[HN Gopher] US Federal Reserve raises interest rates for first t... ___________________________________________________________________ US Federal Reserve raises interest rates for first time since 2018 Author : clove Score : 301 points Date : 2022-03-16 19:19 UTC (3 hours ago) (HTM) web link (www.theguardian.com) (TXT) w3m dump (www.theguardian.com) | RichardHeart wrote: | Be nation. Mint money out of thin air. Prices go up for | everything. Citizens sell stuff for other stuff. Because prices | all went up, causes tax on "gains." But was no real gain. Citizen | robbed twice. Once when all prices up. Once when taxed on fake | gain. | avrionov wrote: | Not only that they increased the rate, but also they'll reduce | the buying of securities: | | "In addition, the Committee expects to begin reducing its | holdings of Treasury securities and agency debt and agency | mortgage-backed securities at a coming meeting." | | Which may have a bigger effect. | [deleted] | ayngg wrote: | IIRC they have already stopped purchasing them as of a week ago | I think, they were supposed to announce their plans on | quantitative tightening (selling the things they bought) which | is what that quote is referring to. | [deleted] | mtremsal wrote: | > Which may have a bigger effect. | | Could you please explain? Isn't that just a way to "enforce" | the target rate in auctions to the primary market? | avrionov wrote: | Here is a good explanation: | https://www.brookings.edu/blog/up-front/2021/07/15/what- | does... | | The federal reserves buys bonds / treasures and mortgage | backed securities. | | It has an effect on long term interest rates and mortgages | (keeping the interests low). | atlgator wrote: | Recession is inevitable. If you're only considering interest | rates, you haven't bothered to look at the Fed's balance sheet or | FOMC meeting minutes from 2020. We bailed out the world through | currency swaps, corporate bonds, and MBS purchases and we're | still doing it to the tune of $120B per month. | jeffalbertson wrote: | so many people in this thread will play the common HN | intellectual and exclaim how the fed is obviously trapped, or | what they did wrong to do get us here. | | And in a different thread will trash bitcoin only focusing on its | energy consumption and not its potential sound money properties. | | If Bitcoin is bad, and the Fed (and every government ever) | created a situation which will only lead to poverty & widening | wealth gap, whats the solution? | sfblah wrote: | The solution is to set interest rates to a historically | reasonable level, say 4%. Then, accept you're going to have a | recession as asset values reset to reasonable levels. | | The reason you need a reasonable risk-free rate is, without | that, almost any marginally profitable that you can finance | with debt will get financed. This leads to malinvestment. You | can see this all around you. | | Asset inflation has the insidious side-effect of damaging | democracy by producing oligarchy. | | An alternative solution would be simply to declare a maximum | net worth and set tax rates on income over, say, $1m per year | to 95%. | boppo1 wrote: | >whats the solution? | | If I misjudge a cool jump off the roof into the pool and | catastrophically break both my legs, then my legs are broken. | colechristensen wrote: | The fed was able to maintain a functioning economy without | major disruption in essentials (i.e. there weren't major shocks | in being able to buy food or maintain housing) despite shutting | down or significantly modifying large sections of the economy | for a significant time. | | They aren't "trapped" this is the natural and expected | consequence of creating a lot more money to sidestep a | temporary condition. Considering the US is the strongest-ish | economy in the world and the rest of the world had to do the | same thing, there shouldn't be terrible consequences as long as | nobody does anything really stupid. | | Bitcoin, gold, and anti-fed fanboys have a tendency to have a | poor understanding at best of global economics with very basic | misunderstandings like thinking that bumping the rate bumps the | rates of all previous bonds. | | Some people who do advocate for those things do know what they | are talking about and can argue valid points which are up for | discussion, but you don't actually see those very often. | | Monetary policy in the US has made major mistakes, but it has | been doing a pretty good job, and importantly has avoided the | worst kinds of disaster for a long time. What it did during | covid was essentially the only option, what a gold standard | economy would have been able to do would have led to much worse | outcomes. | | People will complain about anything. The HN crowd generally | overestimates its expertise in matters not related to startup | tech (i.e. physics, engineering, economics posts often have | pretty awful comments) | alliao wrote: | i don't think bitcoin is the saviour it claims, especially now | it's being used and swayed by all the usual suspects of the old | monetary system. It's now just another bucket within sea of | capital. Used to adjust and move capital around, ended up to be | just another instrument.... | cowmoo728 wrote: | The solution to bad governance is better governance, not | utopianism. Problems like this are the entire reason that | democratic countries have elections and peaceful transfers of | power. Does it always work? No. But looking for a technical | solution (short of all powerful general AI) to a human problem | will only lead to pain when the human problems start creeping | back in to whatever technical solution was designed. | beefman wrote: | It's often different subsets of users in these threads. People | tend to read and comment on stories they're interested in. Any | bias in this interest can become amplified. For example, most | commenters on stories claiming that low-level environmental | pollution causes large socioeconomic effects believe the claim. | Dissesnting comments are likely to be downvoted, so people with | dissenting opinions don't bother commenting. Each topic becomes | its own echo chamber. | | There are discentralized digital currencies that don't require | insane energy consumption. But since clean energy is | essentially unlimited on our planet, this isn't a reason to | avoid conventional blockchains (that reason would be their | abysmal scaling behavior). None of them provide any price | stability at all -- or wouldn't, if more than precisely zero | goods and services were priced in one of them. (Certain DeFi | markets have elements of a banking system that might, | concievably, offer some price stability.) | | The COVID-19 helicopter drops -- which were performed by the | Treasury, not the Fed -- certainly could cause inflation. But | this would generally be an inflationary shock, not an ongoing | inflationary regime. Instead, it's the lockdowns (or hysteria | more generally), which damaged the structure of the global | economy. You can think of the inflation as the cost of | rebuilding these networks, of convincing people to work | together again. Simply put, things become cheap when they're | produced by efficient networks. If those networks decay, things | become more expensive. | neonate wrote: | https://www.wsj.com/articles/fed-raises-interest-rates-for-f... | | https://archive.ph/0XjAq | cubano wrote: | Inflation is almost 100% caused by "too much money" chasing "too | few goods". | | "Too much money" is a condition almost always caused by the | creation of too much "fiat currency" (ie a currency that is | backed by nothing but the good faith and credit of the issuing | government) | | As we all should know, in the US, on 6/5/1933 FDR took the US off | gold-backed currency and started the fiat currency situation we | still find ourselves in. | | Over the past 13 years, the US M3 money supply (see | https://fred.stlouisfed.org/series/MABMM301USM189S ) has grown | from around $7.5T to $22T. | | This number represents the "too much money" part of the original | equation, and to be honest I'm quite surprised that price | inflation isn't significantly worse then what it currently is. | This is almost certainly being caused by the fact that the US | dollar is the world's Reserve Currency. | | Looking at the graph, starting Aug 2020 the line is starting to | approach vertical, so it should be completely unsurprising that | price inflation is occurring. | | Finally, a 0.25% increase in the Federal Funds Rate is laughably | small, and will do absolutely nothing to help with the price | inflation the US is currently seeing. | jldugger wrote: | > Inflation is almost 100% caused by "too much money" chasing | "too few goods". | | I find it baffling that the "always and everywhere a monetary | phenomenon" crowd never inspects velocity. | deeg wrote: | I think this group is afraid of hyperinflation, which _is_ | almost always caused by governments printing too much money. | (And, if we 're honest, hyperinflation is a scary situation.) | The problem is that they then extrapolate and decide that | nominal inflation must be the result of the same problem and | that all government action will lead to hyperinflation. | danielmarkbruce wrote: | It's a beautiful sounding, simple theory. Print lots of | money, get inflation. Humans eat up stories that are | beautiful sounding and simple. | hgomersall wrote: | Worth a read https://new-wayland.com/blog/too-much-money/ and | also https://economicsfromthetopdown.com/2021/11/24/the- | truth-abo... | voisin wrote: | Velocity always seems to be treated as independent. When | velocity plummets, Fed increases money supply. When velocity | recovers, the money supply _never_ shrinks. It is a one-way | ratchet. Why is that? | nostrademons wrote: | Because velocity tends to return to historical norms in a | functioning economy, and if velocity _doesn 't_ return to | historical norms - say it goes to infinity, like in Weimar | hyperinflation, or it goes to zero, like in Japan-style | depression - you have bigger problems. | | The "velocity is dropping so we need to print more" argument | runs into scary problems if you make it without understanding | _why_ velocity is dropping. If it 's because all the wealth | is concentrating within a certain sliver of the population | (like 2008-2020 U.S), that's a really big problem that's | going to cause mass social instability. If it's because | everybody's shutting themselves in their room and not | spending money or engaging with society (like Japan), that's | also a really big problem. If it reverses and returns to | historical norms and beyond (as I suspect will happen), | that's also a problem. | | A big contrarian position in 2008 that I thought was nuts at | the time but now think is very likely was that we were going | to get "Deflation, _then_ hyperinflation ". I didn't | understand the hyperinflation part then, but the argument was | that deflation would lead the Fed to keep expanding the money | supply, which would pool among a small number of people, | until some spark triggered that group to spend money. COVID- | related supply chain disruptions were that spark, and I think | the hyperinflation case is increasingly likely now. | mpalczewski wrote: | In the us we printed a bunch of money, and now the dollar is | strong, but we have world wide inflation. | | I don't think it helps to look at US charts for a worldwide | phenomenon. | tehlike wrote: | price inflation and asset inflation. | | That increased supply went to asset inflation. | AviationAtom wrote: | You shared my exact sentiment. 0.25% is far too small. The | reason we even discussed negative rates when COVID hit was | because the Fed was too afraid hike rates more rapidly, hence | we hadn't gotten to a reasonable rate, before it called for | being dialed back. This left very little "powder in the keg." | At the pace we are going now I fear it's only a matter of time | before the next 2008 hits, and we have nothing left to throw at | it. It's a very delicate balance, and it doesn't seem capable | hands are at the controls. | at-fates-hands wrote: | >> You shared my exact sentiment. 0.25% is far too small. | | Most reports were doubling the rate to 4% or greater. I think | after the talk of moving it up that fast and that | drastically, a lot of investors started getting the jitters: | | https://www.cnbc.com/2022/02/23/the-market-has-adjusted- | its-... | | _That change came after traders had been pricing a move | double that size at the March 15-16 Federal Open Market | Committee meeting. Central bankers have been dousing the idea | of needing to go up 50 basis points at the meeting, with New | York Fed President John Williams saying last week that there | is "no compelling argument" for the move._ | | _Still, it hasn't made investors any less nervous about what | the path ahead will look like._ | | _"I'm not so worried about whether they do 50 [basis] points | out of the gate or not. But I also think they shouldn't | overdo it here," said Jim Paulsen, chief investment | strategist at the Leuthold Group. "You can do 25, and if you | want to do another one soon, you can do it, rather than add | additional disruption or uncertainty."_ | | I can understand the idea of going slowly and evaluating the | effect on the current markets with inflation still going on. | I like the cautious approach considering the massive fallout | if it did suddenly jump up to 4%, you'd see a ton of money | get pulled out of the market which could be disastrous. | | But like you said, either way could lead to another | staggering recession so I'm not 100% confident in either | approach. | specialp wrote: | On 6/5/1933 the USA was also dealing with massive DEFLATION. | Deflation is also a very bad thing. In fact periods of | deflation correlate with periods of large economic slowdown. | Now I know people who are against fiat currency enjoy | deflationary fixed currencies like most cryptocurrencies, but | the inability to control money supply leads to hoarding of | money, and compounding economic problems due to the lack of | money supply. | | Hyperinflation is a terrible thing too. But that does not | necessarily make gold backed or non fiat currencies superior as | large deflation is very destructive as well. | colinmhayes wrote: | Deflation is much, much worse than the inflation we are | currently experiencing. The US was in a 50 year depression | starting in 1860 largely due to ineffective monetary policy | which caused deflation. Small amounts of inflation are in | fact a good thing, as it encourages loaning money. | nemo44x wrote: | The inflation is worse in a lot of things like housing and | healthcare. Especially at the high end. Income and wealth | inequality are the signs here. | alliao wrote: | you're correct on the too much money, though it's not the goods | that we're chasing, rather anything else that represents value. | The gold backed currency was limiting because it's incredibly | hard to adjust for fast moving market. So by freeing up money | supply, we can exploit the full extent of the market. | | When US print money, since the world values USD, whoever buys | USD will pay for that inflation. Since there're not better | alternatives, they just kept buying, in a sense US is just | exporting capital. | | So it's no surprise that inflation will be absorbed by USD | hoarding entities. say here.. | | https://ticdata.treasury.gov/Publish/mfh.txt | stjohnswarts wrote: | Gold would have been so outlandishly valued if we stuck with | that. What is your solution to gold being worth astronomically | more as currency backer vs it's day to use by people and | industry? Just accept that you can't ever use gold again for | manufacturing and let momma's wedding ring increase in value to | ridiculous amounts? | | I'll agree we probably need at least a 0.5 increase in interest | and that's on hte low side. I see so many new land grabs around | town and too many new businesses popping up because it's pretty | easy to get a loan right now. | danielmarkbruce wrote: | Credit spends too. | | US Household debt to GDP steadily went down over that period. | throw0101a wrote: | > _" Too much money" is a condition almost always caused by the | creation of too much "fiat currency" (ie a currency that is | backed by nothing but the good faith and credit of the issuing | government)_ | | Japan money supply: | | * https://fred.stlouisfed.org/series/MYAGM2JPM189S | | Japan inflation: | | * https://fred.stlouisfed.org/series/FPCPITOTLZGJPN | | Money supply [?] inflation. | | > _As we all should know, in the US, on 6 /5/1933 FDR took the | US off gold-backed currency and started the fiat currency | situation we still find ourselves in._ | | Except for the multiple decades post-WW2 with Bretton Woods. | | Further, being on the gold standard didn't seem to help with | inflation in the US during the 1920s: | | * https://www.theatlantic.com/business/archive/2012/08/why- | the... | | * https://archive.ph/FWKcL | jppittma wrote: | I have no idea how anybody looks at Japan without realizing | that the MMT people got it right. | | Thought experiment: If the government printed money to send | unemployed people to uninhabited farmland to start | cultivating it (in complete isolation from the rest of the | economy) would it cause inflation for the rest of us who | aren't connected? | | If that community was then connected to the rest of the | world, would the economic benefit be positive? | | You can clearly see that the limitation on printing money is | unutilized resources in the economy. | Manuel_D wrote: | Quite the contrary. Japan's money supply has grown | considerably more slowly than other countries - reinforcing | the relationship between money supply, economic growth, and | inflation. | | > Thought experiment: If the government printed money to | send unemployed people to uninhabited farmland to start | cultivating it (in complete isolation from the rest of the | economy) would it cause inflation for the rest of us who | aren't connected? | | Sure, because those people can't actually spend the money | they were given. But who would agree to be sent to said | island? The incentive of getting paid is worthless if you | can't spend your money on anything. If the government | printed money to pay people to build wind farms with the | restriction that they can't spend this money on anything, | how many workers would accept this offer? | pdonis wrote: | _> If the government printed money to send unemployed | people to uninhabited farmland to start cultivating it (in | complete isolation from the rest of the economy) would it | cause inflation for the rest of us who aren 't connected?_ | | First, this never happens, and certainly is not what's been | happening for decades now in the US with the Fed printing | money, so it's not a very relevant thought experiment. | | Second, taking your scenario as given for the sake of | argument, what was stopping the unemployed people from | cultivating the uninhabited farmland before? Was it the | absence of money, or the fact that they didn't _own_ the | farmland? | | In other words, the real operative point in your thought | experiment is not the government printing money, but the | government giving tangible resources (uninhabited farmland) | to a group of unemployed people, so that they will produce | something of value from it. The money is really incidental: | once they start producing more food than they can consume | themselves, they will be able to acquire their own money by | selling the excess. The initial printed money is really | more like a one-time grant of working capital, so they can | buy enough initial supplies to get the operation going. And | money doesn't even have to be printed for that: the | government could just allocate some tax revenue to it. | | Third, in our actual system as it actually works, who | _does_ get newly printed money? Is it unemployed people who | could be doing productive work but aren 't? That was | perhaps true for COVID relief checks--although those didn't | really enable anyone to go back to work, they enabled | people to stay _out_ of work, _not_ producing anything, for | longer--but in any case those don 't actually add up to a | lot in terms of the total US money supply. The vast | majority of the money the Fed prints goes to financial | institutions, and the only thing whose "production" is | increased by that printed money is loans. Those loans, | since they are mostly mortgages, will certainly _redirect_ | productive capacity in the economy (so we build more | McMansions and commercial office buildings that sit empty | for years after being built, while our roads, bridges, | drainage systems, electrical power grid, and other | infrastructure deteriorate), but they don 't _increase_ | productive capacity overall. In other words, they 're just | redistribution--and almost always (with the COVID relief | checks being the only possible exception I can see) from | the poor to the rich, since that's who the newly printed | money goes to (financial institutions). | | _> You can clearly see that the limitation on printing | money is unutilized resources in the economy._ | | No, we can clearly see that the limitation on printing | money is how much redistribution from the poor to the rich | the rich think they can get away with. Remember that the | Fed was initially advocated to the US government by rich | bankers who were tired of the government coming to _them_ | for bailouts whenever there was a financial panic due to | stupid government interventions (the Panic of 1907 was the | specific one that prompted the legislation that became the | Federal Reserve Act), so they decided to put a system in | place that would make it so the costs of the bailouts ended | up being paid by ordinary citizens (who wouldn 't get any | of the money the Fed would print) instead of them. | burntbridge wrote: | The "uninhabited farmland" is just an analogy for some | area of the economic landscape that when you spend money | on it, can absorb labor and return a tangible benefit | that is equal or more than what you spend. Maybe for | example repairing worn out infrastructure or creating new | infrastructure. | | >The vast majority of the money the Fed prints goes to | financial institutions | | You maybe thinking of Quantitative Easing. In which case | financial institutions are just incentivized to cash in | their Government Bonds, whereby they need to look for | some place else to put the money, hence perhaps asset | inflation. The Government doesn't just print a whole lot | of money and give it away to someone. | nostrademons wrote: | Then the unemployed people on uninhabited farmland move | back to their home cities with all this extra money and buy | a house for a couple million, sending prices skyrocketing. | | This is literally what's been happening to the economy for | the last decade. All the money that went into the economy | from 2008 onwards ended up in the financial & tech sectors | in NYC, Seattle & the Bay Area. As long as it _stayed_ | there, it only increased prices in NYC, Seattle & the Bay | Area. Then remote work happened and these techie | millionaires realized they could live anywhere. Or they | just hit a threshold where they can retire. Suddenly those | millions are ending up in places like Boise, Phoenix, | Austin, Denver, Asheville, etc. and _now_ we get inflation. | Manuel_D wrote: | Inflation is money supply relative to the amount of goods and | services. E.g. I have 500 cars in the economy and $1000 in | circulation. Over time I grow the economy, and now I have | 1000 cars, and I still only have $1000 in circulation. In | this scenario we'd have deflation. To maintain an equilibrium | I'd need to increase the money supply commensurately, to | $2000. If I increased supply to $4000 I'd have inflation. | | Japan's money supply growth is actually pretty constrained. | From 2007 to 2017 it want from 713 trillion to 960 trillion | as per the chart you linked. For the USA [1], money supply in | circulation went from 7 trillion to 13.3 trillion and | inflation is correspondingly higher [2]. Granted, this source | doesn't include recent data around the pandemic, so it's of | limited use for analysis existing inflation trends. | | 1. https://fred.stlouisfed.org/series/MYAGM2USM052S | | 2. https://fred.stlouisfed.org/series/FPCPITOTLZGUSA | izend wrote: | Compare the US M3 growth vs the Japanese M3 growth from 1990: | | --------------------------- | | _US JAN 1990 M3: $3.166T | | _ US JAN 2022 M3: $21.8T | | --------------------------- | | _JPN JAN 1990 M3: Y=708T | | _ JPN JAN 2022 M3: Y=1536T | | --------------------------- | | US nearly 7x | | JPN just over 2x | pdonis wrote: | _> Except for the multiple decades post-WW2 with Bretton | Woods._ | | Um, what? The Bretton Woods agreement _was_ part of "the | fiat currency situation we now find ourselves in" (just an | earlier stage of it where the government was still trying to | pretend to some sort of "linkage" with gold, instead of just | dropping the pretense altogether as was done in the early | 1970s when Bretton Woods fell apart). No US money was backed | by gold at all (not even United States Notes, which were | still in circulation) after the FDR administration | confiscated all private gold holdings and suspended | redemption indefinitely in 1933. | | _> being on the gold standard didn 't seem to help with | inflation in the US during the 1920s_ | | To call the monetary regime in place in the 1920s "the gold | standard" is a serious misnomer. The Federal Reserve was | created and authorized to print money (Federal Reserve Notes, | not backed by gold or anything else) in 1913. A significant | amount of that money was in circulation in the 1920s. Plus, | even United States Notes, which were notionally backed by US | gold reserves, were not expected to be redeemed for gold in | any great quantities, since paper money was so much more | convenient than gold for transactions; so the fact that those | notes were notionally backed by gold did not have much | practical effect on their exchange value. What _did_ have a | practical effect was the fact that United States Notes and | Federal Reserve Notes exchanged at par (one dollar of each | was required to have the same exchange value), so as more | Federal Reserve Notes were printed, the exchange value of | United States Notes dropped. | [deleted] | russellbeattie wrote: | > _I 'm quite surprised that price inflation isn't | significantly worse._ | | The one benefit of wealth disparity in the US and around the | world. | | I agree that if all that new money had been evenly distributed, | then it would have most likely caused crazy inflation. But it | wasn't. It went directly into the coffers of large banks, | corporations and arms manufacturers, and eventually into the | accounts of the 0.001%. | | The supply of money has to be available to spend in order for | it to affect the economy. With the top 1% owning 40% of the | wealth, it means all that money is essentially locked away from | the general public. | arawde wrote: | Most surprising part of this FOMC had to be when Powell said "we | would like to slow demand" during the press conference, you don't | usually hear the quiet part out loud like that from this Fed | chair. Also shift upwards in PCE in the SEP, plus the dots, all | seems appropriately hawkish | civilized wrote: | > you don't usually hear the quiet part out loud like that from | this Fed chair | | Is it implying / could be construed in some negative way? Like, | "slow demand" means "poor people need to buy less", or | something? | Ericson2314 wrote: | Yes, the only way raising these rates could reduce demand is | by increasing unemployment. | | Powell is much more honest than his predecessors in this | regard. I commend him for it. | | The obsession with this single policy lever is bad, and I | hope it changes. But there being little political will to | raise rates is a good first step. | | Eventually we can leave them at zero, and manage the economy | by other means. | mywittyname wrote: | > Powell is much more honest than his predecessors in this | regard. | | I disagree pretty heavily here. Yellen was always honest | about the need for monetary policy which would be | politically unsavory (which is why her term wasn't | renewed). Her delivery was very much designed not to "spook | the markets" but I think part of the reason she scared the | markets was that she favored long-term stability. | | Her words as Treasury Secretary aren't exactly sugar | coating things. She's been saying that the impact of the | Russian sanctions are going to hurt American as well, and | that inflation is probably here to stay in the medium term | at least (she's long held the belief that high inflation is | an acceptable tradeoff for low unemployment). Granted, | those statements are followed up with "we are working on a | solution"-type statements, but I don't see many promises. | lghh wrote: | > Yes, the only way raising these rates could reduce demand | is by increasing unemployment. | | It could also reduce demand by making it more expensive to | buy things. Sure, that will probably have a side-effect of | increasing unemployment, but that unemployment isn't the | goal. The goal is to make it cost more to do things so less | people want to do them. | civilized wrote: | I wonder why we'd want to pull levers to make things cost | more, when the goal is to fight inflation, the bad | phenomenon in which things cost more. | hellojesus wrote: | Increased costs lead to decreased demand, which | ultimately will dampen further price increases. They're | shifting the intersection of supply and demand. | dragonwriter wrote: | > Most surprising part of this FOMC had to be when Powell said | "we would like to slow demand" during the press conference, you | don't usually hear the quiet part out loud like that from this | Fed chair. | | That's...not really a "quiet part", it's the widely | acknowledge, overt nature of managing inflation. That the Fed's | dual mandate involves employment and price stability, and that | those are in tension because controlling inflation often | involves mitigating demand, while promoting employment enhances | demand is not viewed as a secret. It's like Fed 101, and Fed | board members (chair or not) very often do not walk on | eggshells about it. | mullingitover wrote: | The quiet part would be "We need to put a few million people | out of work to cool things off." | mywittyname wrote: | It's the reason that the Fed is nominally non-political. | | Nobody wants the medicine, even if they need it. | goodluckchuck wrote: | Monetary policy is always political. | dang wrote: | We changed the URL from | https://www.federalreserve.gov/newsevents/pressreleases/mone..., | which is a slightly obscure press release, to what looks like an | ok third-party article. If there's a better third-party article | (that isn't hard paywalled) we can change it again. | nickff wrote: | It's worth taking a look at the effective federal funds rate over | time, which clearly shows how low it's been recently: | https://www.macrotrends.net/2015/fed-funds-rate-historical-c... | victorvosk wrote: | I am sensing a pattern here.. just can't put my finger on it... | whoseonthat wrote: | It seems interest rates lower during recessions. Right now we | are already low and are raising which seems to be a different | pattern. Is lowering interest rates a method to overcome a | recession? | hedora wrote: | Welcome to stagflation. | mym1990 wrote: | We are not yet in stagflation, unless I really missed | something. The economy is actually fairly strong by most | indicators. The question is whether inflation can be tamed | by the time we hit a recession(which we will, whether it is | in 6 months, 2 years, 5 years, etc...) | throwaway0a5e wrote: | Everyone is sure acting like it'll be 6-12mo and if | everyone expects a recession in 6-12mo then... | babypuncher wrote: | These 6-12 month predictions for the next recession are | always real popular 6-12 months before the next major | election. I recall almost identical rhetoric in H1 2018, | coincidentally the last time the fed raised interest | rates. | | Nobody has a clue when the next recession will be. | nickff wrote: | Yes, the common theory is that lowering interest rates | encourages investment and growth, at the cost of higher | inflation. This increased inflation is also generally thought | to depress 'real' salaries, which further increases growth. | | https://www.investopedia.com/ask/answers/12/inflation- | intere... | hitpointdrew wrote: | The thinking is that lowering rates will increases spending | (why save if you aren't getting much of return, you will find | other ways to invest your money rather than have it sit in a | bank account). So, if the economy seems to be in a recession | central banks will often lower rates to encourage spending. | But if you are already at near 0% for a record length of | time, and have printed massive amounts of money, well friend | we are in uncharted territory. What's better than do nothing? | Doing something, we have this interstate rate lever, we can't | pull it down, lets push it up! | mym1990 wrote: | Yes, lowering interest rates during tough times has the | effect of making borrowing capital cheaper, thus | incentivizing people to take on risk via opening a business, | investing, etc... | | In contrast, raising interest rates is a way to fight a hot | economic market. While in theory having massive growth might | be ideal, it would be the equivalent of a sprinter using all | of his/her energy in the first 100m while running a | marathon...it needs to be a balancing act. | | Lowering interest rates has been one of the major tools in | fighting recessions, and one of the main concerns has been | that lowering interest rates isn't possible(or effective) | when they are already at such a low level. | [deleted] | adamhp wrote: | Lowering interest rates makes capital cheaper, which does | spur investment and thus economic development, so, it can | certainly have that effect given the right circumstances. But | keep it too low, too long, and you see money start flying | around too quickly, getting a little too loose because | everyone wants to get theirs, and then they start inventing | things like mortgage-backed securities and everyone starts | over-leveraging, because, why not, money is cheap! Then you | get 2008. | mywittyname wrote: | It's important to separate out fraud from low interest | rates. Low rates absolutely drive investment, and riskier | investment at that. But the issue with 2008 was fraud in | the lending market, not necessarily the low rates. | | Risky investments aren't necessarily bad investments. Low | interest rates give businesses more runway to operate | investments that might take a while to show returns. A | million dollar loan at 10% for an investment means that it | needs to return into ~$80k a month to break even. At 2%, | that same investment only needs a ~$16k monthly return. | That's a huge difference in runway needed to start | generating cash flow. | twh270 wrote: | "Money is cheap" yes, also "you can buy a house if you can | fog a mirror". (Buy as in acquire a piece of paper that | says you'll pay $$$$ per month to whoever holds the note.) | voisin wrote: | > Lowering interest rates makes capital cheaper, which does | spur investment and thus economic development | | There are diminishing marginal returns to this, and when | rates were already close to zero it is hard to imagine | going to zero spurred much more than meme stocks and YOLO | gambles. | BurningFrog wrote: | It used to be, until they reached 0%. | | The usual metaphor is that the interest rate is how hard you | pull a rope. Pulling harder slows down the economy more. | | But below 0%, you're trying to _push_ the rope. And, as any | rope expert will tell, you that doesn 't do anything. | wolpoli wrote: | It's important to note that the Federal reserve normally | controls the overnight rate, and let the market determines | the interest rate for other durations (eg. 30Y). That | changed with the introduction of Quantitative Easing where | it reduces the interest rate over the entire yield curve. | | In other words, even through the overnight rate is 0%, you | could still push down the interest rate down for bonds of a | longer maturity, and that'll further stimulate the economy. | brandmeyer wrote: | The last couple of recessions have placed a ton of | deflationary pressure on the USD, and the fed has reacted to | maintain a small positive inflation by both lowering interest | rates and QE. | | Now that inflation is rising and the economy is also at | nearly full employment, its pretty straightforward for them | to raise interest rates to rein in inflation. | phkahler wrote: | >> Is lowering interest rates a method to overcome a | recession? | | It is claimed to be. The idea is that with lower interest | rate, companies and people will be more likely to borrow | money to spend and that will boost the economy. | | I for one do not really believe this to be true. I suspect | it's the act of lowering rates that gives a _temporary_ boost | until things rebalance. In other words, economic activity has | some dependence on the derivative of interest rates. This is | why things were so good from 198x through 2003 or so, rates | were dropping the entire time (filtered of course). | jjoonathan wrote: | > economic activity has some dependence on the derivative | of interest rates | | If interest rates go down, it's easy to roll over old | promises and make new ones besides. If interest rates go | up, promises must be kept or the business will fold. | | At the end of every business cycle, interest rates are low | and there are lots of unprofitable "zombie companies" that | operate by simply rolling over their promises. In order for | the economy to grow, interest rates must be hiked to do a | controlled burn and remove this underbrush. Zombie | companies have to actually die. This is painful at the best | of times. | | Political will formation will be doubly hard this time | around because A. there is more national debt (so we | probably need to soft-default on it and inflate it down, | first) and B. last time around Carter did the burn and | Reagan got the growth and the credit, so the question is | who wants to be Carter this time around. | reflexco wrote: | It seems that Putin is the scapegoat for inflation and | will be the scapegoat for recession as well. | jjoonathan wrote: | This isn't a rate-hike recession, it's stimulus | withdrawal. | | Rates are at 0.25%. Last time it took 20.00% to stop | inflation. We haven't even started. We haven't soft- | defaulted on the national debt, so we can't even think | about starting. The Ukraine conflict will be dusty | history by the time actual rate hikes and an actual rate | hike recession come around. | xxpor wrote: | There's still a lot of debate if raising interest rates | is what actually caused inflation to fall. | | Another theory is that it was actually Regulation Q. | | https://pages.stern.nyu.edu/~asavov/alexisavov/Alexi_Savo | v_f... | | I also personally think that high inflation is treated as | bad axiomatically. This needs some justification if the | only proposed solution is to intentionally cause a | recession. | cjsplat wrote: | The MMT point is that it isn't clear that the interest | rate is what killed inflation. | | A major cause of inflation in the 70s was the 6x increase | in the price of oil. | | From 1980 to 1986 there was nearly a div by 5 drop. | nostrademons wrote: | Except it wasn't. Inflation was already high and going up | by the time the first oil crisis hit. CPI was 5.5% in | 1969, 5.8% in 1970, went down to 3.3% by 1972, and was | 6.2% in 1973: | | https://www.minneapolisfed.org/about-us/monetary- | policy/infl... | | The first oil crisis didn't hit until October 1973. Look | at the month-by-month numbers for 1973: | | https://www.inflation.eu/en/inflation-rates/united- | states/hi... | | The biggest jump was 1.81% in _August_ , 2 months before | the oil shock. (Note that this is roughly double the | monthly numbers we see now.) There was consistent monthly | inflation 0.68%+ from January -> June. | | The real reason for the 1970s inflation was Nixon | monetizing the debt incurred by our Vietnam hangover, but | in true Nixonian fashion, he found an external event to | blame it on. | voisin wrote: | > Rates are at 0.25%. Last time it took 20.00% to stop | inflation. | | This is good context. Is anything different this time | that would make one believe we won't need much, much | higher rates to tame inflation? | tmn wrote: | The system will seize up and collapse with anything close | 20% interest rates. Look at what happened in September | 2019. The rates shot back to 0 because there was a | liquidity problem in the repo market. The system is rife | with zombie companies servicing their debt with nearly | free debt. This will not go like the 70s. When rates stop | increasing and go back to zero within the next two years | remember this comment | jjoonathan wrote: | The 1979-1982 interest rate spike was preceded by 15 | years of faffing around, playing at raising interest | rates, and then chickening out, with a backdrop of rising | persistent inflation. I think it's likely to play out | exactly as you describe, but that's exactly how it played | out in the 70s. | | I'm much less certain that it will end the same way, but | there are big problems with all the alternatives too | (yuan, euro, crypto, gold) so who knows. | blagie wrote: | I think what you're describing is exactly what's claimed. | /Lowering/ interest rates leads to growth, not low interest | rates. I don't think many economists would dispute that. | | The general model is that interest rates, lowering taxes, | and increasing government spending are tools for shoring up | the economy during a recession. During a growth period, | interest rates should be raised, government spending | lowered, and taxes raised, so we have room to adjust them | for the next recession. This can, in theory, smooth out the | boom-bust cycle which otherwise naturally results. | | The problem is that we rarely raise interest rates, reduce | spending, or raise taxes, since it's politically unpopular. | Many of these tools are harmful; for example, outside a few | domains like infrastructure and medicine, long-term high | government spending tends to /harm/ the economy. | dragonwriter wrote: | > The problem is that we rarely raise interest rates | | Not really true; there was a long period of near-zero | rates not moving during and after the Great Recession, | but that was a unique event; from 2015-2018 there was a | fairly consistent notching up of rates typical of an | expansion with inflationary signals, then an ease back | from 2019 until COVID hit at rates were cut sharply. | | Looking at history there's a long run up in 2003-2006 | after the 2001 recession, a run up 1992-2001 through the | dotcom boom after the short period of easing from | 1989-1992, a runup from 1986-1989, etc. | voisin wrote: | Throughout these time periods there was a dramatic | increase in the money supply (from my view of FRED stats | it doesn't look like there's ever been a contraction of | the monetary supply), so we're rate increases just offset | by enough monetary growth to offset? | spaetzleesser wrote: | "It seems interest rates lower during recessions. Right now | we are already low and are raising which seems to be a | different pattern. Is lowering interest rates a method to | overcome a recession?" | | It used to be that you could lower interest rates and run up | deficits during bad times with the intent of going back to | normal when things are better. We now have kept low interest | rates and record deficits during good times. When things blow | up (as they always do after a while) there is almost nothing | left that can be done to counter a recession. In the past | going to war helped.... | miketery wrote: | Lowering interest rate to stimulate economy, increasing | interest rate to lower inflation. Problem is we've got no | room left to lower and asset prices have never been higher. | downrightmike wrote: | Yes, because it increases the money supply. We are supposed | to tighten when things are good by raising rates. At this | point they need to raise rates to pull money out of the | system. Because with covid, not only did we cut rates, we put | in a HUGE amount of money and that was really irresponsible. | And now we are seeing the repercussions with inflation | lowering the value of the dollar. | mym1990 wrote: | I am not sure if it is really useful to evaluate what | happened vs the other outcomes that we were not able to | experience. We don't really even have that many precedents | for the situation. It was, and still is, an extremely | complex problem to address. Injecting large amounts into | the system ultimately doesn't create long term wealth, but | in that short term gap during the first 1 of the pandemic | many people were undoubtedly pulled out of a hole. | InitialLastName wrote: | We should recall that not only did the US cut rates and | spend a lot of money through the covid recession, when | things were bad, it ignored that first bit of advice before | Covid when things were good (it's hard to remember now how | hot the economy was in 2016-2019, but it was really hot), | by cutting taxes and continuing to print money and keep the | rates low to cover it. As the tax cut detractors correctly | predicted, those tax cuts (and the growth that didn't | happen enough to cover them) reduced the US's leverage to | respond when an actual crisis came up. | throwaway0a5e wrote: | I don't see how tax policy matters in this case. That | money still sloshes around. The only difference is who's | nominally in control of it. | InitialLastName wrote: | a) higher taxes enable the government to apply | deflationary pressure on the economy (by removing | currency from circulation) | | b) Reducing taxes without cutting spending (because it | will "pay for itself in growth") leads to a larger | deficit, which requires increased debt to cover, which | triggers the money-printers. | landemva wrote: | The Fed raised interest rates into Trump's first two | years in office. | userabchn wrote: | It encourages investment (over saving), so can help to boost | the economy | tamaharbor wrote: | We had soaring inflation in the early 80's, but at that time loan | interest rates and certificate of deposit rates were much higher | than they are now. Does anyone know why the difference? | mym1990 wrote: | Someone posted the graph earlier: | https://www.macrotrends.net/2015/fed-funds-rate-historical-c... | | Fed funds rate in the early 80s were at their historical peak. | We are still currently at near historical lows. | bshep wrote: | How did anyone buy a house or a car with interest rates in | the 20%s? | windpower wrote: | Not 100% sure about cars, but houses were cheaper. Interest | rates being higher means that the monthly payment on a | given mortgage amount is higher, meaning the house price | that an average buyer can afford goes down. Low interest | rates mean that people can afford a more expensive house, | and that causes prices to go up. | | Anecdotally, my dad complains about paying an interest rate | in the teens for the house I grew up in. My parents paid | $69K ($188K in 2022 dollars) for the house, which was about | a year old. Zillow estimates the same house at $457K today. | Obviously not all of the price increase is due to lower | interest rates, but the house _was_ much cheaper, so even | with a high interest rate, the mortgage was pretty | affordable. | ryandrake wrote: | Also, returns from other investments tied to interest | rates were higher. I seem to recall seeing CD rates >10% | in the '80s. I know I had a CD paying >6% as late as the | mid '90s. This world where basic banking investments are | pointless and pay ~0% is a historic anomaly. | trgn wrote: | tbh maybe it should stay like that, it's only an anomaly | if you start your timeline at the advent of central | banking. Interest rates on deposits are a purely | mathematical fiction, creating no new value. If people | would like to see their old tired moneys sprout new baby | moneys out of thin air, they should convert their savings | into capital, and effectively invest in productive | enterprise. Any capital gain then is by market consensus | that new value has been created by your investment in | that enterprise. | just_steve_h wrote: | The house cost $30,000 and the car cost $5,000. | Ferrotin wrote: | Prices were lower, and they could refinance when rates got | lower. | efsavage wrote: | House values are driven by what people can afford, which is | heavily influenced by the interest. If you can afford | $1k/mo and 10% of that is interest, 90% is going to | principal and you can figure out the math on what your | total principal would be. If 20% of that is going to | interest, you're still paying $1k, but now your initial | principal is much lower, which at scale will drive housing | down to some equilibrium where, to be a bit reductive, | average people can afford average houses. | | My parents bought their house in 1979, for $33k. ~10 years | later, when rates had lowered significantly, it was worth | $150k. | throwawayboise wrote: | I don't think mortgate rates ever broke 20% but were in | double-digits. | | At that time, though, you needed about 20% down payment to | qualify for a mortgage. So you weren't borrowing as much, | and houses were smaller and cheaper. It was very difficult | for many people to buy a house in those years. | mym1990 wrote: | From this chart(https://inflationdata.com/articles/wp- | content/uploads/2021/1...) we can see that in inflation | adjusted terms, housing was much more affordable prior to | about 2001(give or take). I think generally speaking, | housing changes hands now much more often than it did | before the internet, and there is much more | investment/speculation going on as well, which drives a lot | of the additional cost nowadays. | boppo1 wrote: | Outright, maybe? I've heard of boomers buying mustangs and | paying college tuition with a summer job. | colechristensen wrote: | Lag, it just hasn't happened yet. | ceejayoz wrote: | They don't raise rates rapidly, as that can cause a shock. | They're expecting to dribble small increases out regularly over | the next year. | | If you chart inflation and interest rates you'll see the close | relationship: https://www.gzeromedia.com/the-graphic- | truth-50-years-of-us-... | mywittyname wrote: | They have been "expecting" to raise rates for years now. Most | of the time, they chicken out, and last time they went | through with it (2018), the Fed Chairman was replaced with | someone who was well known to be "dovish" on rate increases. | aeyes wrote: | I don't follow your argument, the feds interest rate | consistently increased from the end of 2017 until Covid | hit. When Powell started it was at 1.4% and got up to 2.4% | in July 2019, more than one year after he took office. | 29athrowaway wrote: | You will own nothing and be happy. | FpUser wrote: | >"An interesting aspect of this is that the endless printing of | money in the last few years was a sort of stress test of modern | monetary theory" | | I think it was / is stress test of how much and for how long | other countries are willing to finance the US and let it abuse | status of the dollar. | andreyk wrote: | An interesting aspect of this is that the endless printing of | money in the last few years was a sort of stress test of modern | monetary theory, which has been seeing lots of discussion in | those same years. I never quite understood how this theory would | work while avoiding inflation, and what's happening now seems to | at least be related - | https://www.nytimes.com/2022/02/06/business/economy/modern-m... | | Conceptually the answer in the theory is to suck up the excess | money with taxes, which of course is not going to fly in the US. | But maybe this inflation will make that more viable in the | future: "Ms. Kelton and her colleagues make clear that the | pandemic relief packages did not follow one of M.M.T.'s key | tenets -- they did not try to account for resource constraints | ahead of time. In an M.M.T. world, the Congressional Budget | Office would have carefully analyzed possible inflation ahead of | time, and lawmakers would have tried to offset any strain on | available workers and widgets with stabilizing measures and tax | increases." | stjohnswarts wrote: | The problem is all that new wealth created, about 90% goes to | the top 1% who can easily store it away in nontaxable assets | (at least until said assets are sold) since generally the "buy | tax" isn't all that high compared to growth in value of | securities and real estate (at least good investments thereof). | Just siphoning more money out of the poor and middle class will | not fly in the USA you will be voted out and your policy | rescinded within a couple of years. | pkulak wrote: | How is it a test? MMT doesn't say you can increase monetary | supply forever without consequence. It says that you can | increase monetary supply until you see consequences, at which | point you need to start reducing it, mostly through taxation. | Raising interest rates does reduce monetary supply, but I don't | think nearly to the degree that MMT would call for. | | Now, if congress immediately votes in a bunch of new taxes, | it'll be a wonderful test. :D | birdyrooster wrote: | MMT simply has currency scaling with the exponential utility | of commerce. Value is created on both sides of each business | transaction, not just for the recipient of the money. The | money supply increases to reflect all of the new value | created by commerce. | boppo1 wrote: | > Congressional Budget Office would have carefully analyzed | possible inflation ahead of time... | | Ah yes, surely central planning is the solution. | r00fus wrote: | You jest, but that's exactly what the CBO is supposed to do. | roenxi wrote: | An important point to keep in mind when talking about MMT in a | policy setting is that the people who will implement it don't | care about theory and will make a series of short-term | politically expedient and/or vaguely corrupt decisions. If they | implement MMT, there are good odds that it will just look like | money printing. | | It doesn't really matter what the academic plan is, the policy | isn't going to follow it. Much like how interest rates were | supposed to rise after being dropped to emergency levels a | decade or so ago and instead a 25 bps rise is front page news. | | All the politicians/relevant voters are looking for is a green | light to hand out money and some buzz to say that it'll make | everyone better so ignore the doubters. If they cared about | good economic policy the last few decades would look very | different. The dominant ideology is that centrally planned | interest rates are a good idea, and that is questionable. | wolpoli wrote: | I would encourage readers to also review this [1] document | which compares and contrasts MMT and other economic theories. | The author concluded that "MMT contains some kernels of truth, | but its most novel policy prescriptions do not follow cogently | from its premises. " | | [1]:https://scholar.harvard.edu/files/mankiw/files/skeptics_gui | d... | GoodJokes wrote: | athrowaway3z wrote: | I keep these things in the back of my mind when talking about | economic theories: | | - an economist is someone who can tell you today why he was | wrong yesterday. | | - the central bank of Sweden made up an award in the honor of | Nobel. Twice the recipient made a point to remind people | economic theory is not an exact science. | solveit wrote: | > an economist is someone who can tell you today why he was | wrong yesterday. | | Which puts them near the bottom as a hard science, but near | the top of the social sciences. (I'm agreeing with you, but | the valence of your observation depends on what reference | class you have in mind for economics) | dragonwriter wrote: | Yeah, MMT basically asserts that the separation between fiscal | and monetary policy is artificial, and that the only real | constraint on "fiscal" policy (tax and spending) is monetary | effects, not the metaphorical limited purse ("fisc") that must | be filled with revenue and borrowing to allow spending. | | It is not "Congress can spend willy-nilly" but "Congress needs | to stop thinking about fiscal balance and start thinking like | the Fed." (Or, perhaps, "Congress needs to define fiscal policy | with movable levers which it gives control of to the Fed or a | Fed-like body.") | throwaway894345 wrote: | Irrespective of its economic merits, any policy which depends | on a competent and upright Congress does not inspire | confidence. It feels like it's bound to be one of those "True | MMT Hasn't Ever Been Tried (TM)" things. | dragonwriter wrote: | MMT isn't a thing to try or be tried: it's not an ideology | or set of policies or even policy goals (there is a very | loose correlation between adherence to MMT and certain | progressive policy goals, but they aren't the same thing.) | | MMT is an _understanding of factual nature of the | environment in which government operates_. Reduced to one | sentence it is "the entire concept of fiscal balance is | play-acting as if the government was using commodity or | externally-controlled fiat currency, rather than it 's own | fiat and a distraction from the real constraints on | government finance, rather than something which reflects, | or even loosely guides policy makers towards, the real | constraints." | grey-area wrote: | Your definition is circular. What proves MMT is in any | way 'factual'. | | MMT is an old lie, oft repeated, and only discovered as a | lie after it is far too late. | stale2002 wrote: | > it's not an ideology or set of policies or even policy | goals | | That might be true in the academic sense. | | But in reality, the only people who talk about MMT are | people who just want to spend money infinitely and claim | that there is no negative consequences to doing so. | | Which of course, doesn't make any sense if you know | anything about MMT in the academic sense, which | absolutely admits that there is negative consequences to | spending/money printing. | | Mainstream economists don't really think MMT has much to | say, TBH, and few professionals care about it. | brimble wrote: | As someone who took a lot of political science and | economics classes once upon a time, and has an ongoing | amateur interest in these things, MMT is the first time | I've looked at one of these macro-level | explanations/descriptions and _not_ felt like I needed to | ask a bunch of stupid questions that are (inevitably) | going to be dismissed with a heaping dose of | condescension. Finally, something that _makes total | sense_ when I look at how real world systems (and | especially governments) behave. | hn_version_0023 wrote: | The best definition of _Congress_ I've ever seen was this: | | Congress: 535 ants on a leaf, floating down a river towards | a waterfall, with each ant thinking they're steering. | | I share your lack of confidence. | mushbino wrote: | If it said being paid not to steer, I think that would | make more sense in our current oligarchy. | travisgriggs wrote: | Let's rebrand it as Critical Fiscal Theory. | | I've got my popcorn already. | kregasaurusrex wrote: | Not-quite Fiscal Theory: the fed mints a $1 trillion | dollar platinum coin and lends it to congress to allocate | the year's budget. The coin may not have any value beyond | spot, but everyone can see that congress has a rare piece | of metal! | somewhereoutth wrote: | The great thing about fiscal policy is that it can be | targeted, unlike monetary policy, for example to address | wealth imbalance. | simpthrown8id wrote: | >>Conceptually the answer in the theory is to suck up the | excess money with taxes | | Govt spending is already 45% of GDP, so there's not much room | to increase it more. | | As for MMT, I think what the MMT crowd doesn't realize is that | there's a lot of latent inflation coming. Asset prices and CPI | do not go up in tandem. First Asset prices are inflated, then | later for the next decade or so, as people slowly make | withdrawals from those inflated asset prices, it begins to | affect the CPI. And that's where we are right now, at the | beginning of the CPI impact. | toyg wrote: | _> Govt spending is already 45% of GDP, so there 's not much | room to increase it more._ | | Several European countries are well over 50%. There is plenty | of room. | cjsplat wrote: | I can't repro the 45% number. | | BEA says 2021 US GDP is nearly $23T, CBO says total 2021 | budget is $6.8T. | jmalicki wrote: | Federal budget is $6.8T, the 45% includes state and local | government spending as well. | | https://fred.stlouisfed.org/graph/?g=8fX https://en.wikiped | ia.org/wiki/Government_spending_in_the_Uni.... | tarsinge wrote: | As I understand it taxes in MMT are just destruction of | money, it's the essential counterpart of money creation used | to balance supply. It's irrelevant to GDP and spending in | that model, since in MMT the government doesn't need taxes to | spend, it just print what it needs, that's the core idea. | nostrademons wrote: | Interestingly, the mechanics of this seem backward. A major | problem with the Fed's operations is that operations on | financial markets take 12-18 months to spread to the real | economy, so they have to target interest rates _now_ based | on what they think the economy is going to look like in | 12-18 months. Conversely, money going into or out of the | average person 's checking account _now_ affects what they | do in the real economy _now_ , without a lag time. When | we've recovered from significant economic crises (2008 and | 2020), it's often been through direct fiscal stimulus. | | It seems that the logical thing to do would be to put money | _into_ the economy through directly giving it to citizens, | and then take money _out_ of the economy through interest | rates, by making it more expensive to borrow and reducing | business investment. Typically you want to put money into | the economy in a hurry, in response to a crisis, but you | want to take it out gradually, so that businesses can plan | ahead. MMT 's framing of this still seems backwards, even | if they've realized that fiscal and monetary policy are two | sides of the same coin. You'd also get a lot less political | resistance to the fiscal policy side if it involved giving | people money rather taking money away from them. | Scarblac wrote: | I seem to recall that France used to do this -- create | money for government spending, taxed money ceases to exist, | no need for government debt. But I can't find anything | about it, and I don't know if I'm just not using the right | search terms. | | Has this been put into practice in large countries before? | zer0tonin wrote: | Is France a small country now? | causalmodels wrote: | I am by no means a fan of mmt, but I think looking at | government spending as a share of GDP misses the point mmt | proponents attempt and often fail to make; which is that | financial constraints are should not be the limiting factor | of the economy. | | A better indicator would be the price of labor and | commodities since they better reflect the constraints of the | real economy. Unfortunately for the mmt people, the prices | are going nuts because we are actually dealing with real | resource constraints now. | hn_throwaway_99 wrote: | > >>Conceptually the answer in the theory is to suck up the | excess money with taxes | | > Govt spending is already 45% of GDP, so there's not much | room to increase it more. | | Taxes (government income) is not all that related to | government spending, as we've seen recently. | dillondoyle wrote: | I can think of a few trillion in urgently needed money we | could spend taxes on: renewable energy, batteries, | retrofitting homes for chargers, resilience building (and | paying people to move out of high risk areas), invest in | carbon capture/moonshots. | ummonk wrote: | MMT doesn't prescribe spending to curb inflation; it | prescribes taxes. | paulpauper wrote: | has MMT worked. it remains to be seen | unyttigfjelltol wrote: | Says the man midway through a 40-story fall from a | skyscraper: "So far so good!" | birdyrooster wrote: | The alternative is a static or deflationary currency. This | leads to hoarding of assets which were originally intended | to serve and increase commerce. Think Bitcoin. Without MMT, | we would be falling from a skyscraper as you depict. | [deleted] | datavirtue wrote: | You can expect inflation as you grow the money supply. | Inflation is good. Runaway, uncontrolled inflation is not. We | have not had, nor do we have now, runaway inflation. You have | to grow the money supply as the population and productivity | increases. Most of the talk and reporting on inflation is just | silly. | MuffinFlavored wrote: | How did "printing lots of money" | https://fred.stlouisfed.org/series/CURRCIR not spike USD to | EUR? did EUR also print lots of money? | https://finance.yahoo.com/quote/USDEUR=X/ basically unchanged 5 | years ago -> now | ThePhysicist wrote: | M3 has roughly tripled in the last 20 years, so yeah we've | printed lots of money too. | OGWhales wrote: | > I never quite understood how this theory would work while | avoiding inflation | | I see this sentiment any time MMT is brought up. I think it | shows a misunderstanding of what MMT is saying. | | While I've got my own issues with MMT, it's always been made | clear by MMTers that inflation is an important signal to | respect and that you can't infinitely 'print' money due to the | constraint of real resources. | freedomben wrote: | You're correct, but I think the problem is that a lot of | people who advocate for MMT, don't actually understand it, | because many of the pro-MMT people I've talked to _really do | think you can print money forever_. | | It's not unique to MMT, the same thing happens with plenty of | other subjects too. | causalmodels wrote: | Not even the MMT people understand MMT. The lack of formal | models means everyone is working with wildly different and | often contradictory definitions | OGWhales wrote: | > everyone is working with wildly different and often | contradictory definitions | | I've found the main MMTers to be mostly consistent | amongst themselves in their theories. Now, I think some | ideas are wrong, but they do seem mostly on the same | page. I agree MMT does an excellent job convincing laymen | of some pretty wacky ideas and that's one of my bigger | complaints with it. | | Also, I find the focus on mathematical models problematic | in mainstream economics. It obfuscates a lot of erroneous | assumptions. Models are great for testing, but words are | useful for communicating ideas too and can sometimes be a | better format, especially for wider audiences. To be | clear, I'm not saying models are bad or that MMT | shouldn't use them, in fact I saw one MMTer post this | paper recently: | http://www.levyinstitute.org/pubs/wp_992.pdf | xxpor wrote: | I think people conflate what MMTers were saying post-2008, | which was we had WAAAAAAAAAAAY more capacity to print | money, especially from 2008-2014 or so, with we can spend | literally infinite money. And so you get all of these | people saying "MMT was wrong" with the pandemic inflation, | when it's the exact opposite. We started running into | _real_ resource constraints (due to lockdowns, supply chain | issues, etc) and inflation shot up exactly as expected. | Now, even as an MMT fan, I 'm perfectly willing to admit | that predicting _where_ the real constraint is is extremely | hard. And that politically in the US raising taxes on a | dime is basically impossible. But MMT wasn 't wrong, for | the parts that have been tested as much as they can be. | OGWhales wrote: | Absolutely, I think MMT in particular is prone to doing | this and it's one of my bigger gripes with it. | mariodiana wrote: | Even if we imagine MMT working perfectly -- whatever that means | -- it represents a stealthy redistributing of wealth. The idea | behind it is for the government to acquire and then | redistribute goods and services from those in the private | sector who would otherwise command that wealth, and do | something else with it: in other words, give these goods and | services to others. | | And no one is going to notice this? The people who are used to | enjoying some quantity of goods and services are not going to | notice that they now enjoy less, because someone else is | enjoying them? | | Or, is this somehow supposed to "stimulate" the economy, so | that more goods and services are actually produced, because of | the extra money? | | This is alchemy. Production comes before consumption. | hn_throwaway_99 wrote: | Here are the first two paragraphs on the MMT Wikipedia article: | | > Modern Monetary Theory or Modern Money Theory (MMT) is a | heterodox[1] macroeconomic theory that describes currency as a | public monopoly and unemployment as evidence that a currency | monopolist is overly restricting the supply of the financial | assets needed to pay taxes and satisfy savings desires.[2][3] | MMT is opposed to the mainstream understanding of macroeconomic | theory, and has been criticized by many mainstream | economists.[4][5][6] | | > MMT says that governments create new money by using fiscal | policy and that the primary risk once the economy reaches full | employment is inflation, which can be addressed by gathering | taxes to reduce the spending capacity of the private sector.[7] | MMT is debated with active dialogues about its theoretical | integrity,[8] the implications of the policy recommendations of | its proponents, and the extent to which it is actually | divergent from orthodox macroeconomics.[9] | | Regarding this being a "test" of MMT, I don't see why. The | first part of the first sentence of that second paragraph, _MMT | says that governments create new money by using fiscal policy | and that the primary risk once the economy reaches full | employment is inflation_ , which seems to be precisely what has | happened, no? | IncRnd wrote: | > ...and that the primary risk once the economy reaches full | employment is inflation, which seems to be precisely what has | happened, no? | | Certainly, there is inflation. There isn't full employment. | standeven wrote: | How do you define full employment? The unemployment rate in | the USA is currently 3.8%. | IncRnd wrote: | BLS defines full employment as an economy in which the | unemployment rate equals the nonaccelerating inflation | rate of unemployment (NAIRU), no cyclical unemployment | exists, and GDP is at its potential. [1] | | [1] https://www.bls.gov/opub/mlr/2017/article/full- | employment-an... | ummonk wrote: | There's no strict definition, but an unemployment rate | <4% almost certainly corresponds to full employment, as | frictional unemployment can be expected to be ~4%. | drexlspivey wrote: | Unemployment < 4% is basically full employment. People that | are changing jobs are temporarily unemployed. Another | metric you can use to reach the same conclusion is that # | of job openings > unemployed work force | IncRnd wrote: | That's U-3. U-6 is at 7.2%. In general the claim that | many people are not returning to work after COVID | lockdowns is true. The reasons are up for debate, but | that's not the point. The U-3 rate is an artificial rate | to claim as the truth. That's moving the goal posts in | order to get the win. | | Plus there are a record number of unfilled job openings. | bskap wrote: | U-6's 7.2% is compared to 7.0% in February 2020 and 8.1% | in February 2007. So even that is similar to pre-Covid | levels and better the the peak before the last recession. | IncRnd wrote: | How does that apply to full employment? | bskap wrote: | The 5% = full employment threshold has always been | calculated based on U3. That's what they measured to come | up with that estimate. If you want to talk about how U6 | is better, then you need to compare it to previous U6 | measurements, not previous U3 measurements. | | If, as you were implying, U3 was hiding extra | unemployment right now but U6 was more accurate, then it | wouldn't be so closely tracking U3. | [deleted] | hn_throwaway_99 wrote: | Your argument is a non sequitur to me: | | > Plus there are a record number of unfilled job | openings. | | Yes, which would basically imply that it's incredibly | easy for anyone who wants a job to get one. | IncRnd wrote: | > Your argument is a non sequitur to me: | | For something to be a non sequitur, it must be a non | sequitur to everyone, not just to one. This is not a non | sequitur for two reasons. 1) The sentence | you quoted was not intended to be a consequence | of the earlier statement. Unemployment rate and | number of job openings are connected, but not as you | believe. Correlation is not causation. You are drawing | inferences without cause. 2) Full employment | depends upon the number of job openings as well | as the unemployment rate, which you ignored from | my comment. | | > Yes, which would basically imply that it's incredibly | easy for anyone who wants a job to get one. | | No. That is your inference but is clearly not implied. | AceJohnny2 wrote: | How is "unemployment" defined in the US? Take those | numbers with a grain of salt. | | In France, you were counted as "unemployed" if you were | registered with the national employment agency and | actively looking for employment _according to their | criteria_. | | If you didn't find anything (for example because the | opportunities on offer were too far away, or various | other reasonably human reasons) after a certain time, the | agency dropped you, and you were no longer part of the | "unemployed" statistic. Unemployment went down! | | I've also seen the government there change their criteria | for unemployment (for example dropping you after 9 months | instead of 12), to make it seem like unemployment went | down. | | (I'm a big believer in statistics-driven policies, but | statistics, like anything involving humans, can be | corrupted) | bskap wrote: | The US uses a large-scale survey for unemployment rather | than tying it to the unemployment process. The official | definition most people quote is based on responses to the | survey of "have not worked recently, have looked for work | recently" but there are also broader measures of | unemployment that count people who want to work even if | they haven't looked, as well as people working part time | who want to work full time. | | Using even the broadest measure of unemployment[1], | numbers are back down where they were before Covid. The | labor force participation rate is still down though[2] | which means that about 2% of US adults aren't looking to | go back to work at all- many of them are likely now | retired, students, or stay-at-home parents. | | [1] https://fred.stlouisfed.org/series/U6RATE [2] | https://fred.stlouisfed.org/series/CIVPART | IncRnd wrote: | That's very astute of you. The GP was talking about a | rate called U-3, but the U-6 rate is far more | descriptive. U-3 is what is generally used as the quoted | rate, because it severely minimizes actual unemployment, | allowing the Federal Government to use false statistics. | [1] | | [1] https://www.bls.gov/news.release/pdf/empsit.pdf | alexilliamson wrote: | I'm glad someone else got on this soap box today. Folks | will bend over backwards to justify the U-3 rate when | it's not that meaningful at all. | xxpor wrote: | It's extremely meaningful. It measures those who are | unemployed. U-6 counts underemployment and people not | actively searching due to an "economic reason". | | Even regardless, the current U-6 rate is very close to | the record low: https://fred.stlouisfed.org/series/U6RATE | OGWhales wrote: | MMTers argue that government spending at full employment | will cause inflation, not that there must be full | employment for there to be inflation. | dlp211 wrote: | Inflation has many inputs and looking at inflation strictly | through a monetary lens will provide a distorted picture as | to why there is inflation. | | Additionally, MMT states that it needs to use taxes to | manage inflation, which the US federal gov't is clearly not | doing, which undermines the testability of the theory. | zemptime wrote: | MMT has seemed to me to be an academic fig leaf over the | indirect taxation which occurs when more money is printed. | MMT is fundamentally wrong, and everyone smart knows it is, | but you as an individual can't make any sort of "respected" | career as an economist unless you say the right things or | are stupid enough to believe them. | ericmay wrote: | Aren't there record job openings? | | I know "full employment" is a loaded term here, but at | least in a general sense all who want a job could at least | find _something_ right? | | One thing I'd be interested in seeing a discussion on as it | relates to this topic is what happens when there is a | legitimate labor shortage. | Mountain_Skies wrote: | Not all job openings exist with the intention of ever | being filled. | germinalphrase wrote: | Wouldn't it also suggest that the prescribed inflation | antidote - raising taxes - would be impractical due to | political opposition. Seems like a double win: stand strong | against raising taxes (which is the heterodox position) while | showing MMT "doesn't work". | mudlus wrote: | All value is explanatory, that is, even if it has "intrinsic | value" like carbohydrates in ATP in a cell, it is still | knowledge instantiated for a resilient purpose (eg to power a | cell to replicate its knowledge). | | As explanations change, value changes, so anything can be a | currency at the level of the individual--in this way, at | least for conscious minds, a public monopoly on money is, | while possible, morally wrong. It's a form of Marxism. | | There's already been a solution the problem of state monopoly | on symbolic abstractions for value (money), that started with | Bitcoin and has been growing a new global economy since 2009. | xxpor wrote: | The state has a monopoly on money because they collect | taxes. Try paying your taxes in BTC and tell me how that | goes. | paulpauper wrote: | here begins the process of the fed sllowwwwly raising rates, well | behind the rate of inflation. Either buy stocks or lose $ due to | inflation. NO way out | AviationAtom wrote: | This is pretty much it. The engine already overheated, now | we're just dumping water on it. | mtoner23 wrote: | Or you could use your capital to invest in a business to | increase the supply of goods that this excess money is chasing. | That would help fight inflation. | AviationAtom wrote: | This is one of the best ideas, but it would be wise to find a | business that is recession resistant. | afterburner wrote: | Overdo it and you crash the economy. On top of that, inflation | is still likely going to fall back down in a year, so no reason | to overcorrect now when the downside is so bad. | trgn wrote: | Which isn't what's happening. It's been months now that this | was being floated, and the stock market has been volatile the | last half year, an outright bear market in some sectors. | Trillions in equity have evaporated already, and that's not | even taking into account the wealth erosion of high inflation. | | Now's the time to be skilled, but not the time to be a rentier. | paulpauper wrote: | Probably half of that selling is due to Ukraine . Also, a few | months of weakness does not change the long-standing trend of | stocks being a good hedge against inflation. Stocks generated | real returns in the 80s, 90s, 2003-2007, 2015-2017 despite | the fed raising rates. | yalogin wrote: | We did waste the 3 yrs before Covid hit by not increasing | interest rates and not reducing Fed's money printing. I don't | know if it's the fed or if the government pushing to win | elections, but feels like we didn't take care of the house in | good times and we have led ourselves into this cycle. | spaetzleesser wrote: | Slowing down GDP growth or the stock market would have been | political suicide. It would probably have been a good thing in | the long-term but long-term planning is not feasible anymore in | the current climate. Sadly it's a winning strategy to inflate | bubbles. | drexlspivey wrote: | The FED balance sheet was decreasing from Jan 2018 till covid | hit and it was stable the 4 years prior to that | r00fus wrote: | Hmm - I wonder who appointed the current Fed chair? | stjohnswarts wrote: | The current Fed chair has basically the same idea on | economics as Yellen. Likely not much would have changed if | she'd stayed in office. | nostromo wrote: | True -- but note that Yellen was appointed by the same | president. | jonathanpeterwu wrote: | Yeah no doubt about this. But its also important to remember | we've been doing this non stop since 2008 minus a few months | in 2018. So this is a multi president, both parties are | involved in continuing this train. | spaetzleesser wrote: | People have been conditioned to believe it's either one or | the other party's fault. And they decide whether things are | going well or not so well based on whether their favorite | president is in power. Nobody looks at the actual data. | trustfundbaby wrote: | >We did waste the 3 yrs before Covid hit by not increasing | interest rates and not reducing Fed's money printing. | | Most of the money printing happened in 2020 and after. | https://fred.stlouisfed.org/series/M1SL | bduerst wrote: | *Printing money, but in response to covid stagnation in 2020. | | Printing and interest rates are separate. There was still a | missed opportunity to increase interest rates while the | economy was running hot prior to 2020. | np_tedious wrote: | It's not as dramatic as that looks. They changed the | definition of M1. | | From the same link: | | Before May 2020, M1 consists of (1) currency outside the U.S. | Treasury, Federal Reserve Banks, and the vaults of depository | institutions; (2) demand deposits at commercial banks | (excluding those amounts held by depository institutions, the | U.S. government, and foreign banks and official institutions) | less cash items in the process of collection and Federal | Reserve float; and (3) other checkable deposits (OCDs), | consisting of negotiable order of withdrawal, or NOW, and | automatic transfer service, or ATS, accounts at depository | institutions, share draft accounts at credit unions, and | demand deposits at thrift institutions. | | Beginning May 2020, M1 consists of (1) currency outside the | U.S. Treasury, Federal Reserve Banks, and the vaults of | depository institutions; (2) demand deposits at commercial | banks (excluding those amounts held by depository | institutions, the U.S. government, and foreign banks and | official institutions) less cash items in the process of | collection and Federal Reserve float; and (3) other liquid | deposits, consisting of OCDs and savings deposits (including | money market deposit accounts). Seasonally adjusted M1 is | constructed by summing currency, demand deposits, and OCDs | (before May 2020) or other liquid deposits (beginning May | 2020), each seasonally adjusted separately. | colinmhayes wrote: | m1 graph is incredibly misleading because they changed the | definition, and even before it was still quite limited. | Here's the real money supply | https://fred.stlouisfed.org/series/WM2NS | tlogan wrote: | We have an inflation which is about 8% while mortage rates on 30 | year fixed are just 4.7% (15 year fixed are just 3.8%). | | So I really do not understand logic here: how can bank give me | money at rate 2x times lower than inflation. | | Seems like free money (and it is no surprise that home prices are | going thru the roof). | | But I'm probably naiive here and do not understand how banking | works. | 01100011 wrote: | I have no idea if any of this is correct, but my understanding | is that mortgage rates are set, more or less, by the market. | You have buyers(say, pension funds) with a lot of cash that | they need to invest in a relatively safe way. They bid on | mortgages and whatever they're willing to pay for those loans | sets the mortgage rate. Up until(or maybe still including) now, | the Fed has also been one of those buyers in an attempt to push | down those mortgage rates. | | Rates are low because there aren't a lot of alternatives for | safely storing cash right now. Normally you could buy | government bonds, but rates on those are also negative for the | same reasons(demand along with fed buying). | | When rates on government bonds rise, or when it's obvious we're | back in a period of consistent inflation(likely, given the | fed's weak move today), investors will have other options and | the demand for cheap mortgage debt will dry up at the current | price, pushing rates higher. | mercutio2 wrote: | The finance industry is not predicting that inflation will | continue at its current pace. | | That, plus the 30 year fixed interest mortgage market is not a | naturally occurring market, it is heavily subsidized. | HeavenFox wrote: | Presumably inflation is not going to stay at 8% over the next | 30 years. | | In fact the current 30-year expected inflation is only at 2.2%: | https://fred.stlouisfed.org/series/EXPINF30YR | MuffinFlavored wrote: | Have you peeled back the categories measured by the 8% | inflation? This is stupid for me to say but, for example... | Used car prices factor into that 8% number. But if you aren't | shopping for a used car... it doesn't really affect you, right? | | Housing affects mostly everybody. Same with energy. I don't | truly understand the weighting or everything that goes into the | 8% CPI getting tossed around and I understand that it comes out | to "on average as a whole, you as a consumer are most likely | seeing a roughly 8% increase in cost" but I wonder if it is | worth calling out that "actual personally perceived inflation" | might be less (or more) than 8% | | My rent hasn't gone up, I haven't bought a different (new or | used) car. Gas is more expensive surely but I think that's an | extra $40/mo for me or so. I think Chipotle bowls cost about $3 | more now... Not exactly life changing? | jcadam wrote: | Got my mortgage at 2.75% late last year. Woooooo..... | seizethecheese wrote: | What do you think is going to happen to your home price is | interest rates go up to 5% and then people can't afford huge | mortgages anymore? | [deleted] | jyu wrote: | Prices will stay the same, but days on market increases. | Inflation works itself through the system and eventually | there will be a buyer. | solveit wrote: | Shouldn't be too relevant if they're planning on living in | the house for the next ~30 years. | jcadam wrote: | We'll see. we didn't have inflation like this during the last | big downturn in 2008. I also don't think the Fed is going to | be able to raise rates as high as they did back in the early | 80s. | nostromo wrote: | The economy would collapse, along with the US government, | at even moderately-high interest rates. | | The federal government is $30t in debt. Even a small rise | in interest rates would quickly make the entire federal | budget servicing the debt. | nwmcsween wrote: | We currently have runaway inflation, if you look at how | inflation was calculated in 1980s compared to now it would | be between 12-16%. | novateg wrote: | Got mine at 2.25% in 2020. I'm saving $500k for 360 months with | the rate i got | lapetitejort wrote: | If you're a dummy like me, 25 bps means 0.25%. | [deleted] | trelane wrote: | Technically, it does not, raising 0.25% is always in relation | to the existing value of the thing, so increasing a percentage | by a quarter of a percent would mean increasing it by a quarter | of a percent of its existing value. | | On the other hand, "basis percentage points" means something | absolute, not relative to the existing level. | | Pedant out. :) | [deleted] | HWR_14 wrote: | Pedantry is _useless._ | | It's very useful to know the difference between the two. It's | similar to many other things where there are two concepts | that people conflate into one word and then spend a long time | complaining or creating humor about confusing the results. | trelane wrote: | Obligatory Jayne: "let's see... A quarter percent of nothing, | carry the nothing, is.. nothing!" | monktastic1 wrote: | The claim wasn't that "raising by 25 bps" should be | interpreted the same as "raising by .25%", it was: | | > 25 bps means 0.25%. | | In a sense, that is technically correct: it _does_ refer to | .25% -- not of the _current_ value but of the 100% value. | dmurray wrote: | While we're at it, we should remember that this isn't a | unitless number although it's often confused for one. | | Interest rates are being raised by .25% _per year_. | nimbius wrote: | imo this has been a comically glacial effort, and im not sure | the feds 1.9% interest target by EOY is anywhere near | aggressive enough to stave off 10% or greater inflation by Q4. | What i really think are needed --Clinton era 4-5% rates-- are | all but taboo to the market post-housing-collapse. nearly a | year ago the fed was cheerleading "transient" inflation in an | attempt to avoid culpability for the corporate credit bubble it | created during 2008's post financial meltdown. the article is | pretty fixative about 2018 but IMO this goes a long way back. | Quantitative easing measures from from 2010 lke low credit and | bond buyback were still going on in 2021. The coming to jesus | moment for the fed that july bond buyback cessation targets | would be a disaster was likely the 2021 holiday shopping slump, | and we didnt start honestly talking about raising prime | interest until febuary. | | the reason 1.9%, and the reason this is a desperate tightrope, | is that the fed has the very real ability to blow up the | corporate credit bubble with prime interest. | throw0101a wrote: | > _imo this has been a comically glacial effort, and im not | sure the feds 1.9% interest target by EOY is anywhere near | aggressive enough to stave off 10% or greater inflation by | Q4._ | | How much of the current inflation has anything to do with | interest rates? You think oil/gas prices will care much about | the Fed's action? | | And we still have supply chain issue before all geopolitical | problems even started: just try asking network vendors what | their lead times are for switches and routers. | | For consumers, Ford is shipping cars with missing | functionality: | | * https://arstechnica.com/cars/2022/03/ford-ships-explorers- | mi... | latchkey wrote: | I run several datacenters. Switches are impossible to find | right now. | rndphs wrote: | The amount of money being circulated absolutely does affect | inflation (almost by definition). The Fed interest rate | affects the amount of money in circulation because the Fed | credit money is simply printed. This printed credit money | gets spent and ends up circulating. The lower the interest | rate, the easier it is to borrow, the more borrowing gets | done, the more money is printed and enters circulation, | which leads to inflation. | | Theoretically, the money needs to be paid back eventually. | But as long as the Fed interest rate is below inflation, | paying back can always be put off by covering the previous | debt with new debt. | throw0101a wrote: | > _The amount of money being circulated absolutely does | affect inflation (almost by definition)._ | | No, money supply [?] inflation. E.g., Japan M2: | | * https://fred.stlouisfed.org/series/MYAGM2JPM189S | | Japan inflation: | | * https://fred.stlouisfed.org/series/FPCPITOTLZGJPN | | Why do Friedman-esqe Monetarists continue to ignore | velocity? | | * https://fred.stlouisfed.org/series/M2V | | I personally like Cullen Roche's analogy: | | > _But this is what so much of the money supply | represents - money that has been issued and is just | sitting around unused. Why is this useful? It's like | calculating your weight changes by counting how much food | you have in your refrigerator. No. That's potential | calories consumed and potential weight gain. The amount | of food in your fridge tells you little about your future | weight changes just like the amount of money in the | economy tells us little about the actual price changes in | the economy._ | | * https://www.pragcap.com/three-things-i-think-i-think-i- | see-d... | | > _The Fed interest rate affects the amount of money in | circulation because the Fed credit money is simply | printed. This printed credit money gets spent and ends up | circulating. The lower the interest rate, the easier it | is to borrow, the more borrowing gets done, the more | money is printed and enters circulation, which leads to | inflation._ | | Things do not work like this. Money gets created through | private banks by credit creation, and the only limit on | that is the the risk they see in their loans being | defaulted on. The Bank of England put out a primer a few | years ago: | | > _The reality of how money is created today differs from | the description found in some economics textbooks: | Rather than banks receiving deposits when households save | and then lending them out, bank lending creates deposits. | In normal times, the central bank does not fix the amount | of money in circulation, nor is central bank money | 'multiplied up' into more loans and deposits._ | | * https://www.bankofengland.co.uk/quarterly- | bulletin/2014/q1/m... | | Roche again from a 2011 paper, "Understanding the Modern | Monetary System": | | * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=190 | 5625 | | Banks create (hopefully) viable loans first, and then | look for reserves after--assuming reserve requirements | even exist, as many countries removed them decades ago. | syshum wrote: | This is the thing, the entire fiat currency system will | at some point likely be recorded in history as the | largest fraud ever perpetuated in civilization. | | Moves like removing reserves completely just move us | further over the ledge into the clear ponzi scheme that | it is | | If any private actor attempted to do what central banks | do, they would be rightfully jailed. We should not allow | central banks to do things private actors can not do | boppo1 wrote: | Sure, but if the interest rate is lowered arbitrarily | rather than based on some market function, don't unworthy | businesses get loans? Seems like we sacrificed efficiency | and price discovery to keep employment numbers high. | HWR_14 wrote: | > How much of the current inflation has anything to do with | interest rates? You think oil/gas prices will care much | about the Fed's action? | | Yes. Oil/Gas prices are pretty determined by OPEC voting | and production of their member countries in conjunction | with other macroeconomic issues. OPEC adjusts their | production to take into account macroeconomic factors. The | Fed rate is one of those issues. | fundad wrote: | Hiring back 10 million laid-off workers is expensive and | consumers are paying the bill. The problem is wage growth | at the bottom is the last thing elites want. | syshum wrote: | Alot... the only reason why a middle class family can | afford that new $80,000 F150 is because 0% financing over | 7-8 years. | | Supply chain issues are being exacerbated by "free money" | from the fed... | tryptophan wrote: | It has everything to do with it. | | If they were higher, people would go bankrupt, not have | money to drive, use less gas/oil, thus reducing demand, | thus reducing price, thus reducing inflation. | colinmhayes wrote: | It certainly does not have everything to do with it. The | answer is somewhere in the middle. Cheap money absolutely | causes inflation, but so do global supply chain | breakdowns. | chasd00 wrote: | > but so do global supply chain breakdowns | | i would believe supply chain issues were major | contributors to inflation if wages were not rising. It | seems to me a supply chain problem causes price to go up | but wages would not. The price increase by the retailer | is there to pay for their price increase to the | wholesaler, not to increase employee wages. | mindslight wrote: | IMO rather than talking about ambiguous "inflation", one | should be specific about what exactly is being inflated - | "monetary inflation", "asset inflation", "price | inflation", etc. Monetary inflation occurred when the Fed | printed several trillions of dollars back in 2020, asset | inflation occurred soon thereafter, and then price | inflation took hold throughout 2021 as that new money | trickled into consumers' hands. | | It doesn't particularly make sense to call the current | rising oil price inflation (that would make "inflation" | just a synonym for price increases), but the price of | energy going up will cause broad price inflation down the | line. | colinmhayes wrote: | Unless I know I'm talking to an economist I use inflation | to mean price inflation, because that's what every non | economist thinks it means. You are certainly right that | it's ambiguous in a technical sense though. | posnet wrote: | Yes, but have they tried raising interest rates, _and_ | kill all the poor people? | | https://www.youtube.com/watch?v=owI7DOeO_yg | hgomersall wrote: | It might possibly have an effect, in the same way that | anything that causes more unemployment and increases the | likelihood of a recession might have an effect. | analyst74 wrote: | Current rate, which is nearly 0, is also an important | consideration. | | What this means is if you borrow at 0.25% interest rate | yesterday, and it becomes 0.5% tomorrow, your cost of borrowing | just doubled. | mywittyname wrote: | Percent-of-a-percent is how I remember it. | | More technically, a hundredth of a percentage point. | cm2187 wrote: | When inflation is at 8%, that's like pissing on a forest fire. | afterburner wrote: | They are saying they will raise it several more times this | year. | | Inflation isn't the worst economic problem you can have, | unemployment and deflation are. And raising interest rates | risks raising unemployment, and even causing a recession if | you're too aggressive. | | The inflation could still be a temporary effect of the COVID | years, so if you overdo it, you'll risk dampening economic | activity too much when it was going to go down after a year | anyways. | cm2187 wrote: | even if you add the subsequent increases, they add up to | 1.5%. That won't do anything to an inflation of 8% raging | right now. | afterburner wrote: | If the inflation falls later on, that 1.5 won't look so | bad. No reason risk to crash the economy right when it's | just starting to recover. Overcorrecting is bad. | cm2187 wrote: | It has been high for a year already and everything points | to it worsening (the 8% doesn't include Ukraine, which | will push both energy and food prices up). It is because | it is not temporary anymore than the Fed is forced to act | now. | rafale wrote: | That's the most optimistic number possible. For most people, I | am sure the actual cost inflation is higher. | mikaeluman wrote: | This was expected since at least December. The market is pricing | in 6 more rate increases throughout the year. They simply can't | afford to lag behind inflation too much for too long. | voisin wrote: | Am I incorrect in thinking they also can't afford to let rates | rise too much as they can't afford the interest payments? | mikaeluman wrote: | The FED receive interest payments. They don't make them. | | But yes, raising too much too fast will cause stress and | defaults, and nobody wants that unless it's absolutely | necessary. | voisin wrote: | Federal Reserve receives but the payments are made as a | share of the government's budget, no? So the Fed is trying | to balance inflation with effectively defunding the | governments non-debt servicing initiatives. | cheriot wrote: | Higher interest payments just means the Gov borrows more. | I don't think the Fed is concerned about the ability to | issue new debt. | drexlspivey wrote: | The coupon payments in the government's existing debt are | fixed and as such they are not effected by any changes. | It will only affect newly issued debt while the debt is | being rolled over which will take some time (the average | maturity is around 5 years) | lvl102 wrote: | Higher rates won't impact US as much as they will impact emerging | economies. Those countries will face food crisis in addition to | rapidly rising debt costs. Keep an eye on this because we are on | cusp of civil unrests across the globe. | UncleOxidant wrote: | War in Ukraine will have a much larger effect. Something like | ~25% of global wheat supply comes from Ukraine and Russia. | There won't be any planting to speak of in Ukraine this spring. | And Russian wheat is pretty much off the world market. | cjbgkagh wrote: | I've heard from Russian sources (so take with grain of salt) | that they've avoided the center of Ukraine to allow locals to | plant food. So maybe some planting may take place. | lvl102 wrote: | Yes, it went from bad to insurmountable in many poor parts of | the world and not enough people are talking about it if any. | frockington1 wrote: | They did the absolute minimum to appear to be able to say they | are dong something. With official inflation nearing 8%, this is | nowhere near enough. SO far equity markets agree this is | effectively nothing | hgomersall wrote: | It's only nowhere near enough if you view the process as | something other than a huge charade. Take a look at the | predicted inflation to see how little the monetary policy | "experts" have a clue. | zthrowaway wrote: | They'll get more aggressive with it after the midterms. | chipgap98 wrote: | Isn't this the first of many hikes planned for 2022? | standardUser wrote: | The Fed said to expect up to 7 increases this year. | jcadam wrote: | As soon as the economy starts really sputtering, they'll | reverse course. | czbond wrote: | And no one believes them. The bond market is doing the rate | cuts for them. | boppo1 wrote: | > The bond market is doing the rate cuts for them. | | Can you elaborate? I don't understand. | nine_zeros wrote: | They need to go slow. An abrupt rate increase will cause a | recession. | bequanna wrote: | Could they go any slower? The consensus seems to be that this | is far too little way too late. | chipgap98 wrote: | Consensus from who? | bequanna wrote: | Every person in the US who has had their purchasing power | destroyed over the past ~18 months. | | Unfortunately, most people were/are too drunk on (maybe | temporary) housing and stock market gains to care. | | Cheap money, free money and rampant speculation could all | have easily been cut off a year ago and we would have had | a much "softer landing". Now we're in a much more | precarious position and may end up fighting stagflation | possibly causing years long general economic malaise. | | ...but hey, Zillow said my house is worth $XXX!!! | colinmhayes wrote: | > Every person in the US who has had their purchasing | power destroyed over the past ~18 months. | | The vast majority of people in the US have no idea what | the fed is. Why would you trust their judgement? | Loughla wrote: | I legitimately want my home value to tank. I'm sick of | paying taxes on a 275k home value that will never, ever, | ever sell for that much. I wish it could go back to | 80-100k, regardless of whatever "equity" that costs me. | I'm in my permanent home, not an investment property. | phkahler wrote: | In particular a bursting of the housing bubble that has been | reinflated (and then some) since the last time it popped in | '08. | mikeyouse wrote: | There's no evidence at all for this. | | The exotic mortgage products (e.g. reverse ARMs) have | essentially disappeared, people's homes are well | capitalized, lending standards are much higher than they | were, there's very low levels of home equity debt, overall | debt payments as a percent of household income are at very | low levels. | | The people waiting for a housing crash are going to wait _a | long_ time. This one chart sums it up well: | | https://fred.stlouisfed.org/series/MDSP | | Mortgage debt service payments as a percent of disposable | income are near all-time lows and at roughly 1/2 the number | of the GFC peak. Since the vast majority of home loans are | fixed -- what's the mechanism for rate hikes to cause a | housing crash? | ameister14 wrote: | Yeah but that's an overall lowering of debt servicing as | a percent of disposable income. The only part that hasn't | dropped much is consumer debt. | | Plus while reverse amortization might be less common, | ARMs generally are still very popular and you'll see a | hike in overall debt service associated with rising | interest rates. | | I don't know what's gonna happen with the housing market | and I don't think it'll crash either but I think part of | the reason is because private equity has bought a huge | amount of housing - BlackRock bought what, 10-15% of the | houses sold in 2020? | boppo1 wrote: | > BlackRock bought what, 10-15% of the houses sold in | 2020 | | Is this official somewhere? I've seen it in headlines and | heard it in soundbytes but did they disclose it in their | 10k or something? | mikeyouse wrote: | Consumer debt is also low; | https://fred.stlouisfed.org/series/CDSP | | And metrics like credit card delinquencies are at | historic lows: | https://fred.stlouisfed.org/series/DRCCLACBS | | ARMs actually aren't very popular - fewer than 15% of new | mortgages are ARM. | | > _BlackRock bought what, 10-15% of the houses sold in | 2020?_ | | People vastly overestimate how large players like | Blackrock are. There are something like 80 million | single-family homes in the US. Of these, Blackrock owns | 80 _thousand_. If they bought every one of those homes in | 2020 (they didn 't) - it would represent more like 1% of | homes sold that year. And of course there are millions of | condos not figured into my denominator. They're huge, but | way under 1% of purchases. | Qub3d wrote: | My (very amateur) understanding of the housing issue is | that its primarily a problem of _supply_. Since houses | have been redefined from a dwelling to a financial | investment, there is strong pressure on political policy | to encourage asset appreciation. That means NIMBYism and | corporate REITs are acting as two wealthy and highly- | motivated special interest groups in favor of making new | development nigh-impossible. | | Or at least, so I've been lead to believe. All I know for | sure is I can't by a third of the sq. ft my older sibling | could 8 years ago. | slaw wrote: | They need to slowly hike interest rate by 25 bps every week | for the next 8 months to match inflation. | nine_zeros wrote: | That is silly. With mere speculation of interest rate | increase, housing sales have already started to slow down. | With every 25 bps increase, real asset interest rates will | go much higher, causing much more slowdown in sales, GDP | and inflation. | | If fed accelerates rate increases, we are very likely to | see a recession. Which will automatically reduce demand for | goods and services and thus inflation. | | But reducing inflation by causing mass unemployment will | lead to other problems. | slaw wrote: | You can build houses cheaper. They don't have to be as | overpriced as they are. | [deleted] | pclmulqdq wrote: | It's worth noting that this is actually a rate target, not the | rate. Previously, the rate floated between 0% and 0.25% based on | a market. Now, it is going to be between 0.25% and 0.5%. | qwertyuiop_ wrote: | First I have heard of this and quite interesting to learn. | Could you explain the difference ? Does this mean they are | going to implement the rate increase some point in future ala | target ? | monktastic1 wrote: | As another reply indicated, the Fed doesn't actually set | interest rates. That's a common misconception. Instead they | purchase and sell treasuries to member banks, such that those | banks' balance sheets change in such a way as to make money | more or less expensive to trade amongst themselves, which has | knock-on effects for consumers. | | On the other hand, since there's no longer a reserve | requirement since the start of covid, the mechanism that | causes banks to have to borrow from each other (to meet the | nightly reserve requirement, historically) is much less clear | to me. Hopefully an economist can chime in. | sbelskie wrote: | " Adjustments to the IORB rate help to move the federal | funds rate into the target range set by the FOMC. Banks | should be unwilling to lend to any private counterparty at | a rate lower than the rate they can earn on balances | maintained at the Federal Reserve. As a result, an increase | in the IORB rate will put upward pressure on a range of | short-term interest rates. The opposite holds for a | decrease in the IORB rate. Typically, changes in the FOMC's | target range are accompanied by commensurate changes in the | IORB rate, thus providing incentives for the federal funds | rate to adjust to a level consistent with the FOMC's | target." | | https://www.federalreserve.gov/faqs/why-is-the-federal- | reser... | drexlspivey wrote: | > As another reply indicated, the Fed doesn't actually set | interest rates. That's a common misconception. | | The FED absolutely sets the interest rates by controlling | the federal reserve rate which is the interaste rate paid | to banks every day for their deposits with the FED | monktastic1 wrote: | The Fed (not FED, BTW) doesn't "set" the rates, but has | policies (including IORB, or what you call the federal | reserve rate) which guide the markets to arrive at their | target. Maybe that's a small distinction, but I think it | helps OP, because I labored under the same confusion for | a while. | nickles wrote: | > The Fed (not FED, BTW) doesn't "set" the rates, but has | policies (including IORB, or what you call the federal | reserve rate) | | This is wrong. The Fed does set interest rates, _period_. | IORB is an interest rate that gets paid out _every single | day_ to market participants. "Federal reserve rate" does | not exist; what you're probably referring to is the _fed | funds rate_. The Fed sets a target range for this, and, | if the _effective fed funds rate_ does not stay within | the target corridor, the Fed will conduct _open market | operations_ to push it there. | | I tried to give you a thorough and accurate response to | your parent comment. Stop spreading blatantly incorrect | information about a nuanced subject. | nickles wrote: | > the Fed doesn't actually set interest rates | | It's not clear cut as to what degree interest rates are | exogenous inputs that central banks respond to, but the Fed | absolutely does set interest rates, allowing some | variability between upper and lower bounds. | | Today, Fed adjusted interest on reserve balances (IORB, | formerly IOER/IORR) to 40bps from 15bps. This rate | determines how much interest banks are paid for reserves | kept at the Fed. In theory, this rate acts as a floor for | the effective fed funds rate. In practice, it's somewhat | murkier. | | The Fed also sets the discount rate (now 50bps), which is | meant to act as a ceiling on rates. Banks are able to | borrow money from the Fed's discount window if they need | it; however, there's a stigma associated with utilizing | this facility. The Fed now maintains standing repo and | reverse repo facilities to help banks manage liquidity. | | These policies all target the front end of the yield curve, | which is where Fed has the most control. To manipulate the | long end of the curve, Fed implemented QE. Other central | banks (e.g. BoJ) have gone further, using yield curve | control to explicitly impact the term structure. | | > Instead they purchase and sell treasuries to member | banks, such that those banks' balance sheets change in such | a way as to make money more or less expensive to trade | amongst themselves, which has knock-on effects for | consumers. | | Repo rates are determined by the market, but are bounded by | the rates at Fed's repo facilities. A catch here is that | not all market participants have direct access to these. | While repo rates may impact behavior, the Fed's intended | mechanism is IORB, which (ignoring steepness of the yield | curve) influences how attractive banks find loaning money | to clients. | | > the mechanism that causes banks to have to borrow from | each other (to meet the nightly reserve requirement, | historically) | | This market used to be the Fed Funds market, which | consisted of uncollateralized loans between banks. The fed | funds market is basically dead, replaced by the repo | market, which is collateralized. IIRC, the remaining | participants are GSEs like Fannie Mae and Freddie Mac, | which can't collect IORB. They sweep their cash to banks | and split the interest (which is why IORB can act as a | ceiling instead of a floor). | bogomipz wrote: | The FOMC(Federal Open Market Committee) is the policy arm of | the Fed. They can not and do not set interest rates directly. | What they do is adjust the money supply to try to influence | interest rates towards a target range. One of the tools they | have to do this is the the federal funds rate which is the | rate that banks charge each other to borrow money overnight | in order to meet their reserve requirements. The Fed Funds | rate is one of the tools they have their disposal. The FOMC | meets 8 times and year releases this guidance. | monktastic1 wrote: | As I mentioned in a sibling comment, there hasn't been a | reserve requirement for two years. I'm not sure what's | primarily driving the interbank borrowing now. | sbelskie wrote: | But doesn't the Fed still pay on reserves held? Even if | it's not required, the Fed increasing the rate paid on | reserves would put upward pressure on other rates, | otherwise banks would just take the IORB rate. | bogomipz wrote: | The Fed Funds rate is still the reference for policy but | the Fed has been using a new framework called "ample | reserves" since the latter part of 2020. See: | | "How Does the Fed Influence Interest Rates Using Its New | Tools?" | | https://www.stlouisfed.org/open-vault/2020/august/how- | does-f... | blawson wrote: | Not GP, but I don't think there's an actual "rate" as such - | it's the actions the Fed takes to balance prices such that it | falls within their target: | https://www.newyorkfed.org/markets/reference-rates/effr | jonnycomputer wrote: | Good thing I didn't come here for informed economic commentary. | Now back to the blogosphere. | jorblumesea wrote: | One of the most annoying thing about engineering (and smart | people in general) is how they think because they are good in X | field, that somehow translates into Y field with little | training. | afterburner wrote: | They're also used to dealing with things that are entirely | within their control and all variables are known. | | That's so far off the mark for macroeconomics it's not even | funny. | andreilys wrote: | Macroeconomics is largely narrative driven with very limited | evidence behind it. | | I would argue a theoretical physicist could produce more | macro-economically sound models than a tenured professor of | macro-economics. | | The former at least would have a deeper | understanding/appreciation of the math. | stjohnswarts wrote: | The blogosphere economics circle jerk is about as good as HN on | economics, I wouldn't cite them as reliable or dependable | source of info. | bigcat123 wrote: | Aperocky wrote: | The only thing that everyone agreed on here is how equally | uninformed they themselves are. | | Which is a breath of fresh air compared to certain places where | everyone believes they are the best informed and most well | thought out. | ahahahahah wrote: | > The only thing that everyone agreed on here is how equally | uninformed they themselves are. | | There are a lot (if not most) of comments here where the | commenter clearly doesn't hold that position. | dang wrote: | " _Please don 't sneer, including at the rest of the | community._" It's reliably a marker of bad comments and worse | threads. | | https://news.ycombinator.com/newsguidelines.html | | If you know more than others do, that's great--but then you | should either share some of what you know, so the rest of us | can learn, or just accept that people are wrong on the | internet. Posting empty, supercilious putdowns doesn't help | anything. | | https://hn.algolia.com/?dateRange=all&page=0&prefix=true&sor... | mactitan wrote: | The Fed is trapped: It can't raise too much since trillions of | debt rely on very low rates. If it doesn't raise enough then | inflation will cause a recession. | matheusmoreira wrote: | It is a position is of its own making. It shouldn't have | allowed this massive debt to accumulate in the first place. | Cheap credit and the massive debt that comes with it is the | main cause of inflation. Now that the whole economy depends on | credit and debt, solutions to inflation can't be applied since | they negatively affect credit. | deutschew wrote: | They've printed their way out of a recession since '08 by | kicking the can down the road, and we can't kick it any | further without creating a large number of losers. | | IMHO, it's a sign that American innovation has peaked. It's | also reflected by the markedly decrease in intellectualism | (as if American culture wasn't anti-intellectual to begin | with). When I see young students from other countries and | compare them to Americans, there is very little valuing | education in fact the antagonism is occurring. | | For example, math is being scapegoated as systematically | discriminating against the lowest performers while the | highest performers are being subject to the equivalent of | forced confessions, guilt and pushed ridiculous theories | about race. Yet despite that camp's calls for equity, it is | still okay for Asian Americans to be discriminated at | academic institutions and various other fields while there | are increased calls for virtue signaling towards other groups | who do not get the same scrutiny and insanely high standards. | Meanwhile the lowest end of the society are allowed to steal | (as long as its under $950), commit crimes without | consequences (take a trip to SF to see thanks to calls for | community patrols post-Floyd) and descend into the inhumane | (mental health issues from drug addictions and poverty being | normalized) because there is now a sort of compassion | industrial complex armed with the loudspeaker that is social | media to manipulate opinions while cancelling out the | rational as the enemy. | | Meanwhile, the military are increasingly spending large | amount of money in video games, making young Americans | idolize military & war, if not evident from the war mongering | cries out of America for a conflict that they largely put in | the groundwork to trap their old enemy, censoring, cancelling | any opposing view to their narrative. We are all confused, | angry, quick to point fingers at one another, instead of | nuanced takes, whatever narrative invokes _emotions_ | strongest drowns out other side, regardless of whether they | are grounded on reality or outright fabrication. | | This is the trickle down effect I notice also at YC, I see | increasingly bad ideas being pushed like blockchains without | any real adoption, trading of unregistered securities, and | SaaS companies without real revenues raise ton of money but | with no real business plan or use case. It's clearly a race | to IPO and find exit liquidity. ex) Coinbase | | This is all a giant mess and I ponder, how did America stoop | this low, where did it all go wrong? | dustingetz wrote: | A lot of the problems of focusing on equality can be | connected to internet media making visible a tremendous | amount of previously hidden inequity, (literacy rates are | highest ever right?), I don't see what it has to do with | interest rates | | I do see a separate parallel problem of too much dumb | capital chasing returns that are in the past not the | future, but that can also be connected to the maturation of | internet/web platform and the rollout of 2010s web tech to | legacy industries; applying web tech to healthcare and like | Africa is low-risk high reward ... capital floods the low | grounds first | | also see "diffusion of technological revolution" | installation/deployment model | https://i.imgur.com/BLVTqo2.png | sfblah wrote: | https://i.redd.it/mfw55duw9h971.jpg | deutschew wrote: | My point was that wealth gap increased due to QE and a | class war masked as racial equity is being waged amongst | the 99% as a result (without any net benefit to society | since the 1. source of wealth come from excess supply of | money which makes debt cheap for those in position to | take advantage of it vs those who are oppressed by it 2. | increasingly diminishing to non-existent value added | widgets and services being sold, see my coinbase example | above), not between the actual winners or losers of the | system but rather the professional advocates from both | ends who are seizing the narrative to push their | political views in all spectrum of American society, | culture and individuals through that tiny screen we carry | in our pockets. | boppo1 wrote: | It's over man. Just sit back and watch it hit the wall. | Anyone who has never sat down and modeled out a DCF in | excel can't tell the difference between your argument and | the crackpot ones on 4chan about jewish illuminati. Half | of the people who _have_ modeled out a DCF have enough | assets to maybe have a chair when the music stops, and | they won 't risk it trying to explain how the game works | to anyone who doesn't already know. | dustingetz wrote: | For others- https://www.wallstreetprep.com/knowledge/dcf- | model-training-... | dustingetz wrote: | "source of wealth come from excess supply of money which | makes debt cheap for those in position to take advantage | of it vs those who are oppressed by it" | | what do I need to read to understand this | MR4D wrote: | It's even worse - if the Fed actions tank the markets, then | millions of retirees who have been enjoying high market values | are screwed and have no other source of wealth or income. | | I do not envy the position the Fed is in. | pastor_bob wrote: | The Fed's mandate is to control inflation and unemployment. | It's not meant to have anything to do with the stock market. | woobar wrote: | Only small fraction (2.5%) of retirees rely on their 401(k) | plans as a single source of income. The majority relies on | social security. High inflation will affect many more people, | and not just retirees. | | [1] https://www.cnbc.com/2020/01/17/heres-where-most- | americans-a... | lastofus wrote: | A typical retiree portfolio should have a significant portion | in bonds (or more likely, bond funds). Initially this will | hurt, but over time, higher rates mean higher bond returns | | Equity markets can take a hit at pretty much any time for | completely unforeseen reasons. This is expected and should be | factored into a "safe" withdrawal rate (see Bill Bingham and | the 4% rule). | | Anyone who was relying on an equity market that never tanked, | to survive retirement, was doomed from the outset. | techie128 wrote: | I'm sorry but if they're 50+ and majority of their holdings | are in stocks, not bonds they're at fault. | thehappypm wrote: | Oh no! Boomers will lose 401(k) value! The horror! | kipchak wrote: | Unfortunately most people with 401(k)s are in SPY as the | default, boomers or not | tootie wrote: | SPY is up >2% today. I think the market wants inflation | to be tamped more than they want cheap money right now. | thehappypm wrote: | Time in the market > timing the market. It'll go back up. | colordrops wrote: | Phrased less sarcastically: "Millions of retirees won't | have enough money to survive until they pass away." | akvadrako wrote: | Lots of people live on social security alone. | budoso wrote: | Phrased sarcastically again, but from the opposite point | of view: "Jerome Powell wants your grandma to starve!" | throwawayboise wrote: | Or: | | Your elderly parents need to move in with you because | they cannot afford to live on their own. | foogazi wrote: | Savings diluted by inflation or artificial asset growth? | | Can you have it both ways ? | xienze wrote: | You won't be laughing when you find out it's your | responsibility to bail them out. | thehappypm wrote: | Sadly this is probably the case. | moltke wrote: | We can always just bring in more immigrants since that | seems to be the solution to every problem like this. /s | rhexs wrote: | I'm actually quite impressed they haven't started that | push yet --- guessing COVID still sort of being a thing | but no longer spoken about due to it polling poorly makes | this a non-ideal time. | | On the other hand, as there's effectively no border | enforcement during this administration, I guess they're | already accomplishing their goals without needing the | media to ram "Americans can't/won't do the jobs" down | your throat. | Qub3d wrote: | That's a bit callous of you, not to mention shortsighted. | If the Baby Boomer generation loses financial security, | they will as a group A) tighten their spending habits and | B) not retire. | | Either of these effects on their own would hurt the younger | generations, and together would make the already slow | wealth building hit a brick wall. (I'm 25, for the record, | and I don't expect to be debt-free or a homeowner until | well into middle age) | | While it really shouldn't be true, and at the level of | financial mechanics probably isn't, the stock market has | become _the_ measure of the economy. Remember, pensions are | dead and buried, and the nuclear family standard means that | relying on your children (read: you and I) is not the | bulwark it once was. That means 401(k) performance is | really, really important, as terrible as that may be -- its | just the reality right now. | thehappypm wrote: | It's really not callous. If a boomer's 401(k) is still | heavy on stocks they're being greedy! De-risk, people. I | don't want to let inflation tank my economy to protect a | generation of greedy grandparents. | nick__m wrote: | If they are one of the lucky few with a defined benefit | public pension, like my parents have, having your RRSP | (401(k) in Canada) biased towards stocks is a sounds | investment policy. | Qub3d wrote: | Generally 401(k) plan ratios are not managed | individually. Most will have target date funds[0] that | automatically transition in to progressively less-risky | investments as you get closer to retirement. | | The problem is... almost no financial instruments outside | of stocks can provide a meaningful return any more, so | even the target date funds are almost all stock. | | I noted your other "time in the market beats timing the | market" comment, which suggests you are an active | investor. That's great! But very few Americans are active | investors, and expecting them to become so is | unrealistic. | | Its a problem of realpolitik, which is why, going back to | my original comment, you _should still care_ , if only | for how it will affect you. | | [0]: Here is an example prospectus of a 2055 target date | fund. Note the graph showing the changing allocation of | stocks/bonds/money-market funds (or CDs). By retirement, | nearly half the portfolio is still stocks. | https://prospectus- | express.broadridge.com/summary.asp?client... | amanaplanacanal wrote: | A big chunk of those boomers have almost nothing. The only | thing they'll have to look forward to is poverty. | thehappypm wrote: | So these boomers have "almost nothing" yet have a 401(k) | that's set up in the riskiest way possible, when they're | near retirement age? | analyst74 wrote: | Poor boomers are affected more by inflation than market | crash. | sillyquiet wrote: | What a horrific ageist and bigoted comment. | | This literally could mean the difference between living | independently or not for a lot of people. | | Not to mention _everybody_ working today with a 401k as | their retirement plan will lose value no matter their age, | which means they have to work longer than planned. This is | a real life impact to a lot of people. | dragonwriter wrote: | > This literally could mean the difference between living | independently or not for a lot of people. | | Given that quality of assistive care matters, it could | literally mean the difference between _living_ and not | for people. | | Of course, on the other hand, so could runaway inflation | for lots of people into the same age group (not every | elderly person is self-sufficient on retirement income; | many are supported by younger, working family members.) | thehappypm wrote: | If your retirement portfolio crumbles with a stock market | correction when you're actively retired, you have made | terrible investment choices. | dragonwriter wrote: | I have no idea why you thought that a subthread on estate | tax and what it says about younger people's interest in | older folks savings was the most germane place to post | that, but I hope you feel better having gotten it off | your chest. | pastor_bob wrote: | If you're in all stocks (growth particularly) and | retired, you're living pretty foolishly. | nightski wrote: | Depends. If you plan to draw down your savings to 0 to | survive retirement maybe. But if you have enough saved up | for a safe withdrawal rate to survive retirement, why not | keep it invested normally and have more for your | inheritors? | thehappypm wrote: | I don't think I am obligated to care. | | Retirees who are fortunate enough to have substantial | retirement assets should take precautions against risk. | If they haven't then that's their problem. I'm retiring | in 30 years, my retirement accounts are all stocks. If I | was 65 I'd have my 401(k) heavily in bonds and fixed | income. | | Anything else is just greed. | [deleted] | anonporridge wrote: | It's rough. | | On the one hand, retirees bring nothing of real value to the | economy. We serve them because of the obligations they built | up over their working careers. But, they get the focus of | attention because a) they have all the money, b) they have | all the time to be engaged in politics, and c) they vote. But | they're purely an extractive cost center. A kind of economic | parasite that keeps getting bigger and bigger with the magic | of compounding interest. | | On the other hand, the younger working class generations, who | are the real engines of the economy that keep us all fed and | served, are legitimately suffering and failing to acquire a | significant stake in the economy. Sure, employment is high | but pay is low compared to their parents. When shit hits the | fan, the young generations are largely gonna shrug, because | who fights to defend something they don't have a stake in? | | It really seems like a powder keg for revolution. | duncan-donuts wrote: | You're talking about living breathing humans. "extractive | cost center" is a weird way to describe "person who paid | social security their entire working life". You're not | wrong about what you're saying but fuck can you act like | there's real people involved here and not just numbers? Are | retirees _really_ economic parasites? | | Let's not forget that consumption is bringing in revenue to | _someone_ which does provide value to the economy. | Unbelievable | anonporridge wrote: | If you want to work on and solve big hairy problems, you | can't get caught up in the weeds. | | We can acknowledge the humanity of the humans who make up | the constituent parts of the colossus while also saying | that the colossus, the sum of those humans, is a | potentially negative force on the stability and | sustainability of the system. | | And I speak as one of these retirees. | loufe wrote: | Sure it's not the most humanizing but it is valuable to | disassociate oneself from our human side in order to | analyze inhuman systems. The perspective isn't without | value, and GP wasn't implying it wasn't, but to take the | time to elaborate the point going through the motions to | emotional pad it would have been time wasted for most of | us. | | It's something I appreciate about this community, that we | can express ourselves in such ways in order to convey a | point without any fat on it. I still assume the person | making the point understands that there the fat is there | without needing to explicitly mention it. It's a sign of | mature dialogue IMO. | mc32 wrote: | Retirees are everyone, except older. What would | "you"[1]want from the fed once a retiree? | | [1] other working people once they too retire. | pessimizer wrote: | Far fewer young people have any possibility of retiring. | You can't build retirement from gig labor and shitty | service jobs. | tw600040 wrote: | //On the one hand, retirees bring nothing of real value to | the economy | | Not true. If retirees have money, that's money they got | paid for doing actual contribution. If you devalue that | money that's devaluing their life's work and contributions. | | Not an advocate for crypto etc, but it feels wrong that a | bunch of folks like Powell etc get to decide the fate of | whole generation's peaceful retirement. | boppo1 wrote: | >feels wrong | | Because it is. Why did we start interest rate | interventions again? | mrmuagi wrote: | > retirees bring nothing of real value to the economy. | | Sure they may not be producing anything, but is there any | value to the idea they consumers still? A lot of FIRE | philosophy is you work hard so you can _earn_ retirement | early too -- people aren 't going to work all their lives | either, there has to be a light at the end of the tunnel. | It is saddening that it may not be the case for many. | duncan-donuts wrote: | Apparently retirees aren't allowed to hold investments | dc-programmer wrote: | Probably not. Estate taxes are low | mikeyouse wrote: | Estate taxes don't exist for 99.7% of people. A married | couple can exempt the first $24M of their estate from | _any_ Federal taxes. | | https://www.kiplinger.com/taxes/601639/estate-tax- | exemption-... | | Mind you, this also avoids a ton of tax that would | otherwise be due had they not died via the step-up in | basis... it's a massive giveaway to the rich. | | https://www.investopedia.com/terms/s/stepupinbasis.asp | dragonwriter wrote: | > Estate taxes don't exist for 99.9% of people. | | Which supports the claim that they are low, and, | consequently that young people (who often stand to | inherit from their elderly relatives) have a stake in the | investments of old people not getting wiped out. | mikeyouse wrote: | Of course young people have a stake in their rich parents | not getting wiped out - but it has nothing to do with the | estate tax. | bogomipz wrote: | This is an incredibly bigoted screed. Describing human | beings who were the economic engine for 40-50 years and | paid in to the system as a "parasite" and a "purely an | extractive cost center" is truly appalling. | | >"It really seems like a powder keg for revolution." | | I would argue your entire post seems like a powder keg for | some self-reflection. | jcranberry wrote: | You think retirees are keeping all their savings in cash in | their mattresses or something? | 0xB31B1B wrote: | The point is, the things that make the economy work and | grow is the production of things. Regardless of how many | investments a retired person has, they by definition do | not produce things. | jcranberry wrote: | You need investment to produce things and consumers to | buy produced things. | throwawayboise wrote: | You need to have consumers to make production worth | something. Retirees are consumers. It's basically all | they do. | stickfigure wrote: | This is a variant of the broken windows fallacy: | | https://en.wikipedia.org/wiki/Parable_of_the_broken_windo | w | tomc1985 wrote: | Jesus Christ, work til you die eh? | | For a lot of people, what is even the point of living if | there's no retirement to enjoy? | | They are an extractive class insofar as their present | contributions are net negative. But you are forgetting they | likely spent their entire life building up that account, | both in terms of an actual retirement and the broader | accounting of total life's contributions. Indeed, it is | something that hopefully you and I will enjoy one day, | because we've earned it. | | That idea reeks of short-term thinking, and a world of | endless work for no reward as your worth goes to 0 once you | stop contributing. | anonporridge wrote: | > Jesus Christ, work til you die eh? | | That is the normal human experience. | | But also not what I'm suggesting. | tomc1985 wrote: | Among the poverty-striken, sure. | | But nearly every society has some form of elder care. | anonporridge wrote: | True, but almost every society expects its elders to | still do some kind of work, usually house work and child | care, which helps free the healthy adults to do the more | difficult work. Those who can't do that are usually very | close to death. | tomc1985 wrote: | So then what is the complaint? They are indeed | contributing to society. We enjoy the level of | technological advancement that we do because our | innovators are free to innovate, and not wasting their | time on prosaic matters (because the elders cover that | for them) | tonguez wrote: | "For a lot of people, what is even the point of living if | there's no retirement to enjoy?" | | The point is you are supposed to be helping other people | in some way. Not just being a useless turd and forcing | young functional people pay rent to you so that you can | do nothing but sit on your fat ass and shit in your | diaper. They also lived in a society that was much more | prosperous than any young person ever will. Considering | that now everything is ruined, it's hard not to look at | them and imagine they share some small part of the blame. | | Maybe if people cared less about saving up a big sum for | themselves to "enjoy their retirement", aka being a self- | centered moron, then the world wouldn't be such a | shithole today. | tomc1985 wrote: | > forcing young functional people pay rent to you so that | you can do nothing but sit on your fat ass and shit in | your diaper. | | They own the house, which they bought and paid for. It is | their property to rent or not rent as they see fit. You | pay money for said privilege. They are not squatting on | communal property, and short of returning it to the | market the property would otherwise sit unused and | wasted. | | Are you saying that young "functional" people should have | free housing? Most of you had some for 18, 20, maybe even | 25+ years with your parents. Is it that you want that to | last forever? Do you guys think you are Peter Pan or | somethign? | | > Considering that now everything is ruined, it's hard | not to look at them and imagine they share some small | part of the blame. | | Don't let generational nihilism color your vision so | much. There is a world of opportunity out there, | especially here in the US, but young people think said | opportunity looks like Twitch streaming or professional | influencing or pretending that are innovating, but it's | not. If those kids would pull their heads out of their | asses and start learning how to be boring they will find | there is lots of ways to get ahead in life, and that | there aren't a lot of easy answers on YouTube. | | "Everything is ruined"... like, c'mon, if that's really | what you think then you've barely even lived | JaimeThompson wrote: | >Don't let generational nihilism color your vision so | much. | | >but young people think said opportunity looks like | Twitch streaming or professional influencing or | pretending that are innovating | | Physician, heal thyself | munificent wrote: | TIL that saving up so that one can afford to pay their | own bills after they are too old and infirm to work is | "being a self-centered moron". | | I guess the alternative is to not have any savings and | rely on others to take care of them and that is somehow | _less_ self-centered? | paulpauper wrote: | Not once in my lifetime have I seen the fed tank the markets. | It's more like the fed being tailwind. Since 2008 the pattern | has been for the fed to be way behind the curve by keeping | real interest rates negative and raising rates very slowly | and with tons of advance warning even as the stock market and | economy rips higher. | vineyardmike wrote: | This is always the case though, there are always retired | people. They have raised rates and damaged market values in | past. Its a decision they are comfortable taking. | | Plus, at least current US retirees have social security, | which may not last another 20+ years in current form | (unfortunately for people paying in today). | lotsofpulp wrote: | There is no reason the US federal government would have to | nominally end federal social security benefits. The federal | government has the power to simply create new money. | | However, it would be prudent to assume that the social | security benefits will have less and less purchasing power | (since each USD will have less and less purchasing power), | and the government will not increase the amount of the | benefits sufficiently to offset the decrease in purchasing | power. | code51 wrote: | Shouldn't there be an "invisible hand" at work to settle this | problem automatically when Fed over-raises or under-raises? | With the invisible hand and free market arguments, this | should have been a non-problem at the first place. But... | since the initial move was not natural (lots of cash | injection), the natural final move has to be sudden and | forceful. These analysis-paralysis rate hikes seem like lots | of pawns to be lost before the final blow. It just opens a | window of opportunity for ahead-of-the-curve retirees to save | their wealth, not helping to avoid the final effect. | fuzzer37 wrote: | Won't somebody please think of the poor poor boomers with | millions of equity in their houses! | | Cry me a river. | throwawayboise wrote: | Most "boomers" have a house maybe worth a few 100K, if they | even own their own home. Very few live in million dollar | homes. | joshkrycerick wrote: | California would like a word. | throwawayboise wrote: | That's a small segment of "boomers" | chiefalchemist wrote: | > I do not envy the position the Fed is in. | | Let's not be naive. The Fed put itself in this position. | You're correct. Most of the rest of us will - once again - | take a massive shot to the wallet. But to The Fed and its | "fan base" it's simply another cycle in the process of moving | more from the bottom to the top. | | Put another way, you or me are simply not The Fed's priority. | I'm not sure why we voted for them. | | That last bit is sarcasm. | SamuelAdams wrote: | I'm surprised this is top comment. Everyone ought to | rebalance their assets as they get closer to retirement. If | you are retired you should have a minimum of 3-10% of your | portfolio in bonds, which typically fluctuate less than | stocks. Then you draw from your bond assets to actually get | money. | | As long as your stock assets aren't touched for 3-5 years it | doesn't matter what the market does in the next few months. | godmode2019 wrote: | You should have 60% bonds and 40% stocks | | As you get older 80% bonds 20% stocks. | | Source: The intelligent investor (famous finance book) | | People these days have 80% house, 15% crypto and 5% stocks | voisin wrote: | I think this particular advice from The Intelligent | Investor is unreliable. Back then, bond yields were | substantially higher, dividend yields were significantly | higher, equity valuations we significantly lower, etc | etc. The rest of the book is top notch though. | paulpauper wrote: | people say this every time rates go up. The fed is not trapped. | Rates went up from 0% in 2015 to 2.25% by 2018 and nothing bad | happened. Inflation remained low, bonds did well. | [deleted] | chiefalchemist wrote: | The problem is, The Fed* is the sole creator of this situation. | Again and again. | | * An entitity with unprecedented powpower, unelected, and is | effectively - due to a lazy and incompotent Congress - | unregulated. What could go wrong. | colechristensen wrote: | That debt was already sold at low rates. Now it's going to get | inflated away. New debt will be more expensive, old debt will | be losing effectively 10% of its value as the price of | everything else goes up. | thehappypm wrote: | A recession may be all right. Americans have a gigantic amount | saved up and so long as it's mild enough it'll probably | strengthen the dollar. | dragonwriter wrote: | > Americans have a gigantic amount saved up | | The median household savings is about $5k. Sure, the _mean_ | is a lot higher, but that gets thrown off by a few really | rich people with enormous savings. | Sohcahtoa82 wrote: | You are living in a bubble. This may be true for you and the | people you associate with, but for the majority of Americans, | it's not true in the slightest. | notch656a wrote: | Median household wealth is over $100k. Not only is it true | far more than the slightest, it's true of the majority of | American households. | qbasic_forever wrote: | Over half of America can't cover a surprise $1000 expense: | https://www.cnbc.com/2022/01/19/56percent-of-americans- | cant-... | | You are not looking at the reality of the situation if you | think the average American has a "gigantic amount saved up". | The average American is working paycheck to paycheck and is | lucky to have a couple hundred bucks for a rainy day or | unexpected car repair. | notch656a wrote: | You've been played by a study designed to manipulate the | view of American wealth. The median household has a | gigantic amount of wealth, over $100k worth. Not having $1k | in a checking account doesn't mean you can't afford $1k or | even a $10k expense. | qbasic_forever wrote: | Sure if you define 'household' as home owners, of course | their assets are well above $100k because of the hyper | inflated housing market in the country. | | I would _love_ to see how someone renting an apartment | and working minimum wage with less than $1k in their | checking account can get a $10k loan. What are they going | to do, go to the check cashing place around the corner | and walk out with 10 grand? (that's saracasm btw) | notch656a wrote: | >Sure if you define 'household' as home owners | | I don't. All households. Majority of households have > | 100k wealth. Your claim is patently wrong, when taken | against your citation which shows nearly everyone found | _some_ way to pay the expense. Personally I would just | pay with a credit card so I can let inflation shred away | ~0.5% of the real cost, but I'd be tossed away with those | who 'cant afford' it by your interpretation of the study. | | I usually keep less than $1k in fiat accounts and I could | easily have tens of thousands tomorrow if I like, and my | household is far poorer than the median household. It's | called selling (or borrowing against) assets. The median | household can do the same thing. Only an idiot holds fiat | in a savings account when inflation is raging. | qbasic_forever wrote: | I'm really trying to understand how you can agree that | 56% of people can't find $1k, and yet over 50% of people | have $100k in assets. | | I don't think we're looking at the same ~50% of people | here... | notch656a wrote: | I'm skeptical but willing to believe 56% of people can't | find $1k on the spot in fiat cash because of the | structure of their wealth. However statistically _most_ | households have a hundred times over that in net wealth. | Carefully reading the study, it becomes apparent the vast | majority are able to alter the composition of their | wealth or future spending to accommodate the expense. 59% | were going to pay outright (if you add in the 15% that | said they would pay and cut their budget), and if you add | in people like me that would let it sit on credit to let | some real value inflate away, it goes up to 79% who would | pay it outright either by debiting from their fiat | stockpiles or credit card. Only 4% actually needed to | take out a personal loan, and only 10% would resort to | family. Factor in that probably 14% of adults are 25 or | younger or in school, and it starts to become apparent | that the overwhelming majority of adults can afford a $1k | expense. | mcs5280 wrote: | The Fed has created a debt bomb. | photochemsyn wrote: | Probably best to not let Wall Street gamble with boomer | retirement money on when the debt bomb will blow up. Putting | Glass-Steagall rules on investment vs. commercial banking back | in place would probably make sense around now. | AnimalMuppet wrote: | It would have made _sense_ to never remove them in the first | place. | bequanna wrote: | I agree, but I think the size of public/private debt is a | guarantee that rates will stay historically low for the | foreseeable future. | | It's only a bomb if rates go up. ___________________________________________________________________ (page generated 2022-03-16 23:00 UTC)