| m/media/FPjE8zVX0AQCFuD?format=jpg&name=...
| PragmaticPulp wrote:
| A lot happened around that time: Technology and automation
| really started taking off, sending productivity way up.
| Global shipping costs plummeted, giving way to a new era of
| international trade. The first personal computers started
| entering the market. Trade relations with China opened up
| around that time. Households started moving from single-
| earner to dual-income.
|
| It was a time of rapid change. That particular website is
| usually used to suggest that the only thing that changed
| was the gold standard, but it's been debunked and refuted
| all across the internet.
| deevolution wrote:
| Stills begs the question... why would we see inflation
| when all of those trends are deflationary? Can't possibly
| be because the fed is printing money out of thin air..
| Workaccount2 wrote:
| If you currently work for a tech company that runs on VC cash,
| the time to look for an established profitable enterprise to work
| for is yesterday.
|
| Raising rates will likely massacre debt dependent companies.
| AnimalMuppet wrote:
| Is VC cash "debt dependent", though? My impression is that it
| is not.
| whoisburbansky wrote:
| In the sense that public market stock valuations are debt-
| dependent, because cheaper debt increases future earning
| potential by making it cheaper to finance operations,
| acquisitions, expansions. Without the expectation of high
| public valuations, VC have less incentive to pump cash into
| early-stage companies. I think that's the rationale?
| kasey_junk wrote:
| "established profitable enterprise" is not the opposite of
| "debt dependent" and "company that runs on VC cash" is not
| synonymous with it.
|
| What you really want to be concerned about are enterprises,
| large or small, established or starting out, that are impacted
| by first order effects of interest rates. The obvious examples
| are the mortgage and real estate industries.
|
| Second order effects are going to be harder to suss out but
| companies that have large lag times between production of a
| product and receipt of cash for that product will be adversely
| impacted. Companies with costs that are hard to restructure are
| also problematic because (in the US) getting rid of people can
| be much easier than getting rid of long term leases or debt in
| raising rate environments.
|
| That is to say, in a raising interest rate environment lots of
| other items top the list of problematic before VC funding. In
| fact, it _may_ lead to companies getting more freedom as the VC
| funds needn't return as much as they do in the current rate
| environment.
|
| As always, keep enough money on hand to ride out a job search,
| keep your skills sharp and your professional network built is
| about all that you can say you should do to prepare for
| changing macroeconomic regimes.
| Reichhardt wrote:
| A major driver of inflation is Baby Boomers retiring. If we want
| to contain inflation, we should immediately increase the full
| retirement age to 70 and partial to 65.
|
| Secondly, we can immediately ban the purchase of
| Crytpocurrencies, to drive down the price and hence
| attractiveness of mining and electricity rates.
|
| Government action needs to be at the supply side.
| francisofascii wrote:
| Fear of inflation could keep people from retiring. Not to
| mention the "less risky" bonds assets getting hammered
| recently.
| heylook wrote:
| > A major driver of inflation is Baby Boomers retiring.
|
| What's the mechanism here?
| not2b wrote:
| I'm skeptical of this argument. It has a surface plausibility,
| but I find it more useful to think like a scientist. Assuming
| that the hypothesis is true, what would we expect to observe? The
| claim is that that low interest rates are causing marginal
| investments to be made, so we would expect to see a lot of "penny
| boxes", to use the author's term: low-profit activity that's just
| squeaking by. Business profits should be low. But that's not what
| we're seeing at all. Profits are high, even after taking
| inflation into account.
|
| There are other arguments for higher interest rates, but the
| analysis in the article strikes me as too simplistic.
| citizenpaul wrote:
| Since the first sentence is factually wrong this article is
| useless drivel. The FED is not a government. It is a banking
| organization created to keep the rich, rich. Full Stop.
| etaioinshrdlu wrote:
| The Federal Reserve was created by the government,
| https://en.wikipedia.org/wiki/Federal_Reserve_Act , and their
| leaders are nominated by the US President and confirmed by
| Congress.
|
| However, it is supposed to be independent from the politicians
| on a day-to-day basis, and people seem to like it that way.
|
| I believe you are somewhat wrong in stating the Fed is not
| government.
| citizenpaul wrote:
| Read The Creature from Jekyll Island: A Second Look at the
| Federal Reserve. Might change your mind about what is
| arguably the most powerful institution in your life.
|
| Admittedly the title alone kind of tells you they have a
| bias.
|
| Edit: Why are you apologizing for people that do not care
| about you and also rule over your life?
| frankbreetz wrote:
| I have heard the case that the Fed can't raise rates due to the
| high debt to GDP ratio we currently have and this would make the
| interest payments too high. Is there any truth to that?
|
| I am by no means an expert, but this doesn't make sense to me. If
| the choices are runaway inflation and making higher interest
| payments and making the debt to GDP ratio worse, the choice seems
| obvious.
| snake_doc wrote:
| Technically it is a constraint on monetary policy. But the US
| is no where close to where it is a concern, and it only usually
| matters in countries where there is a history of sovereign debt
| defaults. The US treasury debt is deemed by global financial
| markets as risk free.
| chasd00 wrote:
| > I have heard the case that the Fed can't raise rates...
|
| i think it's more political. A while back I was driving to pick
| up my son from a school thing and there was an interview on NPR
| with the fed. I can't remember the exact date but a number of
| months ago. The fed was going on and on about how great the
| Build Back Better plan is and was going to be and now the
| inflation that was beginning to show was all due to supply
| chain issues and will be sorted out in a few months.
|
| I think the fed didn't want to raise rates and held out this
| long for political reasons only. Now, not raising rates
| presents more risk to the administration in power than raising
| rates and so here we are.
| Workaccount2 wrote:
| THe fed has been holding back because it doesn't want to
| spook the markets.
|
| Tech has been Americas golden goose for the last decade and
| high interest rates are like kryptonite for tech. All those
| flashy startups burning hundreds of millions with only
| negative profits to show for it are a direct product of a low
| interest rate environment.
|
| The fed knows that raising rates will likely result in the
| goose losing most of its feathers, and the carry on effects
| from that.
| throwaway0a5e wrote:
| That golden goose is enriching people who are using that
| wealth to do bad things to our country. If it were up to me
| the goose would get both barrels.
| rcpt wrote:
| > Tech has been Americas golden goose for the last decade
|
| I wish the federal government realized this so that they'd
| fix Bay Area housing
| everybodyknows wrote:
| > ... fed was going on and on about how great the Build Back
| Better plan ...
|
| Who exactly at the Federal Reserve was praising an Executive
| branch policy "on and on"?
|
| To do so would be an extraordinary lapse from the principle
| of central bank independence. Evidence is required.
| chasd00 wrote:
| You're right, it was the treasury secretary. I can't update
| my comment for some reason but see the link below
|
| https://www.npr.org/2021/11/03/1051877079/treasury-
| secretary...
| gsibble wrote:
| Indeed. The Fed is supposed to be politically neutral so for
| them to be supporting one party's major bill is a clear
| violation of that. And I fully believe they didn't raise
| rates earlier for political reasons.
| lotsofpulp wrote:
| The Fed will never let asset prices fall in general,
| because it benefits all politicians and most voters to keep
| them rising. Voters want to see their 401k and IRAs going
| up, as long as their expenses go up slower.
| AnimalMuppet wrote:
| The Fed is supposed to be politically neutral, that is, not
| acting to help one party or the other. But that does not
| mean that the Fed has no opinion on the effects of big
| fiscal decisions. It is perfectly within the remit of the
| Fed for them to suggest that a large amount of Federal
| spending would currently be a good idea, and that it could
| usefully be applied to some end.
| chasd00 wrote:
| i can't update my original comment but it wasn't the fed i
| was listening to i believe it was the treasury secretary.
| so my mistake
|
| https://www.npr.org/2021/11/03/1051877079/treasury-
| secretary...
| JumpCrisscross wrote:
| > _the Fed can 't raise rates due to the high debt to GDP ratio
| we currently have and this would make the interest payments too
| high. Is there any truth to that?_
|
| No.
|
| The Fed is raising rates. They raised rates yesterday. They say
| they intend to keep doing so through the end of the year. Net
| interest is a low single digit percent of the federal budget;
| it's lower as a fraction of GDP than it was in the 90s [1].
| Most of the federal debt is fixed rate--raising rates now only
| affects future borrowing.
|
| The real limit on rates is growth and employment. If the
| economy falters because people are spending all their money on
| servicing debts over goods and services, we'll see a crunch.
| That's not happening. The opposite is happening: inflation is
| surging.
|
| [1] https://www.cbo.gov/publication/56910
| drdec wrote:
| I suspect you are better versed in this subject than I am but
| what about the idea that the US has essentially already
| committed to heavy borrowing to finance the government for
| the foreseeable future? Wouldn't that be a deterrent along
| the lines the grandparent comment was suggesting?
| onlyrealcuzzo wrote:
| > The Fed is raising rates. They raised rates yesterday. They
| say they intend to keep doing so through the end of the year.
| Net interest is a low single digit percent of the federal
| budget; it's lower as a fraction of GDP than it was in the
| 90s [1]. Most of the federal debt is fixed rate--raising
| rates now only affects future borrowing.
|
| I think the question is: can we sustain 5%+ interest rates?
| The answer is no - unless GDP increases precipitously or
| government spending declines A LOT.
|
| Imagine 5% is the new norm. In 30 years, the government will
| have 100% of public debt at 5% interest. At 139% debt to GDP
| - that's 7% of GDP going to debt financing. Federal revenue
| is only ~18% of GDP.
|
| That means 38% of taxes would go to debt financing. And if
| trends continue - within 30 years, public debt to GDP would
| likely be closer to 180%. So 50% of taxes would go to debt
| financing. It's simply not possible long term (unless there
| is some MASSIVE unknown boost to productivity to save us).
|
| Interest rates might go up to 20% for a year here and there.
| Who knows. They'll be hovering around 0 or negative and
| steadily going lower for most of our lives - unless we reach
| the singularity.
| JumpCrisscross wrote:
| > _the question is can we sustain 5% interest rates. The
| answer is no - unless GDP increases precipitously or
| government spending declines A LOT_
|
| We can't sustain 5% real interest rates. But nominal GDP,
| rates and tax take are inherently linked; if short-term
| rates are 5% for 30 years it's because inflation and/or the
| economy are going gangbusters. That will drive up GDP and
| tax collection. Until it doesn't. Then we have a recession
| and all those numbers go down.
|
| This isn't infinitely extensible. But we're nowhere close
| to federal debt servicing being a constraint on the Fed or
| the Congress. Inflation, instead, remains the check.
| onlyrealcuzzo wrote:
| > But we're nowhere close to federal debt servicing being
| a constraint on the Fed or the Congress. Inflation,
| instead, remains the check.
|
| Not a constraint in the SHORT TERM. Long term, it is
| absolutely a constraint. As I said, Interest rates can go
| up. But long-term trend will be hovering around the
| negatives (unless there's a MASSIVE boost to
| productivity).
| JumpCrisscross wrote:
| > _it is absolutely a constraint_
|
| For domestic-currency debt, no, it is not. Inflation and
| politics are always the constraint.
| onlyrealcuzzo wrote:
| So you're saying you think it's possible we can have 5%
| interest rates and not a massive recession?
|
| When you're in 350% public debt (state & local) to GDP -
| inflation is not a problem! It's a gift! A recession is
| the problem.
| JumpCrisscross wrote:
| > _you 're saying you think it's possible we can have 5%
| interest rates and not a massive recession?_
|
| There _would_ be a massive recession. (And /or
| inflation.) That's the point.
|
| What is _not_ possible is for the federal government to
| wind up in a situation where interest payments are
| dominating the budget, inflation is low, there is
| political will to service the debt, and yet magically the
| Congress can 't appropriate the money. It can. It always
| can.
|
| Federal debt servicing is not a constraint on rates _per
| se_. It 's a constraint because it requires either debt
| monetization (inflation) or high rates (recession) which
| are politically difficult.
|
| > _inflation is not a problem_
|
| How did you interpret "inflation and politics are always
| the constraint" as "inflation is not a problem"?
| snake_doc wrote:
| That's a bit of a straw man argument. Why would the Fed
| want 5% nominal rates for 30+ years?
|
| Also, the Fed mostly thinks about output and rates in real
| terms when thinking about the long term.
| onlyrealcuzzo wrote:
| > Why would the Fed want 5% nominal rates for 30+ years?
|
| This is a strawman. I said nothing about the Fed wanting
| 5% rates.
|
| I'm simply saying rates are not going to be higher for a
| LONG period of time because - if you look at the math - a
| sustained period of high interest rates with our current
| public debt to GDP means that public spending would have
| to fall dramatically (which would crush GDP in itself - a
| negative feedback loop).
|
| Substitute 5 for any non-negative number, and you'll see
| that any number higher than 0 LONG TERM means a cut to
| public spending.
|
| You multiply the increase by ~3.5x (to include effects
| from state & local governments) and then you multiply by
| ~4x (because taxes aren't 100% of GDP - their ~25%).
|
| A 1% LONG TERM increase in interest rates means a ~14%
| reduction in public spending (with the same tax burden).
|
| The US Federal Government is already spending about ~14%
| of GDP on SS, Medicare, Medicade, and Debt Service.
| Considering that our tax revenues is only ~17.6% of GDP.
| Good luck cutting spending by 14%. Let alone 2x or 3x
| that.
| snake_doc wrote:
| Ultimate it is the Fed's decision though. But anyways
| your calculations make sense, but it all falls part if
| you don't do them in real terms. Because in nominal
| terms, the solution to your equations is simply
| hyperinflation or start a new currency, a la Argentina.
| ericd wrote:
| They can and are raising rates, but do you think it's
| feasible for them to go full Volcker if that's what it takes
| to beat back inflation? When I worry about the debt to GDP
| ratio, it's not about whether we can withstand bumping from
| 0% to 1-2%, it's whether we can withstand historically normal
| ranges, let alone what it took in the 80s.
| JumpCrisscross wrote:
| > _do you think it's feasible for them to go full Volcker
| if that's what it takes to beat back inflation?_
|
| "US inflation, which peaked at 14.8 percent in March 1980,
| fell below 3 percent by 1983...Volcker raised the federal
| funds rate, which had averaged 11.2% in 1979, to a peak of
| 20% in June 1981" [1]. For comparison, we're currently
| around 8.5% [2] and 0.75% to 1%, respectively. Long-term
| rates are below 4% [3].
|
| There is no need to tip the economy into a recession at
| this time. If we needed to, the constraint would be--as it
| was in Volcker's time--political. If we were suffering
| double-digit inflation, I suspect the will would be there.
|
| [1] https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_
| the_F...
|
| [2] https://fred.stlouisfed.org/graph/?g=rocU
|
| [3] https://home.treasury.gov/resource-center/data-chart-
| center/...
| smileysteve wrote:
| What doesn't make headlines is the longer term average
| for inflation as well;
|
| The diminishing effectiveness (in part based on global
| unison from 2008) meant that the federal reserve could
| not reach its target 2% inflation a year from 2008 until
| 2021.
|
| In a history of being under inflation targets by .5% for
| 14 years, 8.5% in one year is partly a headline grabber.
| And we have wage growth happening.
| JumpCrisscross wrote:
| > _the federal reserve could not reach its target 2%
| inflation a year from 2008 until 2021_
|
| This is an excellent point. Between January 2012 and
| January 2022, CPI-U grew at 2.2% annually [1][a].
|
| [1] https://www.bls.gov/regions/mid-
| atlantic/data/consumerpricei...
|
| [a] (281.148 / 226.665) ^ (1 / 10) - 1
| newaccount2021 wrote:
| landemva wrote:
| >>> high debt to GDP ratio we currently have and this would
| make the interest payments too high.
|
| USA can you use Federal Reserve to monetize debt at low rates.
| Europe and others can't.
|
| Pensions have been hit hard since 2008 because laddered bonds
| no longer yield sufficiently.
|
| The solution is a worldwide government debt default, with UBI
| after pensions default. While I don't want this socialism,
| world politicians seem to follow Klaus Schwab's idea on this.
| axg11 wrote:
| Higher rates are coming, that's certain. Is there any work on
| estimating what the optimal interest rate is to combat the high
| inflation that we're seeing? I'm not an economist so perhaps the
| question doesn't make sense.
| ItsMonkk wrote:
| Rates should ideally be set such that the increase(or decrease)
| of actual productivity matches the increase of the money
| supply. If people aren't taking enough loans, then the rates
| should be lowered. If people are taking to much loans, rates
| should be raised.
|
| The Fed's mandate does not do this, and we very often have way
| to much debt followed by short spikes of not enough debt, so we
| are destined to continue the boom and bust cycle.
|
| The way I see it the major problem happens to be with when we
| take out debt on zero-sum goods. When you take out debt and
| create something new with it, and that debt pays off,
| everything is fine. When you take out debt to buy something
| like land, it messes up a fundamental balancing force and
| speculation runs amok.
| landemva wrote:
| On loans not backstopped by government, higher rates have been
| here for at least a year. The Fed rate rise is catching up to
| rates.
| dwater wrote:
| The Taylor Rule does that.
|
| "According to Taylor's original version of the rule, the
| nominal interest rate should respond to divergences of actual
| inflation rates from target inflation rates and of actual Gross
| Domestic Product (GDP) from potential GDP"
|
| https://en.wikipedia.org/wiki/Taylor_rule
|
| Some argue that the reason we have seen such extreme
| speculative bubbles in recent history is because the Fed has no
| Taylor Rule-like systemic policy related to market factors.
| They are free to make policy completely divorced from the
| market.
|
| https://www.ft.com/content/ece92145-443d-4e94-bfa9-7fe06cb9c...
| ineedasername wrote:
| Question-- So I'm not a finance quant or anywhere near conversant
| in the intricacies of finance, so I really don't understand what
| seems to be an important question:
|
| Why do banks have to follow the federal rate for certain types of
| loans? IIRC the rate is used for interbank loans against federal
| reserve deposit requirements, but why would they follow the Fed
| rate for this rather than some other market force? I don't think
| it's _required_ by statute (is it?).
|
| What, if anything, prevents banks from ignoring federal benchmark
| rates all together?
| wccrawford wrote:
| Competition? Profit motive?
|
| If they go too far one way, people will use other banks. If
| they go too far the other, they waste money.
|
| Also, there comes a point where they could just invest that
| money in someone else rather than offer the service themselves,
| and make more money. That keeps things from going too far that
| direction.
|
| And finally... Deciding things is hard. When someone else
| decides things for everyone, legally, it's an easy choice to
| follow it. Most of the time that's price fixing and is illegal.
| djyaz1200 wrote:
| "Most of the time that's price fixing and is illegal."
|
| Bingo!
|
| That's the answer, the fed funds rate is a price fixing tool.
| Banks via the federal reserve governors meet to decide the
| base interest rate from which most other interest rates are
| derived. Aka the "price" of money. This is done to optimize
| the rent seeking activity of loans. The banks want to
| optimize how much interest they extract from the productive
| economy without harming it to the degree it stops growing or
| shrinks.
|
| Related, most people think the Fed IS the government but it
| is not... it's banks... https://www.stlouisfed.org/in-plain-
| english/who-owns-the-fed...
| ineedasername wrote:
| So, theoretically, banks _could_ lend at different rates but
| for various practical reasons they don 't?
| neilwilson wrote:
| "The reason why I write so frequently about monetary policy is
| because it is so important."
|
| It isn't important. It's been made important by financiers.
|
| What the last 50 years have shown is that trying to manage an
| economy by trying to influence the amount of credit is a fool's
| errand.
|
| Instead we should set that ship free - and leave it up to the
| private sector to determine interest rates amongst themselves.
| That means anchoring monetary policy at zero base rates.
|
| Instead we should be rationing firms access to labour by pushing
| for higher wages with a much higher minimum wage and preferably a
| guaranteed job for all at the higher minimum wage.
|
| What we need to make firms efficient is reassuringly expensive
| labour. That way they will use the cheap access to capital to
| borrow, invest in technology and drive forward productivity -
| solely so they can use less of the expensive labour.
|
| It's time to get banks, lending, and finance out of the prime
| path. As the Chinese have.
| gizmo686 wrote:
| Managing the economy through wages is politically impossible.
| To be effective, you need to be able to both raise and lower
| wages as conditions demand. If the Fed has such a lever and
| decides to lower wages, it will not survive the political
| bloodbath that follows.
| zozbot234 wrote:
| It's simply not possible to anchor policy rates to any value.
| Rates behave according to an unstable equilibrium; when they're
| too low (i.e. deflation) they tend to go lower; when too high
| (hyperinflation) they run even higher. It's possible to peg an
| exchange rate, or the value of a commodity (such as gold) or a
| basket of goods (such as those used for the CPI), etc.
| (Currently, policy approximates a crawling peg on the PCE
| consumption basket, but this is only an approximation.)
| landemva wrote:
| >>> zero base rates
|
| When I take the risk to loan out money, I want more return than
| zero. Why would anyone bother at zero?
|
| Maybe reading the enabling legislation would be useful.
| https://www.law.cornell.edu/uscode/text/12/225a
|
| ' maximum employment, stable prices, and moderate long-term
| interest rates. '
|
| I'm interested in the forgotten 'stable prices' part.
| yborg wrote:
| >In other words, the Fed feels it can continue to juice financial
| assets and exacerbate wealth inequality so long as the average
| person doesn't notice price increases...
|
| And the Fed is not quantifying stealth consumer inflation, which
| people do notice in spend, namely "shrinkflation" where consumer
| goods manufacturers reduce the amount of corn flakes in the box
| and hold the price the same. This was a trend happening before
| the headline inflation number started to move.
| JumpCrisscross wrote:
| > _the Fed is not quantifying stealth consumer inflation_
|
| The Fed doesn't calculate CPI; BLS does. And they do consider
| quantity [1]. Mainly to account for quantity discounts. But it
| takes care of shrinkflation, too.
|
| [1] https://www.bls.gov/opub/hom/pdf/cpihom.pdf
| vmception wrote:
| > This isn't populist rhetoric, it's the Fed's own data.
|
| It's sad the author feels they even need this disclaimer. Its
| interesting how much gets lumped into a political cause (that
| requires inheriting all associated political causes of that
| party).
| rsync wrote:
| "What we desperately need today is higher rates, not merely as a
| temporary measure or to restore a sense of near term credibility,
| but higher for longer, in order to promote long-term economic
| vibrancy. In the near term, this will cause economic pain and
| wealth destruction."
|
| There is an apt analogy to be made with forest fires and
| recessions.
|
| You can keep forest fires from erupting for decades - and we have
| done that in much of the American West. But the fuels continue to
| build up and, eventually, a fire that cannot be managed will
| explode violently - and cause much more damage than the aggregate
| of all of the smaller fires along the way.
|
| Business firms fail. Employees of those firms lose their jobs and
| suppliers are left unpaid. Nobody likes this but it is the circle
| of life of the economy. Keeping these firms alive with cheap and
| easy rollover of debt is akin to letting the fuels build up in
| the forest: when the day finally arrives that these zombie firms
| cannot finance or rollover debt we will have an explosion of
| defaults and bankruptcies that consumes far more than the
| laggards we supported along the way.
|
| We need regular recessions the same way we need regular fires in
| the forest.
| greeneggs wrote:
| I don't buy this analogy. Bankruptcy isn't the only market
| discipline. If a firm is underperforming, then it will be
| bought up and sold for parts. This happens all the time, and
| low interest rates only make it easier.
|
| Anyway, the article's main mistake is in thinking that the Fed
| controls interest rates. It can only control nominal interest
| rates, not real interest rates (adjusted for inflation).
|
| Like any other competitive market, real interest rates are set
| by supply and demand. If companies, entrepreneurs, and
| investors see few ways of investing cash to increase revenue or
| improve efficiency, then interest rates must be low. Better
| investment (real) returns can come from new technologies and
| innovations, or from demographic surges.
|
| Yes, we all want better investment opportunities, in real
| dollars. But the Fed can't control this.
| I_DRINK_KOOLAID wrote:
| > Yes, we all want better investment opportunities, in real
| dollars. But the Fed can't control this.
|
| Better means an optimal risk-reward profile, meaning that you
| don't lose principal while looking to allocate that capital
| in search for yield.
|
| The Fed controls the rate of the safest investment there is:
| money held at the Fed AKA the Fed fund rate. Every interest
| rate is calculated using that fundamental rate as the point
| of reference because literally every entity in the world has
| a higher risk of default rate than the U.S. Federal
| Government.
|
| So yes they control the most important thing in global
| markets: the price of safe money backed by 5000+ nukes,
| largest air force, 2nd largest airforce, 3rd largest
| airforce, largest navy, largest economy...
| datadata wrote:
| Your principal is safe only if you demarcate principal in
| dollars. This is only a reasonable way to measure principal
| when inflation is negligible. With inflation widely
| exceeding interest rates, it is unreasonable to consider
| the only risk of US debt to be default and you have to
| consider the inflation loss.
|
| Another angle is that all of the military defense backing
| the USD is coming from dilution of the USD (monetary
| inflation), or at least that is true as long as we continue
| to run a deficit.
| I_DRINK_KOOLAID wrote:
| > it is unreasonable to consider the only risk of US debt
| to be default and you have to consider the inflation
| loss.
|
| The Fed mandate says "stable prices AND maximum
| employment". It says nothing about setting the fed fund
| rate in a way that enables investors to earn money from
| lending to an entity which has a zero default risk.
|
| They set the rate and investors use that as a reference
| point to calculate the rate of everything else, starting
| from the security which most resembles the overnight Fed
| fund rate : the US. Treasury with the shortest duration
| which if I recall correctly it's the 4 weeks US Note.
|
| When investors are very scared it happens that they get
| very defensive and pay the Fed govt. for the privilege of
| parking their money in US Treasuries. It makes sense
| even, you only have to get rich once and if you are born
| in America you are essentially already rich the moment
| you are born (on a global basis), the desire for capital
| and wealth preservation has steadily increased over time
| and the Federal Govt. like any borrower is taking
| advantage of this thirst for safety from investors at
| home and abroad, this phenomenon actually reduces the
| Federal Debt which was a huge topic of concern circa
| 2011-2014.
| schaefer wrote:
| > the price of safe money backed by 5000+ nukes, largest
| air force, ... and an increasingly fringe
| electorate.
| rsync wrote:
| "I don't buy this analogy. Bankruptcy isn't the only market
| discipline. If a firm is underperforming, then it will be
| bought up and sold for parts. This happens all the time, and
| low interest rates only make it easier."
|
| The cheap financing allows these firms to _disguise the fact
| that they are underperforming_.
|
| So whatever form of "market discipline" might occur, these
| firms are shielded from it because they can just keep rolling
| over their debt obligations while continuing to pretend they
| are competitive in the marketplace.
| donthellbanme wrote:
| I just heard a msnbc guest say, "Once inflation rears it's ugly
| head, in my experience (very old guy) only a severe recession
| brings down prices. (I hope that's not the case.)
|
| Then I heard Kathy Woods say she predicts deflation in about a
| year.
|
| I my world of the poor, and low middle class we didn't get much
| out of the low interest party. I guess there's more jobs? We
| can't afford to speculate on stocks, and those high interest
| rate cd's were nice 20 years ago.
|
| We can't afford a home, so we didn't get those low interest
| rate mortgages.
|
| We can't afford new cars, and used car loans always seem high.
|
| Did you guys know the Homeless got 0 government money through
| the pandemic. (Off topic, but it just bothered me.)
|
| I just heard a big wig business guru say that Jerome Powell
| should be looking for another job. I think he did an ok job for
| what he was handed.
|
| What I will never understand about Jerome Powell is why had
| government buy the mortgage backed securities, and treasury
| securities for so so so long, especially since realeste and the
| stock market flourished during the pandemic?
|
| (Yes--I'm no expert obviously.)
| zozbot234 wrote:
| I don't think anything _policy_ does is going to cause a
| recession. We 've got a whole lot of QE to wind down before
| anything like that happens. If a recession hits now, it's going
| to be due to supply factors: the aftermath of the pandemic and
| the global situation more recently. Of course, any move towards
| sustained inflation is also dangerous; it would be good to
| avoid that.
| whimsicalism wrote:
| The issue is that we might need to contract quite a bit to
| pull inflation down.
| greg7gkb wrote:
| You can still have less successful businesses failing (trees
| dying) without entering a recession (forest fire). Nice analogy
| but I don't think it proves that recessions are necessary.
| macinjosh wrote:
| It is all just garbage collection.
| TimPC wrote:
| The counterpoint is that we needed higher rates earlier to
| combat inflation before we had stagflation. My understanding is
| that with stagflation the better policy is to accept the
| inflation. Raising interest rates combats inflation but also
| contracts the economy. Contracting the economy during a
| recession is extremely dangerous. As in start talking about the
| D-word dangerous.
|
| I think raising interest rates so aggressively now is poorly
| thought out and is going to bite us in the ass.
| flunhat wrote:
| But isn't stagflation defined as high unemployment + high
| inflation? Whereas now we have low unemployment -- to the
| point of labor shortages -- and high inflation, i.e. an
| economy that is not in a recession.
|
| In other words, we have an economy running too hot, and
| raising interest rates will slow that (by how much is another
| question...)
| redleader55 wrote:
| Do we actually have high employment at the moment?
|
| The way I understand the current situation, one one hand
| there was a lot of covid money and on the other hand a lot
| of people were fired by their companies during covid. This
| in turn made them unwilling to go back and work the same
| job, on the same salary as before, for a company which
| preferred to cater to their profits than to their
| employees.
| flunhat wrote:
| It's true that companies are having a hard time finding
| employees. And it's also true that fewer people are in
| the workforce than before, largely due to retirements. So
| that paints a picture of an economy where there are
| plenty of jobs available and not enough people to work
| them, which is low unemployment.
|
| But _high employment_ seems a little different to me than
| just low unemployment, just because my read is that there
| 's fewer people working in general than before the
| pandemic (IIRC). [1][2]
|
| [1] https://www.uschamber.com/workforce/understanding-
| americas-l... [2]
| https://www.fitchratings.com/research/sovereigns/fittch-
| rati...
| datadata wrote:
| It seems like we have high employment but unemployment
| rate is being ravaged by Goodhart's Law after being such
| an important needle for politicians and the Fed itself.
| It doesn't seem like many of the employment options are
| good, but in order to keep unemployment down we have
| coerced our institutions to create low quality high
| quantity jobs.
| TimPC wrote:
| The more relevant variable isn't employment rate but GDP.
| We have a shrinking GDP which is the definition of a
| recession.
| flunhat wrote:
| Shrinking GDP over a sustained period of time would be
| more accurate. GDP has decreased in past quarters even
| when there wasn't a recession, most recently in 2014.
| zozbot234 wrote:
| > My understanding is that with stagflation the better policy
| is to accept the inflation.
|
| Accepting _sustained_ inflation is always dangerous; it 's
| exactly what we did in the 1970s. Letting it run up even
| further now just means a bigger recession later.
| TimPC wrote:
| I still think it's the least bad option. I prefer two
| recessions to a depression.
| whimsicalism wrote:
| If you get sustained inflation, the ensuing
| contractionary policy will have to be much, much harsher
| than if you nip it in the bud.
|
| We are also not currently in recession, so I don't know
| what you mean about contracting while we are in a
| recession.
| mpalczewski wrote:
| First quarter gdp was negative, we could very well be in
| a recession and not know it.
| whimsicalism wrote:
| The fed should be targeting nominal GDP, which is
| currently way too high. First quarter GDP was negative
| because inflation expectations are running amok.
| lend000 wrote:
| This is a topic I truly want to become more mainstream
| knowledge. Wealth inequality only decreases notably during
| market corrections, which the Fed is determined to prevent at
| all costs [0].
|
| The more the Fed distorts normal market signals, like interest
| rates, the less efficiently capital is allocated, and so the
| wealth distribution morphs from one that roughly represents
| human skill at allocating capital to an extremely top-heavy
| skewed chart that rewards incumbents.
|
| [0] https://fred.stlouisfed.org/series/WFRBST01134
| HWR_14 wrote:
| > the wealth distribution morphs from one that roughly
| represents human skill at allocating capital
|
| When has the been the case? I thought the case for index
| funds went something like "there is no replicatable skill
| test for assigning capital, so just diversify"
| whimsicalism wrote:
| I largely agree with many of the points you are making, but I
| feel like you are missing the obvious rejoinder anyone would
| make to your point:
|
| Why care about wealth inequality as a first-order concern?
| The periods you identify as decreasing wealth inequality also
| correspond to periods of decrease in real median income [0].
| If my median income is going up, why should I root for
| periods that decrease it, even if it means that the wealthy
| are being hurt more than I am? Seems a bit like cutting off
| the nose to spite the face.
|
| [0] https://fred.stlouisfed.org/series/MEHOINUSA672N
| avgcorrection wrote:
| That is not an obvious rejoinder that "anyone would make".
| whimsicalism wrote:
| If you are arguing that recessions are actually good
| because they decrease wealth inequality, it seems like
| yeah - recessions being bad for most people would be an
| obvious rejoinder.
| avgcorrection wrote:
| Some people care about wealth inequality "as a first-
| order concern". That is the point. So yours is not an
| "obvious rejoinder".
|
| Do you understand now?
| lend000 wrote:
| I agree we can't just assume "wealth inequality" is
| inherently bad. That would imply that perfect wealth
| equality is the goal, which a number of communist and
| socialist government experiments have demonstrated to be a
| poor ideal in practice. My metric is that it should roughly
| match human skill at allocating capital / generating value
| in a free market. The closer we get to this metric, the
| bigger the overall pie should end up in the long run (and
| the better we can feel about people who have big pieces).
| usefulcat wrote:
| > The more the Fed distorts normal market signals, like
| interest rates, the less efficiently capital is allocated
|
| It seems like a 0% fed rate would corresond to a complete
| lack of 'distortion'--the effective rate is then 100% a
| 'market signal', no?
|
| I would think--at least according to this author's thesis--
| that a moderate level of fed 'distortion', in the form of a
| moderate-but-certainly-not-zero fed rate, would be desirable.
| pclmulqdq wrote:
| A 0% rate distorts the market by giving out money for free
| in the form of loans. A 100% rate distorts the market by
| giving out money for free in the form of savings interest.
| Ideally, the fed funds rate is about equal to the inflation
| rate. Alternatively, there would be a "no distortion"
| policy if the rate for savings interest was 0% and the rate
| for loans was >100%.
| trgn wrote:
| > The more the Fed distorts normal market signals,
|
| I don't see at all how the Fed is manipulating market
| signals. Public companies are an open book. We know at all
| times what their financial fundamentals are. Fed does not
| manipulate this. Aggregate market sentiment develops in a
| thousand ways, the Fed really isn't puppeteering here.
|
| > market corrections [...] prevent at all cost.
|
| Fed-decision this week cascaded in the wiping out of
| trillions of equity. Can somebody please explain how they are
| propping up the capital class, or how they are preventing
| market corrections?
| darawk wrote:
| The fed sets the risk free rate. The risk free rate is an
| input to many other capital allocation decisions across the
| economy. When the risk free rate is low, you can keep an
| unprofitable business spinning for far longer. When its
| higher, conditions are tighter, and you have to run a
| leaner business to survive.
|
| Consider the fed funds rate as the difficulty setting for
| business. Dialing it down is easy mode. Dialing it up is
| hard mode. When the difficulty gets dialed up, we
| inevitably discover that people that were believed to be
| smart businessmen and women were actually incompetent all
| along.
|
| > Fed-decision this week cascaded in the wiping out of
| trillions of equity. Can somebody please explain how they
| are propping up the capital class, or how they are
| preventing market corrections?
|
| Their decisions this week were to raise the rates, although
| they were actually a bit more dovish than expected, which
| is why the market rose on that day.
|
| The way people consider the fed to be propping up the
| market is that, in the recent past, the fed has responded
| to market corrections by lowering interest rates and/or
| increasing QE. Both of which serve to prop up asset prices.
|
| The behavior of the Fed at this very moment though is to
| raise rates, which is not propping up the market. The
| author of this post though is arguing that they should have
| raised rates _even more_ , and the fact that they didn't is
| a gift to capital owners.
| vmception wrote:
| > This is a topic I truly want to become more mainstream
| knowledge. Wealth inequality only decreases notably during
| market corrections, which the Fed is determined to prevent at
| all costs [0].
|
| I don't think any action the fed takes can reduce wealth
| inequality because of the simple reality that there is a
| capital class, and a class without capital.
|
| Once one has capital, they can take any direction of the
| market in response to any market condition.
|
| It "reduces" only in the sense that asset values decline for
| passive holders, but its hardly a different reality for those
| with negative/zero/five-figure net worth and the whims of
| those with 7, 8, 9, 10, 11 figure net worth.
| darawk wrote:
| The federal funds rate mechanically lowers asset prices.
| Wealthy people own assets, poor people do not. Lowering the
| federal funds rate literally mechanically reduces the
| portfolio value of people that own capital in relation to
| people who do not.
| vmception wrote:
| did you read the just the first sentence?
|
| the post acknowledges that the numerical value difference
| will decrease, while also acknowledging that the reality
| is barely different at all. so if you really want to say
| "the distance between wealth is less unequal" then,
| congratulations?
|
| if you looked at "wealth inequality" at the very bottom
| of an asset crunch or recession, and never even saw what
| it was at the top of an asset expansion, you would still
| say "wow wealth inequality is super wide" only to be
| flabbergasted or amused at how much wider it gets
|
| so its kind of a useless distinction if the realities are
| so widely different either way.
| ajsnigrutin wrote:
| I mean.. there are other factors in play too.
|
| How much tax does a mom-and-pop (book)store pay, compared
| to eg. amazon (relative to size, income and profits)?
|
| I live in a country that was once communist, and we still
| get a lot of very left leaning parties (literally with a
| red star in the logo), who always mention "tax the rich",
| but the effect of any such measure is, that poor people
| still pay (almost) zero taxes, rich people earn enough to
| make it worth it to avoid taxes (open a company in a tax
| haven country, move money around,...), and the middle class
| (engineers, developers, etc.) gets fucked.
|
| Can't we first fix the tax laws, so that amazon would pay
| the same effective tax rate as smaller stores do? And then
| do the same for Bezos personally compared to a regular
| worker.
| vmception wrote:
| not really? taxes aren't about getting hurt equally, they
| are about being a passive revenue source for the country,
| _amongst the other revenue sources_. the user experience
| isn 't really a factor and it doesn't make sense to give
| the overleveraged mismanaged country extra money that is
| just going to use the taxes to make its interest
| payments, just so people feel its like they're getting
| screwed equally.
|
| if you spend more than you make that year, then it
| reduces what you have to pay in taxes. people with
| savings that far exceed what they earn that year, that
| they actually spend towards something revenue producing,
| will not pay taxes on what they earn. if you have outside
| capital that you spend, and that exceeds your earnings
| that year, then you have no tax to pay. smaller
| participants can operate this way too. if they don't have
| capital and are barely making ends meet by spending what
| they earn on consumptive things (even if necessary) then
| they have taxes on what they earn. this is the same for
| larger organizations if they chose to operate that way.
| not everyone has access to capital, or savings, or
| willingness or the risk profile to use their savings
| towards additional growth. but if you do take the risk,
| then thats the reward.
| DennisP wrote:
| Sure, some assets do well when others do poorly. But labor
| is an asset too, and it's possible for labor to come out
| ahead when everything else is doing badly.
| ThalesX wrote:
| Capital owners would have to crash through a lot of
| safety nets to even get to the point where they would
| consider labor as a possible means to get ahead.
| DennisP wrote:
| No, what I mean is that capital owners can do badly while
| workers increase their income.
| trgn wrote:
| I think that's overextending the parent's point.
|
| Labor can certainly come out ahead. Market crashed (or at
| least tech did), and will likely continue to do so. If
| you're a rentier now, it doesn't mean you'll end up in
| the poor house, but you're certainly getting clobbered
| versus the sharp income increases skilled labor is seeing
| today.
|
| I think you'll see this inversion very concretely at the
| edges; the FIRE-crowd holding on to their jobs for longer
| would be an example (many of those find them starting
| from scratch now). Or those evil "capital owners",
| basically any 60+ white collar employee trying to retire
| now, they're terrified and will be holding on.
|
| Sometimes people get what they want; labor market is
| completely hot, and capital is down the drain. Seeing
| very little rejoicing though.
| oversocialized wrote:
| maerF0x0 wrote:
| Discarding that this article is about Fed's nominal rate and
| instead discussing the general topic of market interest rates.
|
| Another reason for higher market interest rates is it's a forcing
| function on entrepreneurs to make them think harder about what
| they spend social resources on.
|
| Think of it this way with an interest rate of 0* , you merely
| need to trade a dollar for a dollar in order to service the debt.
| Many would be entrepreneurs will pursue ideas which have an EROI
| in the [0-1]% range just because they're expected to return
| _something_ . However this deploys many societal resources that
| marginally keeps them from better ideas, should they simply wait
| or innovate longer. If interest rates were, say, 5% then
| entrepreneurs must find ways to increase resources by 5% at a
| minimum just to service the capital. I think this is part of why
| we've seen so many shitty ideas come from startup over the years.
| Because a net 0 outcome has minimal repercussions . Yes obviously
| everyone wants to be a billionaire, but thinking of every gamble
| having a spectrum of outcomes, it means a gambler can continue to
| gamble on lower payouts if the "rake" is much lower.
|
| * Consider all of this net of inflation and mandatory minimum
| returns etc. so that we can speak simply about interest rates.
| gpsx wrote:
| I subscribe to a different take on what has happened to interest
| rates the last 40 years. I think market driven rates have been
| going lower and the fed has just responded by lowering their
| rates.
|
| With interest rates so low, money is poring into the stock market
| driving it up. This is helping the wealthy. But I also think the
| interest rate problem is caused by wealth inequality, with more
| invested money chasing fewer productive lending opportunities,
| and this is because more money is in the hands of savers and less
| in the hands of spenders.
|
| I personally am hoping after the inflation rate comes back down
| we see larger net wage inflation than price inflation, returning
| money to the hands of the working class. (Of course, it would be
| tricky to push for this too much as a policy because we certainly
| do not want to cause a wage-inflation spiral. I don't think that
| is a given though. As they say, the best cure for high prices is
| high prices.)
| formerkrogemp wrote:
| It's ironic. I've heard so much fear of wage inflation leading
| to general inflation from some minority of my fellow minimum
| wage lackeys back in the day. It's unfortunate how often people
| will vote against their own interests for other unrelated
| issues.
| keppy wrote:
| You can't write off all lending that you don't see as "worth it"
| as a "penny box". We spend money on things like housing and cars
| because those things empower us to create and forge new paths
| ahead. Sometimes it's more of a liability we are putting capital
| in to--but we tell ourselves it's an investment. Likewise lending
| capital to acquire a company may have societal gains, to say
| nothing of the long term economic growth that this argument
| ignores.
| lamontcg wrote:
| The real reason why we're going to get higher rates is that we're
| now seeing broader wage growth and unionization.
|
| And that's the point where inflation will be stopped by
| policymakers.
|
| The asset bubbles that have been blown up were of no real concern
| because that makes the rich get richer, and is indeed regressive.
|
| Now that it looks like wage inflation for the average joe might
| happen (which is not regressive at all), it suddenly has to be
| stopped at all cost.
|
| But ultimately this will trigger an extraordinarily painful
| recession/depression in order to accomplish it.
|
| There's two ways out of this. One would be to tolerate wage
| inflation until it caught up with asset price inflation, with
| rates rising naturally as investor expectations for inflation
| increased, this would actually produce more stable long term
| higher interest rates. The other way is for the fed to jack up
| rates until the economy goes into a recession, throwing a massive
| number of people out of work and destroying retirement savings
| for the rest of the bulk of the population and then having asset
| prices readjust downwards (which must eventually happen). But
| that latter path won't result in high long term rates since the
| bond markets will price in the coming recession and that the fed
| will once again drop rates to zero in the depression (and
| ultimately we have to eventually hit the "pushing on a string"
| condition where fed can't even reflate asset bubbles by ZIRP).
|
| The very fact that everyone in the managerial class is so
| terrified of the current inflationary environment is why everyone
| should be more concerned with the fed slamming on the brakes and
| the coming disinflationary depression.
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