Re:America's 1% Has Taken $50T From the Bottom 90%
by nostrademons on Thursday February 11, 2021 @06:19PM
(#26108849)
I don't like loan-forgiveness for all the reasons brobdingnagians mentioned. Also, it introduces moral hazard into the economy: companies assume further loan-forgiveness is coming, so they think nothing about taking on unsustainable levels of debt. (To a large extent, this is what's happening now: after the 2009 bailouts companies figured they were too big to fail.)
The root cause of this is that our economy has become hyper-optimized around monetary policy that's unsustainable. With markets trending toward efficiency, all major companies that exist today build in the assumption of 0% interest rates into the cost & capital structures of the business. Many activities they engage in would probably become unprofitable at higher interest rates, which means mass layoffs, restructurings, different business processes, possibly adoption of different technologies, products & services going away, etc. Change the monetary environment and you get different companies, different technologies, different supply chains. But the current monetary environment means that whenever there's a demand shock, the Fed has nowhere to drop rates, and whenever there's a supply shock, there's a potential inflationary price spiral.
The Fed, to their credit, recognizes this predicament. That's why they're targeting > 2% inflation, so there's room to raise rates. They've also said that any increase in rates will be well-telegraphed, to give companies time to adjust.
But I have doubts that this'll work. Simply because this isn't a tweak now, this is an existential change to how companies structure their operations. And any company that prepares for it before the Fed actually raises rates will be outcompeted by companies that do nothing, so no company is going to take the mere warning seriously.
It occurs to me that post-Volcker monetary & government policy has basically served to weld the economy & government together so that it's impossible for one part to fail without it all failing. We used to have recessions every 5-10 years; these would clear away uncompetitive businesses so the capital could be recycled into new ones. In trying to "smooth over" these recessions, and then outright bailing them out in 2009, and then failing to raise rates in 2013/2015/2018, we've coupled the whole economy's fortunes together, and then coupled it to the government. As a result, we can't sweep away companies that are doing the wrong thing without widespread civil unrest.
The root cause of this is that our economy has become hyper-optimized around monetary policy that's unsustainable. With markets trending toward efficiency, all major companies that exist today build in the assumption of 0% interest rates into the cost & capital structures of the business. Many activities they engage in would probably become unprofitable at higher interest rates, which means mass layoffs, restructurings, different business processes, possibly adoption of different technologies, products & services going away, etc. Change the monetary environment and you get different companies, different technologies, different supply chains. But the current monetary environment means that whenever there's a demand shock, the Fed has nowhere to drop rates, and whenever there's a supply shock, there's a potential inflationary price spiral.
The Fed, to their credit, recognizes this predicament. That's why they're targeting > 2% inflation, so there's room to raise rates. They've also said that any increase in rates will be well-telegraphed, to give companies time to adjust.
But I have doubts that this'll work. Simply because this isn't a tweak now, this is an existential change to how companies structure their operations. And any company that prepares for it before the Fed actually raises rates will be outcompeted by companies that do nothing, so no company is going to take the mere warning seriously.
It occurs to me that post-Volcker monetary & government policy has basically served to weld the economy & government together so that it's impossible for one part to fail without it all failing. We used to have recessions every 5-10 years; these would clear away uncompetitive businesses so the capital could be recycled into new ones. In trying to "smooth over" these recessions, and then outright bailing them out in 2009, and then failing to raise rates in 2013/2015/2018, we've coupled the whole economy's fortunes together, and then coupled it to the government. As a result, we can't sweep away companies that are doing the wrong thing without widespread civil unrest.