It's time to let everyone reckless go bankrupt, and idiots who "could not see this coming" lose their money and jobs.
The business etc. will go bankrupt, restructured and purchased by people who know how to preserve the capital.
The reason why this keeps happening is because of moral hazard. We keep rescuing reckless behavior at all levels of society. Until there's no way to rescue anything, or the rescue package is going to kill the dollar due to its size.
Why "way too long"? Inflation was not a problem so why exactly did rates need to rise to cool things down?
The ECB did in fact raise rates at one point... and the EU recovery stalled. Krugman for one was very critical of raising them too soon, and he turned out to be correct.
Where does cash have to go? In Germany/Europe you have a culture of saving, so everyone stashes in "safe" accounts, and so government bond yields are at zero or even negative. Those folks would do better, both financially and for the health of the economy, to go with equities. German/EU governments would do well to spend more as well.
In the US people seem to be more culturally tuned to spending, and is "the" market to invest in world-wide, so a lot of folks are putting their money there. Potentially bidding up prices.
This is why Krugman is calling for a "permanent stimulus":
> OK, if you’re still with me: I hereby propose that the next U.S. president and Congress move to permanently spend an additional 2 percent of GDP on public investment, broadly defined (infrastructure, for sure, but also things like R&D and child development) — and not pay for it.
> The starting point for my argument is the astonishing drop in interest rates over the past few weeks. They were historically very low even a year ago, but at the time of writing the 10-year rate was only 0.76 percent. That’s below the rates on Japanese debt during the Lost Decade:
* https://www.nytimes.com/2020/03/07/opinion/the-case-for-perm...
Borrowing is cheap, so if the US is going to run deficits anyway, instead of 'tax cuts for the rich', there's a lot of infrastructure that's aging that could be rebuilt.
Savers deserve nothing special. Nobody is owed a safe investment vehicle with a positive return. If the market dictates that you have to pay people to take your money and hold it for you, then that's how it should work.
I mean, it's like if you have a bananna stand, and the gov prints billions of dollars to buy banannas on the open market, and now you have to sell your bananas for 5c a piece.
At full employment -- which we were at up until a week ago -- the only thing flooding the market with money can do is cause inflation. We didn't have an inflation, and interest rates were still incredibly low.
Hopefully people have insurance to protect against some of this, but a restaurant owner that didn't plan for their community being shut down by a pandemic within a couple weeks of the first cases in town hitting the news wasn't being reckless
In my very limited understanding the price of stocks were way to high already. The virus is just the proverbial drop, it is not the cause.
And demand shock isn't the extent of it. How many companies could reasonably have been expected to anticipate that their employees will have to work from home? Remote work isn't an option for everyone (good luck remoting into a wetlab), and some companies have built cultures that thrive on people coming into work to meet employees face to face, find opportunities for teamwork and innovation etc. This is a fundamental set of behavior changes, not just a simple demand shock.
And yet, millions of Americans sacrificed, liquidated their businesses or shifted them to a war materiel production footing, changed jobs, bought war bonds, etc. Tens of thousands of diners and clothiers closed their doors in 1942, and Americans were largely happy to do it for the greater good.
This is precisely the opposite of what is occurring now - demands of bailouts, monetization, handouts, 50+ person St. Patrick's Day parties still going, bitching about having to learn how to cook, etc. A complete and total unwillingness to accept even a modicum of pain or sacrifice.
And America didn't even want to join until we were attacked first, even with the threat the nazis posed.
This was all happening in the middle of the new deal, one of the most significant, major government bailouts in all of american history, fundementally defining america as a welfare state.
And what do you call the huge amount of sacrifice by employers taking lowered productivity by sending workers to be remote? Companies that have declared they'll continue paying workers even if business gets shut down? What do you call the enormous social effort to get people to understand social distancing and flattening the curve? Did the populace even know what those terms were a couple weeks ago? What about the thousands of students packing up and going home, evacuating campus while their graduation ceremonies that they've been looking forward to for 4 years are cancelled? And do you seriously think that in all of america during world war two, nobody was a bad person that didn't accept pain or sacrifice, or even actively make things worse? What about jsut a few years before int he spanish flu when government stupidity led to the streets of philadelphia being filled with corpses because people didn't want to call off a parade? What about all the nazi sympathizers and eugenecists in the US that supported hitler? If your bar for "society is just and moral" is that literally no idiots hold a saint patricks day parade out of 360 million people, we've never been at that bar. The only constant through history has been people with superiority complexes on the side moralizing about how people used to be so much more moral (just like themselves of course) in the good old days, and how much society has decayed today.
Businesses shifted to materiel production because they were told the have to, no?
So it seems fair that people are demanding leadership now too, no?
That's definitely one perspective.
How long can you sustain yourself after sudden and sustained loss of income?
One issue with a bunch of broke and homeless people is that a fair portion of them tend to be young males, who tend to have a bit of a penchant for violence.
How long do you think you can defend your hoard of cash and food against looters?
I'm curious as to whether the money would ever make it into the hands of the average consumer (which is where I'm assuming it needs to go to actually cause an increase in inflation, considering how consumption-heavy our GDP is, but correct me if I'm wrong!) There have been recent calls for the government to distribute money to prop up demand, but won't banks lobby politically against this sort of activity? Seems like a lender wouldn't want inflation to actually increase because that would cause their current lower-interest loans to be less valuable? One of the oft-cited concerns for continually missing our 2% symmetric inflation target is that market participants will begin to expect and plan for low inflation, which has a negative feedback effect on future inflation. Seems to me like financial institutions are already expecting low inflation and aren't all that interested in seeing it rise.
What we need is a way for the Govt to get money into the hands of the people who will spend it on real stuff that will stimulate our factories and housing industry. Although helicopter money is a phrase I hear more frequently, the method of execution so that it doesnt appear as an entitlement is obscure. Personally, I think the Fed should print money with a half life. This 'Fed coin' should be issued to every taxpayer and the value of that bequest should gradually fade away until it is spent. At which point it enters the economy and it's value is fixed.
Low inflation kind of sucks for banks (and investors in general) because it tends to coincide with low interest rates. When interest rates are low, people borrow money and invest it, which reduces real returns by increasing competition to buy securities.
The people who dislike inflation (really, higher interest rates) are the people doing all the borrowing.
Care to cite a link for this? My understanding is that the money they loan you is physical and real, but the money “held” for savers is a fiction that could be lost if the bank went under, thus the reason that the federal government offers FDIC insurance for money deposited in banks, and why the feds are allowed to dictate interest rates and tell banks what overall percentage of their holdings they are allowed to loan out.
Banks (like everybody) use double entry accounting. When they make a loan, there are two entries. One is a credit to your account for the amount of the loan, the other is a debit representing the debt you now owe to the bank. You borrowed $5000, so you owe the bank $5000 (the loan) and they owe you $5000 (it's in your checking account), which cancel out. Notice that the amount of cash in their vault hasn't changed at all.
Banks have reserve ratios. They're required to keep a certain amount of their deposits on hand in case somebody actually wants to withdraw them. (Those just got set to zero, but they're normally something like 10%.) But as long as they've satisfied their reserve requirements, they create money from nothing when they make a loan.
When you pay back the loan, the debt of the loan and the credit in your deposit account cancel each other out again, they both disappear and the money that was created is destroyed along with your debt.
It doesn't have to be UBI either. The USA is desperately behind on infrastructure investment. In New York alone, we could use this opportunity to: build high-speed rail between NYC and Albany, rebuild the decaying Amtrak bridge in the Bronx, extend the NYC Subway with the Triboro Line, rebuild the Amtrak tunnels under the Hudson, heavily renovate NYCHA housing, invest in downtown beautification projects across the state, overhaul the Rochester bus system, etc etc.
If you listen to white house press conferences, Sec Mnuchin said that he and the president of the united states would like to see direct cash payments to Americans in the next two weeks.
That's really good. The fed has been trying to spur inflation to hit their 3% inflation target for many many years now. However thanks to the great economy, we haven't seen that. Printing money would sure help create much needed inflation.
If the alternative is -10% GDP growth in Q2 2020 and God knows what later in the year, a little inflation won't kill banks
The economics are no different than a shop keeper getting a loan at .05% to pay himself.
the actual action in and of itself makes no sense from a business perspective.
The action basically is, a company doesn't have any good investments or R&D or whatever to invest in, so i'm going to return money to shareholders to do that
...but am going to take on debt to do that...because of dat phat interest rate doh??
Another important detail is that you only have so much stock you can issue. When you pay back a big wad of debt, you can take out some more debt. When you issue stock, that stock is basically gone unless you buy it back.
A share buyback results in an increase in share price because it reduces the number of shares of the company to buy. All things being equal.
McKinsey advertises as much
https://www.mckinsey.com/business-functions/strategy-and-cor...
The question is why would a company use debt to finance a buy back.
They use the loan to buy 10,000 shares at $100. The company does so anticipating the price of the shares will go up. Let's say the price is now $150. They sell the shares and get back $1.5m. They return the $1.02m owed for the loan and pocket the rest as profit.
If you believe the growth of your company's stock price will exceed the interest rate, you can make a profit using debt to finance a buy back.
This makes sense. Reduction in debt with the proceeds. Just like the other poster, you are concocting a strategy that is not happening. You hypothetical does not apply.
Instead, the companies are simply taking on debt and keeping it on their balance sheet.Now that there is a downturn, they cannot service the debt and need funding to operate (e.g. bailout) They are betting that the government will keep rates low or fund them in a time of crisis because they are too big, too important to fail. They've also bought up competition so they cannot just " go away" and let new entrants enter the market.
Yes, my example is an admitted oversimplification. I was directly answering the question "why would a company use debt to finance a buy back?", not "why would a company use debt to finance a buy back and then leave that debt on their balance sheet for an extended period of time?"
Although I suspect the answer to that question is that they didn't want to leave profit on the table and wanted to continue riding out the bull run, then got caught by the fastest bear market in history and weren't able to get out at a profit. Or that they believed they could eventually service the debt without having to reissue shares at all and ran out of time because of the crash.
For large cap companies that trade tens of millions of shares a day, you can figure out how much you can buy without moving the market. For less liquid stocks, you can also spread the buys out over a period of time to aim toward an average buy-in price.
The phenomenon you describe is called slippage [1], and those entering and exiting large positions are aware of it.
> it seems awkward to assume both that the volume purchased by the company significantly increases the price of the stock
I'm not implying that the reason why the stock price goes up is because the company is buying shares. The purchase may be done based on quarterly/yearly projections showing X% growth can be expected in the stock price in the future.
> the actual action in and of itself makes no sense from a business perspective.
At 0.05%, I'm pretty sure almost any business owner would take that loan, because if there's anything that can return more than 50 cents per year per thousand dollars invested in profit or avoided losses (e.g. solar panels or an ad campaign or a camera system to prevent shoplifting or whatever) that 0.05% loan is free money. I would happily take a loan at 10 times that interest rate for as much money as you wanted to loan me.
Making any of the reasons you stated above would make sense, but that did not happen
It’s not a business decision, it’s a financial decision. Why do companies go into debt at all instead of financing their operations with equity only?
Financing paying shareholders is the opposite of this.
You don't even get the inflation until later, because all it's doing now is counteracting the deflation we would have otherwise. And later the inflation can be addressed by raising interest rates.
Hyperinflation is what happens when banana republics print their entire money supply a hundred times over every year.
How much inflation did we get from QE in 2008? In 2009 the rate of "inflation" was negative, and the Fed has been hitting the low side of their low inflation targets for more than a decade since, despite more rounds of QE and maintaining historically low interest rates. Meanwhile the entire world is hoarding US dollars (which causes deflation) because of this coronavirus.
The number of dollars we would have to print to unintentionally get hyperinflation right now is difficult to even imagine. We could print trillions of dollars and be lucky to get regular inflation.
Crashing money velocity and vanishing credit. Inflation is a function of money supply and money velocity. Money supply is central bank money plus private money (e.g. checking account deposits) plus credit.
Demand destruction, like what we're seeing now, causes money velocity to plummet. That affects lending, which causes credit to plummet. (If we got into a credit crisis, it would cause private money to plummet.)
The increase in central bank money simply paled, even in 2008, compared to the destruction of credit and reduction of money velocity. As such, we actually experienced deflation while the central-bank money supply expanded. Because the total money supply, relative to the economy, contracted.
To get technical:
* https://en.wikipedia.org/wiki/Zero_lower_bound
* https://www.nytimes.com/2020/03/07/opinion/the-case-for-perm...
It's the same reason both consumer and government debt are also high. But anybody who thinks now is the time for higher interest rates is a bit confused.
If anything now is the time to print a bunch of new money to counteract the existing deflationary forces caused by the coronavirus, which in the long term is what allows interest rates to rise, since once the deflationary forces wane the printed money would start to cause inflation which could be counteracted by at that point raising interest rates.