In the lead up to all these Fed meetings, I always see plenty of articles talking about why the Fed should hold rates steady (or drop). I still remember reading a weather article that included a random quote from the weather company CEO about interest rates.
I’ve come to associate it with an attempt to will the Fed into doing what they want.
Not that I know anything, but I’m wondering if the Fed is just going to keep doing it until everyone is resigned to continued increases. The Fed won’t stop until rich people stop asking them to stop. (Yes I know I’m probably dead wrong)
I think the substack article linked here [0] is pretty good at addressing what you need to know.
It used to be that money - capital - was used for value creation like a better product or service or some public good in the commons. Now the most crucial use of capital is to generate (further) wealth for those already wealthy. And since "conventional wisdom" of the economics kind blames higher wages as an impetus for inflation, "hurting" those wage earners is the key via higher rates to reign in said inflation. But real wages are and have been falling. Thus, because the economy is biased towards enabling and sustaining the making of money with money, in other words continuing to generate and increase wealth for the wealthy at the expense of others, the system will continue to reward the needs and wants of the wealthy.
Inflation is also good for those that own assets as their relative value to dollar increases.
Everyone has a mix of:
Debts, money they've loaned to others, amount of assets owned, and amount of dollars owned and wages (recurring income in dollars).
So, inflation is most harmful to wage earners with few assets - and most helpful to non-wage earners with many assets.
Increasing wealth disparity between workers (most people) and those who own the most assets. Those who own large amounts of assets largely don't own dollars - they own real estate, securities, etc..
The bank issue is a strawman - simply a matter of SVB (and others) making bad interest rate bets and losing.
> Inflation is also good for those that own assets as their relative value to dollar increases.
That's not "good", it's just less bad, because as soon as they want to turn those assets liquid they run into the same problem. Their assets are not gaining value, they're just not losing it.
Physical assets generally lose "real" value on their own too, because they degrade or need maintenance. The asset prices might go up but if you sell them to buy other stuff, that other stuff also went up in price (probably higher).
However, high enough inflation does benefit people who borrowed tons of money to hoard more physical assets than they can afford.
"high enough inflation does benefit people who borrowed tons of money to hoard more physical assets than they can afford"
If their salary keeps up with inflation yes. The trouble with relying on RSUs for comp is that when the fed raises rates to fight inflation, it ensures your total comp doesn't keep up with inflation.
> Inflation is also good for those that own assets as their relative value to dollar increases.
I'm not sure what type of assets you're referring to, but I haven't exactly noticed stocks skyrocketing along with inflation. If anything they seem to have dropped in value.
With inflation, the price level increases. This means that firms' input and output prices, and as a consequence, also their profits, will increase. Unless stock prices are in a bubble right now, this should make them rebound in value later on in a way that cash won’t.
If inflation was running hot persistently at like 6% then long term interest rates would be higher and housing prices would fall in nominal terms compared to wages.
The low-inflation, low-interest rate environment has produced high asset valuations due to the cheapness of borrowing money.
There is an important distinction on the spectrum between consumable things bought with wages and investments bought with borrowed money, and the rise in prices in those categories are different.
If you want to play the semantic game that all rises in any prices are inflation there is a real distinction that you're missing -- in which case we should talk about asset inflation vs. price inflation vs. wage inflation as being different inflations and stop talking about it like its the same thing (which economists would tell you it isn't by arguing that you're talking about assets and not inflation, but now we've just gone in a circle talking past each other because of definitions).
> If inflation was running hot persistently at like 6% then long term interest rates would be higher
This is not true.
> housing prices would fall in nominal terms compared to wages
I suggest you reconsider your assertion that 6% inflation would result in lower housing prices.
> The low-inflation, low-interest rate environment has produced high asset valuations due to the cheapness of borrowing money.
The high asset valuations as a result of low interest rates is textbook monetary inflation.
> There is an important distinction on the spectrum between consumable things bought with wages and investments bought with borrowed money, and the rise in prices in those categories are different.
The prices in both those categories are affected by dilution of value as a consequence of monetary expansion and that increase in prices has a name, 'inflation'.
> If you want to play the semantic game that all rises in any prices are inflation there is a real distinction that you're missing -- in which case we should talk about asset inflation vs. price inflation vs. wage inflation as being different inflations and stop talking about it like its the same thing (which economists would tell you it isn't by arguing that you're talking about assets and not inflation, but now we've just gone in a circle talking past each other because of definitions).
The point of semantics is to enable us to communicate by having mutually understood meanings for the words we use. If you want to talk about price increases that are not a result of monetary factors, then you can just talk about the price of things going up without misappropriating the word 'inflation' and making it seem like you don't understand what the word even means.
The distinction you speak of was cleverly crafted by the rich to provide cover for them because they own most of those assets and wage earning people can no longer afford them.
In the end who gives a shit if you dissect inflation into categories or not if my standard of living keeps dropping, which is what inflation does. Robs purchasing power from the people.
“Real distinction” is a semantic game. In fact how we label the numbers is all semantic games.
We’re insulating an aging gerontocracy at the expense of the next generation.
That’s ageism.
We’re on the hook for their contracts, their businesses agreements. I never signed anything.
They’ve successfully leveraged their propaganda spewing media companies to convince us to coddle them and fuck the next generation; no one else matters!
That’s the only real thing going on here. Everything else is semantic games.
A bunch of elders raised in a more religious era built “flocks” of employees whose agency they exploit to avoid real work.
I have a small heloc, about 50k. It’s all I have left on my house, mortgage wise. Currently trying to slap as much principal down on it as possible as it’s still in its “interest only” phase. Come 2024, it’ be interest and principal.
Was told last year the payment will be abt 500. I reckon after rate jumps it’ll be closer to 800.
I agree with this take. Being a builder does not generate predictable returns like an index fund or the S&P over the last 100 years. They tell you in school that you should invest money early and watch it accrue, but if we all do that collectively as a society then who is going to build.
The people who get funding will build, presumably? Investing doesn’t prevent people from building. Investments fund building. (Among other things.) This happens literally when banks loan money to real estate developers or other large projects.
But we’re in a situation where there was, until quite recently, both too much consumer demand (inflation) and too much investment (lots of wasted investment on silly things).
Higher interest rates are an incentive to slow investment and consumption and park money in government funds, where it‘s presumably more inert.
I think the answer to “what if everyone does it” is that everyone doesn’t do the same thing. If you have a good idea then you can spend your own money on it, and sometimes you have to, but if it’s expensive then it’s probably better to try to raise money from other people.
It is pointless and Mindless to save money purely for the purpose of having more. The point of investing and saving is to have money to spend. When money is spent, it goes to the person who built something, provided a service, or has a good.
I disagree. Money buys you recognition, influence and power. There is no fixed price for these. It's an auction where the rewards go to the highest bidder.
More to your core point, you only make money investing if someone is building. Talking to S&P 500 goes up because those companies are building something and the stockholders get a piece of profit when the things that are built sold. If no one builds and no one buys, stocks are worthless and are not an investment.
I think there's an element of educating the younger generation to invest. If you can bring in more investors than are leaving, supply and demand will ensure that prices will keep increasing.
Freedom. Having money in the bank allows you to control your circumstances. It gives you time to wait for and consider multiple job opportunities. It gives you time to re-skill if the economy shifts or move if your region undergoes an economic depression.
Different people may indeed have different values, but when we are talking about most people and what they are taught, I think this is true. People are thinking about retirement, buying a house, or paying for their kids education and this is why they save.
> Being a builder does not generate predictable returns like an index fund or the S&P over the last 100 years.
Sure but investing a modest sum in the S&P 500 as a wage earner, salary earner, or otherwise also requires you to work for someone else your whole life and never get wealthy. That incentive kesp people starting new companies and doing other things - i.e. taking risks.
When valuations are high, companies IPO, founders cash out and hopefully go on start new companies. People on the street buy companies for 3x their annual earnings but the stock market regularly buys companies for 8x, 20x, even 80x their annual earnings. This is expressed in each stock’s P/E ratio.
What percentage of 30 year spans give a 1.4% return or less? Better question: what's the cumulative distribution function of a 30 year investment span on an S&P 500 index fund?
No one is saying the system is nonsense. They are saying returns aren't predictable over decades. Buffett highlighted this a few years back: the returns from 1964-81 - zero. From 1981-99 - up about 12x.
These periods highlight that the returns don't meet any common sense definition of "predictable". Maybe if everyone was more precise on the definition of predictable it would resolve the discussion, but it doesn't appear that the common sense definition of predictable is met here.
Looking back it might appear so, but looking forward over any time horizon it is not predictable. Happy to arrange a long-term bet at even money - I'll guess you can't predict within 3% annualized what the total returns are over any time horizon for any of the common indices. And the difference between 4% or 7% over a long time is a lot.
Broadly, no [1]. There was some weirdness around the pandemic, but real wages today are flat with 2019 which, apart from the interceding era, was and is an all-time high.
> number is meaningless unless compared to productivity
No, it's not. Productivity adds a dimension to the question: it tells us the pie got bigger without more ingredients. But that isn't relevant to the absolute size of one's slice. Real wages are meaningful without preference to productivity.
> wages have comparatively been flat since the 1970s
Flat isn't falling. Taking into account benefits, per your Pew article [1], they're up. (Barely.)
The real economy grew in that time, and the rich got richer with it. That's a problem. But it's not a problem of falling real wages.
If wages stay flat and capital makes gains, then in the most true general sense wage-earners are earning less of a % than before. Also what’s the story with purchasing power which seems to be way down.
I think those are much more important to highlight and less pedantic.
> in the most true general sense wage-earners are earning less of a % than before
Yes. The fraction of GDP paid out to labour has fallen. This is a problem. But it's a problem of dividing gains, not of anyone being materially worse off than they were before.
> what’s the story with purchasing power which seems to be way down
It's not. It's flat to slightly up over the last half century. That's what real wage measures: the real purchasing power of the median earner's wage.
But there are tricks there aren't there? I'd want to look at home and car purchasing power, education, healthcare. If it's bundling in some tricks around technology as I've seen, it's very misleading IMO. And also the bundling of weird home tricks like nicer technology in the home is another misleading factor. Ultimately I think people are happiest with sq foot and location. From what I've seen a single wage earner in the 50s was far wealthier than even double wage of equivalent prestige jobs today, I don't really think a bigger and brighter TV even begins to touch the happiness achieved by having your family in a bigger house.
Productivity increases may be mostly due more to improvements in capital vs improvements in labor, though. If I make my peasants plow the field by hand, and then buy a horse, I'm not going to pay the peasants more for that. Rather I'm going to tell them they should be glad they are able to use the horse, as their muscles are less strained. I may even pay them less as it's less intensive.
That assumes possibly the most ancient, menial task, and assumes the peasants always do it the same way (i.e., it circularly assumes that labor productivity doesn't increase).
Educating and training people, giving them general and specific skills, makes them much more productive.
I'd argue the educational gains in the past 30 years have been negative.
The markets appear to indicate the worker value hasn't improved much lately, but capital has.
>Educating and training people, giving them general and specific skills, makes them much more productive.
And yet if you talk to almost any American, they will explain that the educational system has gone downhill. If the product produced through education is of lower quality, I would not expect the wage demanded to be higher.
Lots of people saying something doesn't at all make it true; in fact, it should make you skeptical that they are following a mis/disinformation herd and don't know what they are saying.
Education isn't the only source of skills, of course. There is training, and also people are far better informed now, for example, due the the Internet (or disinformed).
Even if the quality of education is reduced, it's not nearly zero. Partly because of education (and health, freedom, political stability, etc.) we are far more productive than illiterate neolithic peasants farmers.
Also, the quality could go down, but may more people could be educated, resulting in a large net gain.
>Also, the quality could go down, but may more people could be educated, resulting in a large net gain.
That's an aggregate gain, why are you comparing this to per capita gains.
>Even if the quality of education is reduced, it's not nearly zero. Partly because of education (and health, freedom, political stability, etc.) we are far more productive than illiterate neolithic peasants farmers.
Worker earns more real value than neolithic farmer, but I don't think anyone was saying they weren't.
>Education isn't the only source of skills, of course. There is training, and also people are far better informed now, for example, due the the Internet (or disinformed).
There was also training in the 1960s and 1970s. The median worker likely has more optionality to become an above median worker now, although whether the median worker themselves has better training today than in the past decades is debatable.
>Lots of people saying something doesn't at all make it true; in fact, it should make you skeptical that they are following a mis/disinformation herd and don't know what they are saying.
This is true, but if everyone is saying US high schools produce dogshit, the world is not going to be inclined to pay a reputational premium to US workers graduating from high school. Perception is part of value, and in markets indeed the buyers believing something has value creates real positive demand. This can be seen elsewhere i.e. felons get depressed wages, even if their conviction was bogus or not something that effects their work. The very fact our education is seen as going downhill creates lower value/quality for our workers -- so as you can see what I said was highly relevant.
As I mentioned in that thread, this is an extremely disingenuous take. The Federal Reserve has no interest in "hurting wage earners." Before the rate hikes, wage earners had already been hurt because inflation was outpacing wage growth. A wage-price spiral would only exacerbate this pain for those who aren't in a good position to switch jobs or negotiate with their employer.
Also, "the wealthy" isn't a monolithic group that all have the same interests. People who got rich off of cheap money, like Elon Musk, are asking for the Fed to lower interest rates as well.
It's extremely disingenuous to act like these tendencies are new, or as if anything has fundamentally changed. It hasn't. 150 years ago, Karl Marx articulated all of these characteristics of capitalism, including the tendency of capital to accumulate, the tendency of the rate of profit to fall, the contradictions and complexities of financialization, and much more.
A couple weeks back as the SVB story was breaking, someone here on HN said (and I paraphrase): "okay. that's it. there's no way the fed will raise rates now that they're destroying the banks."
And I was thinking... "I'm not sure 'destroying the banks' is a metric the fed tracks. Unemployment and inflation are."
But the earnestness with which the comment was offered. It was, as you say, like the commenter was willing the fed to do what they wanted. I guess magical realism isn't just a literary genre.
The Fed is the central bank. Its primary purpose has always been to be the lender of last resort and provide liquidity to the banking system. Of course they track the health of the banking system.
It's often stated that their two goals are to maximize unemployment and minimize inflation, but those are ultimately secondary to maintaining the overall health of the banking system and financial sector (although it's generally thought that aiming for those two goals help achieve that stability).
> And I was thinking... "I'm not sure 'destroying the banks' is a metric the fed tracks. Unemployment and inflation are."
It's interesting you say that. Putting on my tinfoil hat for a second.
People who have been making their fortunes on easy access to capital, VCs and the tech sector, are now mad that the rates are going up and it is starting to kill their golden gooses. Since the fed isn't listening to them they are going to force the Fed to listen to them by laying people off to increase unemployement and will continue to do so until the Fed relents to their demands.
> Since the fed isn't listening to them they are going to force the Fed to listen to them by laying people off to increase unemployement and will continue to do so until the Fed relents to their demands.
That would be threatening the Fed with a good time! The Fed has lower consumer demand as a target metric, and laying people of is one way to achieve that goal (roughly speaking).
So there is a strong argument that the construct the Fed chose for the SVB depositor bailout was very much designed to give them free hand to continue rate hikes.
> I’ve come to associate it with an attempt to will the Fed into doing what they want.
They kind of got what they wanted. IIRC, before SVB collapsed, it was widely believed the Fed was planning to hike rates by far more than they just did (IIRC, 0.75%).
> I’m wondering if the Fed is just going to keep doing it until everyone is resigned to continued increases.
In a way, that's the idea. Inflation is a psychological phenomenon. People raise prices, etc. because they expect inflation. The Fed needs to keep raising rates until people expect that the Fed will continue to raise rates until prices stabilize (if that sentence makes sense).
> I’ve come to associate it with an attempt to will the Fed into doing what they want.
Because that's what it is. Powell tried to raise rates early in the pandmeic and wall st. meltdown successfully got him to lower them back down. It worked before so they're trying again.
mmm.. I think the 2020 Taper Tantrum was a bit more complex than you're giving it credit for, but the end result was indistinguishable from the simple cause(s) you propose, so maybe it wasn't that complex.
Somewhat related to weather articles commenting on interest rates, I found it was fascinating that in Powell's opening statement he blamed the rise of consumer spending partially on the weather.
>Consumer spending appears to have picked up this quarter, although some
of that strength may reflect the effects of swings in the weather across the turn of the year.
I'm not proficient enough in monetary and fiscal policy to comment on the accuracy of drawing that conclusion, but I found it hysterical nonetheless.
It has, at least in my part of the country, been the most mild winter in my memory. We hit the 70s the majority of the days in February, with overnight lows in the 50s. I'm in North Carolina, not Florida! We're supposed to have mild winters, but this year, other than that one weekend where much of the south saw negative temperatures... it's like we skipped right from fall to spring. I've barely even worn long pants.
Nice weather leads to more travel, outdoor activity, more shopping, more going to restaurants. If it's cold and rainy, you stay home more.
I'm in Southern California, and my parents visited from Virginia this February. It was rainy with highs in upper 50s lower 60s. Meanwhile it was 78 back in VA...
You're actually onto something, I think. Half of the fed's job is setting interest rates, but the other half is setting interest rate _expectations_. If people expect rates to hold steady or decrease, they may not change their behavior (e.g. slow hiring or spending) to the extent needed to reduce inflation. But if they do expect rates to stay high or go higher, then they will act on those expectations, and the effects will ripple through the economy.
And yes, it is by and large "rich people" the fed needs to convince, specifically business and capital owners.
Because they're human and humans are weak. The "right thing" involves a lot of pain for a lot of people. OR, they can attempt to kick th can further down the road, be a hero, and let the next Board deal with it.
> The Fed won’t stop until rich people stop asking them to stop.
I think the most negatively affected by these rises is going to be the US middle-class, i.e. the people who have to pay mortgages (the same goes for the middle-classes based in Western countries more generally speaking). Higher interest rates means higher mortgage rates, and taking into consideration that those mortgages were signed when the effective rate was close to zero we're talking about a devastating effect on those people's finances.
Of course, VCs and capitalists somehow also negatively affected by these rises will have the louder voices, they're the ones controlling the discourse.
> taking into consideration that those mortgages were signed when the effective rate was close to zero
Most mortgages rates are locked in when you buy the house (unless you get an adjustable-rate mortgage, which is only about 9% of applications in the US as of September 2022)[1]. Like my mortgage payment hasn't changed hardly at all since I got it 5 years ago (it went up $100 because I have a PMI, but that's it, and that predated any rate increases).
What it's actually caused is it's kind of locked millions of people into their existing mortgages, because they got in while rates were so low, they don't want to buy a new home at the much higher rates (especially considering home prices are still super inflated over the past couple of years), so they're kind of stuck.
We kind of wanted to move but didn't buy a new home fast enough during the pandemic (we were looking late 2021, but didn't pull the trigger), so now it just doesn't make sense, the new rates would almost double our current mortgage payments, especially considering we'd have to buy a house at about +50% of our original purchasing cost. Selling our also inflated home will help towards that a bit, but not enough.
So now we can't really afford to move, even though we'd like to.
Yup. As long as this crowd can keep making their mortgage payments they will never really be motivated to sell and move into a larger home. This will keep inventory low on what used to be called "starter" homes for likely the rest of this (millennial) generation in most US metro areas.
If you could not buy into an expensive market then, you likely never will barring some huge windfall like doubling your salary or inheritance. Guessing most of Gen Y will be renting condo's or living with their parents until the homes are passed on to them. A dumpy 3/2 1400-1600 sq ft. in the south bay area is like $8000+/mo with taxes and $360,000 down payment. Good luck.
Lets be real here. If someone took out an adjustable rate mortgage with the lowest rates in history then they likely have many issues beyond their house payment.
They will have to raise again. The slight change in tone "The Committee anticipates that some additional policy firming may be appropriate" was to prevent larger panic. Inflation is not done. This soft landing is really dragging out but they are stuck between a rock and a hard place trying to avoid stagflation or massive recession. You don't unwind a decade of free money in a year without consequences.
Inflation is never going to be done without some kind of structural change to how we govern ourselves. It’s the only politically acceptable out to deal with massive over spending by the federal government. There’s no political will to raise taxes to cover desired spending, and no political will to lower spending to match taxes. So the only answer is for the debt itself to be devalued.
> Inflation is never going to be done without some kind of structural change to how we govern ourselves.
I think the reference was to “above target” inflation, not “above 0 inflation”.
Yes, as long as we have policy based on the experience that slight deflation is worse than slight inflation, we will have a structural bias toward slight inflation.
To the extent that debt (or debt-service cost) to GDP matters, balancing the budget is way outside of what is needed to address it. The concerns are, in the short-term, ability to pay debt service out of current revenue, and, in the longer term, assuring the GDP grows faster than debt. Neither of those requires balancing the budget.
I think OP is suggesting that inflation is a product of the introduction of additional dollars to the system, which are mainly added thanks to the government's imbalanced budget (which dwarfs the effects of bank lending on money creation). This is a probably-not-too-wrong but also extremely contentious theory about how the economy works. Most of the people who run the fed and the treasury today subscribe to the idea of modern monetary theory, which does not agree. It's looking more correct now than it has ever looked in the past, though.
> The concerns are, in the short-term, ability to pay debt service out of current revenue, and, in the longer term, assuring the GDP grows faster than debt. Neither of those requires balancing the budget.
I agree. I don’t mean balancing the budget in an accounting sense. I mean getting spending down to sustainable levels. It just isn’t sustainable right now, and the only two possibilities I see is to either get that under control or to buy government debt with “printed” money, causing inflation which will decrease the real value of the debt.
Seeing the flagrant incompetency and immaturity in Congress, I’m betting on the latter.
Even a competent and mature Congress would find it challenging to dramatically cut the budget. The entitlements programs are crucial to keeping people out of poverty.
The next biggest item is the defense budget, and I suppose a "competent and mature Congress" would be able to cut that dramatically, but it's a challenging task. People genuinely believe that our enormous defense budget is required.
The rest of the budget is a lot of little things, each one barely more than a rounding error. You could zero out whole departments without moving the needle. People talk about them because of culture warfare, with "teh deficit" as a fig leaf.
In the end, the US budget is so big because we want it to be so big. And that's not inherently a bad thing. It is part of an economy doing well enough that people believe the government will repay loans. Eventually we'll outstrip that, but it's not today.
The fact that Congress is immature and incompetent... that's kind of a different problem. And one much more important than the deficit. But I don't have any idea how to fix that, because the voters know what they want and deserve to get it, good and hard.
Nobody can possibly "control" inflation. They do have the single biggest mitigating tool and, more importantly, operate largely independent of political influence and election cycles. The result is a swirl of media attention. Congress could fix inflation, but getting them to do it is such a slow and uphill battle, that nobody bothers asking them. During the 2007 crisis, every time Congress dragged Ben Bernanke in to testify he spent most of time begging Congress to take action because the Fed was nearly powerless. But berating him is a lot easier than writing bills.
Isn't it interesting that the biggest mitigating tool is "loosening the labour market", which is thinly veiled code for "make people unemployed so we can pay them less", despite the fact that corporate profiteering and not wages are behind most of the recent inflation:
Maybe claw back the money supply from corporations instead of the labour market. If instead of having only one tool, they also had this complementary tool, maybe we'd see better policies.
All things the Fed has zero authority over. That article says it has policy suggestions and then has a single half-baked thought at the end over what that policy might actually be. Right now, unemployment remains rock bottom. Fed policy is to raise rates until inflation comes down with as little impact on unemployment as possible. That's exactly what they're doing. Idk what else you expect them to do. Cut rates? Like they've been doing in Turkey?
> MMT says that taxes should rise when inflation is up
Keynes said that. In theory, fiscal policy alone can keep an economy balanced. In practice, you need an independent central bank.
MMT's novel assertion is that government debt is a monetary, not fiscal, exertion. (It also asserts raising rates is stimulative, et cetera.) It's broadly criticized and empirically unsubstantiated.
Interest on treasury bonds or federal reserve accounts can only come from new money. The Fed has no power to do anything but create money or sell money created by the treasury. All roads lead to the money printer.
1. When central banks raise interest rates, this means governments spend more on their interest payments. This translates into increased income for bondholders. Higher incomes lead to more consumer demand, pushing up prices. Similarly, banks benefit from higher interest payments from the Federal Reserve. In other words, the interest from the higher interest rates goes to someone in the economy, and their demand increases rather than decreasing.
2. Interest rates are a cost for businesses. When central banks raise interest rates, businesses pass this new cost on to consumers in the form of higher prices, which is inflation by definition.
3. Higher interest rates make it harder to start a business and harder to hold inventory. This reduces supply, leading to higher prices aka inflation.
4. Finally, MMT economists point to the fact that there is no empirical research at all showing that higher interest rates decrease inflation. In fact, the correlation runs in the opposite direction.
A few coastal politicians saw MMT supports deficits, ignored the intellectual bankruptcy within, and turned it into a polarising topic when it’s just an interesting but impractical way of reframing common topics.
Wow, Kelton did really say that. I never did finish reading her book, I found it much less convincing than Mosler's or Mitchell's. Many MMT'ers consider themselves to be the true heirs of Keynes, so embracing things that so directly contradict Keynes...
Like any field, there are different sides to it. Krugman and Cowell are both mainstream economists, but they disagree on a lot.
The user may be referencing work done on global and domestic demographics (aging populations in china and at home) and supply chain challenges highlighted by the Ukraine issues, since Ukraine is home to critical manufacturing inputs for farming + Russian exports going offline (fertilizers and oil). Ukraine won’t come online any time soon to its previous capacity and the replacement for it isn’t known yet. The story on Russia is that it is being cut off completely from the west.
The work on demographics is done by Pradhan and Goodhart and of course Peter Zeihan likes to discuss the latter as well. I don’t know where Zeihan gets his sources but he consults for the military and other government agencies.
In any case, I’d like to see asset markets deflate courtesy of the Fed raising rates, so I would agree with your take on the Fed holding more responsibility.
First, it's self-evident that no one controls inflation, so I'll assume you're talking about the rest.
Rate rises are being justified to "loosen the labour market" aka drive unemployment higher, and to suppress wages. Except labour costs are NOT the main driver of recent inflation:
So if employment and high wages aren't driving inflation, then suppressing them will only eventually, indirectly drive down demand to the point where corporations can no longer justify their profiteering.
> Except labour costs are NOT the main driver of recent inflation
Wages drive spending and aggregate demand.
We know that tax cuts for the rich don't do it, if you want to juice aggregate demand give everyone a $500 tax rebate.
If everyone is employed and their wages are climbing they go out and buy things.
> indirectly drive down demand to the point where corporations can no longer justify their profiteering.
If you cut those wages that means that means that less is getting bought which means that corporations start to look at warehouses full of flat panel TVs or whatever that aren't moving fast enough, and they start to price them lower in order to move them. The corporation that sticks to their pricing model becomes the one left holding the bag with all the inventory that isn't moving.
Dunno why you'd describe that as only "indirectly" affecting prices since that is directly addressing the supply and demand curve that sets the prices of the goods. The company will always try to take any profits it can.
Also, in case it isn't clear, rate hikes are indirect pressure on inflation exactly because they don't directly suppress wages in the way you describe. Instead they tighten credit, which reduces how many people can be employed, which gives employers more bargaining power which only then, eventually, ostensibly, suppresses wages. That's a pretty indirect chain of events, as I said. Per the link I cited, since wages aren't the main driver of inflation here, this arguably isn't even the best way to tackle this type of inflation. We need different tools, but the elite neoliberal class only has a "labour must sacrifice" sledgehammer, so they can't see any other possible options.
> Dunno why you'd describe that as only "indirectly" affecting prices since that is directly addressing the supply and demand curve that sets the prices of the goods. The company will always try to take any profits it can.
It's an interesting double standard that you seem perfectly willing to tolerate this greedy behaviour from corporations, but not when it's individual people getting better wages and being employed. Here's a thought: instead of capping employment and driving down wages, why not cap profits and so drive down incentives to take any profits they can?
Primarily rate increases don't even correlate with less borrowing (meaning less credit) so how can they correlate with something ten steps down the line, being inflation?!
So increase corporate taxes, even up to capping profits. That's effectively what raising rates does to employment and wages. Capital has had all the control for too long.
This is where people who were still in elementary school in 2007 post about hyperinflation because all they've ever known is sub-2% federal funds, right? Clicking "All" on the chart at https://www.newyorkfed.org/markets/reference-rates/effr is illuminating.
Interest rates like this were a lot more manageable when the cost of homes was less. Adjusted for inflation, the average home price today is about 60% higher than it was in 1998.
Adjusted to 2023 dollars and assuming interest rates of 5.5% in 1998 and 4.5% now (source: https://fred.stlouisfed.org/series/FEDFUNDS), home owners on average are spending about 43% more money on their mortgage payment per month.
I would take a few issues with that claim. The average price of a home is a function with a lot of inputs, supply and demand chiefly among them. We see issues with both, but the demand is surely the largest issue: as single-family homes are seen increasingly as investments to be collected rather than basic human necessities, the price shifts from the "average" income to the income of corporations or moneyed individuals, and they consume a huge number of these homes. That creates a supply issue for real people.
Real wages have been stagnant for a long time. The average person is not likely to be borrowing more than they were able to in 1985 adjusted for inflation and assuming the same loan terms. While real wages have stayed stagnant, all homes sold today will cost their new owners ~43% more of their individual purchasing power than the same homes would in 1985.
I think this applies more on the way up when interest is decreased. When interest go up, home owners may not afford to sell at a lost as they could have borrowed more, so you hold on to it. So I imagine house prices raise much faster than they decrease with interest changes.
Just a few more points and we'll be back at the levels of the late 90s, a period of time most millennials associate with prosperity and happiness (possibly because we were 8 years old).
I think there is some path dependency to prosperity and happiness being at this level coming off the 80s at higher rates would mean that sure rates were higher than now but people had bought assets at much lower prices (because higher past rates pushed values down). Now we’ve got the opposite where everyone blew their brains out at high asset prices because there was no interest rate / capital creation discipline AND now we’ve got higher rates so we are doubly punished.
* Political stability: As we are re-learning, that is necessary for everything.
* Economic stability
* Large productivity improvements due to the IT revolution
The bubble was only one small part of it for one sector of the economy, afaik. When it popped, we didn't reset to 1992; most or even all of the gains remained (was there even a quarter of negative GDP?).
> We're going into a period of elevated military risk and spending. In the 1990s, we were exiting one.
That was certainly a common-though-mistaken impression early in the year 1990; it wouldn't last through the year, and it definitely doesn't describe the late 1990s (when the US was a direct participant in the most significant European conflict between WW2 and the present, which was also where the renewed Cold War at which the later Clinton “Reset Button” was directed began, simultaneously with escalating threats & conflict in and beyond the Middle East involving Iraq, Hezbollah, and al-Qaeda.)
Ha! I remember getting 5.25% on my Savings Account at Silverado... Until I got 0% and was forced to learn what F.S.L.I.C. stood for. But yes... they were heady days!
Where are some finance/economy-focused forums where people are discussing this?
EDIT: can someone explain why this is being downvoted? I made this comment when there were zero other comments on HN, so I meant no offense to this community. It was just crickets on the HN thread, so I wondered where else there might be active/informed discussion.
among others. You'll at least be exposed to a lot of terminology that you can then dive into with sites like Investopedia. I'll caution you not to rush out and start trading based on what you see. If you want to trade, that's a skillset that needs to be honed over time(learning to be unemotional, set limits, choose position sizes, etc).
I assume OP is looking for smart discussion threads not the original content. I am looking for the same. Cannot find it in Reddit, always looking first in HN.
Read the transcripts and watch the press release yourself. The quality of discussion from Powell is superior to any discussion I've seen on Reddit or here on HN. And the various people in the press will ask questions of varying quality, but the important questions will probably be asked at some point.
> OP is looking for smart discussion threads not the original content
Smart talk on this topic is valuable. Monetary forums are in person, to preserve privacy, and when distributed by newsletter, expensive.
Reading the Fed's thoughts directly, and maybe following some well-regarded economists, is the best one can do as a nonprofessional. (I'd argue it's at par with most professionals, too.)
Probably the cheapest way to get this is a subscription to the FT. The comments are great as long as the topic isn't too popular, and it's much more finance heavy than around here.
Definitely not a perfect source, but I find it helpful at least.
The Q&A Portion of the press is pretty good at that. You'll get plenty of typical people's opinions from a variety of news sources. That's happening right now, and transcripts will be available soon.
There's some fun, intellectually stimulating discussion on Twitter/Fintwit. I mostly follow the anti-crypto/crypto-is-a-bubble space, but it overlaps with traditional finance a lot.
Oh, that would work out so well. Lower the values of the treasuries even more so the banks have to book even more losses when they have to sell them. That'll show them.
Exactly. Fed was boxed in. 0bps and it would have sent a signal that things were more serious than currently accepted. 50bps and the market would have panicked. 25bps was widely anticipated and doesn't rock the boat, even if it fails to seriously combat inflation.
The press release is pretty telling about how bad it is. From the second paragraph:
> The U.S. banking system is sound and resilient.
That is something like saying "the house is not falling down" - you don't need to say it if the house isn't at risk of falling down. I think the statement is true right now, but they are hoping to stem the bleeding on bank balances.
From later:
> Russia's war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty.
While true, it's hard to think that they aren't planning to set up a scapegoat here.
> That is something like saying "the house is not falling down" - you don't need to say it if the house isn't at risk of falling down. I think the statement is true right now, but they are hoping to stem the bleeding on bank balances.
If somebody asks "is the house falling down" and you ignore the question then that's worse than responding "no."
I think that would be the only innocuous reason to include that line, but nobody really asked. The treasury and the FDIC have both been taking a lot of actions, like setting up 12-figure lines of credit and having banks deposit money in each other, without the market really "asking" for it, which makes me think that there's a decent chance that something is actually wrong (my guess here is that Bank of America may be insolvent on paper, depending on the duration of their outstanding loans and bonds). If the FOMC believed the system was strong, there was probably a lot of debate at the meeting as to whether to include anything. If not, the line would be included 100%.
> Not Finance person, but Fed not raising interest rate would evoke suspicion about how bad is it?
OTOH, to the extent the banking turmoil and recession risk is a problem, the hike directly makes it worse. That may not be a better choice than something that merely signals that you think it is worse.
Makes it worse in the short-term, but if you continue to steer boat off course the more drastic the course corrections will have to be later on.
If we are timid now, it will only require larger course corrections later if we want to get inflation under control. The longer we wait, the more inflation gets baked into expectations and pricing.
SVB was supposed to be an isolated event. While they were large, they were not "too large to fail". If their failure was enough to rattle the entire system, things are in serious trouble.
Seems that Powell had two options, one was to stop raising rates/cut rates despite the already high inflation, which would of course increase inflation further. Or he could do this to get inflation down to his target range... which will drive assets and the economy further into a hole. Neither of which is a good option to the public eye. Not apologizing for Powell at all though, since he and the Fed have been making terrible decisions for the last 10 years and has directly led us to this point. They've just run out of easy choices.
This is especially interesting given the market had priced in Powell making rate cuts.
It's still an easy choice because has absolute zero obligation to do anything whatsoever for asset prices. His mandate only covers inflation (too high) and employment (extremely low). Stocks, bonds, housing, climate, politics. None of them are part of the equation.
Which market? The stock market? No. The bond market? To a degree.
Markets are still digesting the news that there will be no rate cuts this year barring a catastrophe.
Stocks remain highly overvalued. Equity risk premium is in the gutter(https://www.morganstanley.com/ideas/equity-risk-premium-low-...). There is little upside to stocks vs bonds right now. Stock valuations still aren't reflecting earnings revisions likely later this year as the economy cools. We've been riding on the savings built up during covid but that's starting to run dry. Personally, I'm almost 100% in T-bills with some long dated puts on the major indexes to hedge my unvested stock based compensation.
I think this may be interpreted as welcome by the markets: a significant reduction in the size of the rate increase, signaling the Fed is closer to a "monitoring mode." Between recent reports of (not good but better) price changes and the disruption at the banks, if we can coast down on pricing without raising rates much more, that's probably the kind of landing you want.
Sad to think if only the PS5 had never been launched, none of this would have ever happened.
If I have to explain it, it’s not funny. I’ve failed.
But since you ask - supply chain shocks limited GPU availability and further squeezed PS5 availability. That led to people paying absurd prices for PlayStations. The joke is that was the root of rampant inflation.
Part of the problem might be that there are so many dollars out in the world, for people to do whatever with. The US has kind of lost track of how much is in circulation.
The COVID economic policies lead to a K-shaped recovery. It was a money-printing bonanza that didn't do enough for average people while transferring wealth to the very top.
This was layered on top of near 0% free money and QE.
It feels like we're replaying 1979 all over again.
The failure was ~11 days ago I think. There was quickly a new expectation (is my point), but I'm just happy to talk about this stuff with anybody else, no need to split hairs. :)
Did you see what J Powell said today on the press conference? No rate cuts for 2023? Do you believe him? Fed Futures Contracts pricing don't seem to.
Being a gold bug is irrational because gold is backed by "it's pretty" but paper is backed by men with guns.
People often forget.... so is gold. And it's much harder to print. Plenty of the people with guns want gold. In fact in the lawless parts of Brazil/Guyana/Bolivia even unschooled forest dwellers pay their "tax", trade, create debts, hire security, and buy food with it all with minimal friction in handling it. Plenty of people hate on gold, but it is the tongue that everyone understands.
Hasn't the S&P500 (filled to the brim with high-frequency trading algorithms and billions of dollars in exposure through different assets) already priced in both boom and bust scenarios perfectly? :)
This is gaslighting -- increased taxes without increasing spending might reduce inflation. But the IRA massively increased government spending, and government spending is a primary driver of inflation. [1]
If you transfer wealth from the rich (who mostly use money to invest in assets) and transfer it to the poor (who mostly use money to buy consumer goods), wouldn't that naturally reduce asset values while increasing prices of consumer goods?
Fiscal policy's monetary effects are not a fringe theory. Increasing taxes reduces the money supply, and a smaller money supply decreases price levels ceteris paribus. This is conventional economics.
Modern monetary theory goes a step further, arguing deficits and debts don't matter, all that matters is inflation. Which is sort of true, in a way, but also useless since it provides us with no system for predicting when inflation might become problematic beyond deficits and debts.
I don't doubt it, but I'm curious about how it works:
If I buy a car from GM, who then uses the money to buy things from suppliers, who use the money to pay some people and build a new factory, etc. - that all increases the velocity of money which increases inflation.
If I pay the same amount to the government, who then uses the money to buy things from suppliers ... how does that have a different inflationary effect?
I'd guess that the government, with less revenue than expenses, doesn't save the tax revenue. It's not stuffed in a giant mattress at the Treasury. I would guess that it's spent, pretty soon. In fact, there might be more velocity if I give the money to the government than to a company sitting on fat cash reserves.
EDIT: I just realized: Higher taxes reduce return on investment and thus reduce investment. Is that the only mechanism in play?
Downward redistribution is not an effort by states to fight inflation, its an effort by states to mitigate its effect on their non-rich residents end while other entities fight it.
If you cut checks for the bottom x% of wealth, thay bottom percentage is still better off. For example, if everyone in the bottom 25% of wealth got cut a check that doubled their wealth, inflation would not double but those peoples buying power would. The problem with the checks during the pandemic is that so many people qualified that inflation outweighed a significant amount of peoples increased buying power
"if everyone in the bottom 25% of wealth got cut a check that doubled their wealth, inflation would not double"
What makes you say inflation wouldn't double? It's not clear to me that there's a linear relation between money supply/money velocity and inflation. In addition, I think there's a large psychological component to inflation: people spending money sooner than they would otherwise, i.e., quick buy it now before prices go up more; and, demanding increases in wages to match the expected increases in prices.
> inflation would not double but those peoples buying power would
I mean, inflation wouldn't double as a result of giving the bottom 25% additional money, but unless there was a matching increase in the supply of goods and services, the additional money would make prices rise.
Right, thereby increasing the purchasing power of those who need it most, aka, inflation relief.
I dont like the recent inflation, but as someone one the upper end of the income distribution (likely true of many HN readers), my life isn't fucked up by it. Merely my discretionary income.
I believe Michigan has north of $5B 'extra' money sitting around, which is anticipated to grow close to $10B by end of year. Maybe there will be a one-time refund check to citizens/taxpayers there, but is that marketed as 'inflation relief'? I wouldn't think so.
Or, thank you for not having the willpower to raise taxes. /s
It is easier certainly to call out the IRA (even though it is doing a lot to drive a transition to a cleaner economy) because it happened, as opposed to “what ifs,” but not touching taxes as far as slowing the economy should be called out imho.
The IRA raised corporate taxes, which is a very effective means of fighting inflation.
The CBO called out the IRA for being ineffective because the IRA only reduced the deficit by a few hundred billion dollars, when trillions in relief were needed.
Sure, trillions of dollars in increased taxes would have killed the economy, but interest rate rises are also killing the economy.
I assume this is to control inflation to some degree.
As an aside, the BTC USD rate has also jumped during this turmoil, and in many ways, it appears to mirror safe haven commodities quite closely. I find it interesting that an asset with such a "bad" reputation in the media is attracting investors during these unstable times.
> I find it interesting that an asset with such a "bad" reputation in the media is attracting investors during these unstable times.
Are people actually rationally using Bitcoin as a safe-haven, or are the Bitcoin maximalists irrationally fantasizing that this time they'll get some crisis that will fulfill their wildest dreams, so are piling more money into it?
I'm not sure the distinction between those two thoughts are as clear as you think.
If money moves into it and the price tends to increase during inflationary times, then you would be rational to use it as a safe-haven, regardless of what other people are doing.
We will see but I think in a context with much uncertainty Bitcoin or other cryptocurrencies could be at the same level of uncertainty than the traditional economy and rising up.
> a safe asset with thin liquidity and $2 billion of cash injections from binance and bitfinex
Safe asset is in part a statistical designation: it holds value or goes up in times of financial stress [1][2]. Crypto did that in the last weeks.
There is a second component of money-like stability that crypto does not meet. But it's interesting to see crypto rise while bank stability falters when, previously, Bitcoin was correlated with the S&P 500.
Right, but what I'm saying is that the appearance of a "safe asset" relied on $2 billion of purchases and very thin liquidity in the market (allowing that $2 billion to have a larger than normal effect on price). Without the $2 billion of extra purchases, who knows whether it would have been a "safe asset" or not? My guess is "no."
A track record of it failing to hold up under numerous other periods of market turmoil is pretty disqualifying though, as is its spectacular failure to achieve one of its stated goals of being an inflation hedge when we finally got around to experiencing significant inflation.
> track record of it failing to hold up under numerous other periods of market turmoil is pretty disqualifying though
I agree. To be clear, I'm not declaring Bitcoin a safe asset. Just pointing out that it behaved like one in the preceding weeks. That's genuinely interesting.
> its spectacular failure to achieve one of its stated goals of being an inflation hedge
Correct. Though I'd be amiss not pointing out that equities, too, failed their traditional role as an inflation hedge in that time.
I’ve come to associate it with an attempt to will the Fed into doing what they want.
Not that I know anything, but I’m wondering if the Fed is just going to keep doing it until everyone is resigned to continued increases. The Fed won’t stop until rich people stop asking them to stop. (Yes I know I’m probably dead wrong)