Rates are a shitty stimulative tool. Here's Bernanke in 2012:
https://www.theatlantic.com/business/archive/2012/12/ben-ber...
Low rates help people with money borrow more cheaply, accrue more wealth, and kick bankruptcy cans down the road indefinitely. It also royally screws over your average saver and pension fund who's forced to take on more and more risk for any sort of meaningful return.
It's not just fiscal stimulus but "how" the stimulus was applied.
It's not like the government isn't spending enough. It is spending. Until recently, all the spending went on tax credits and military.
What we need is fiscal stimulus in industries of the future. Only the current administration gets it and made it happen with the recent bill to support new energy transition.
We need more fiscal stimulus in cheap production of pills, medical practitioners, hospitals, daycare services and housing. Literally just give incentives to produce more units of these.
The federal government is an extremely poor resource allocator. It knows nothing about local and personal wants and needs. In my view, funding should be dolled out to individuals and maybe local governments. That way money flows from the bottom up, not top down.
The money flow is an extremely important factor: when money flows to individuals, each individual gains "votes" to allocate resources. Those votes informs how and where the economy grows at a granular level. The federal government cannot do this with any level of precision or efficiency.
If higher levels of government need money to do things, they should tax for--this includes some portion of the transfer payments. I know it sounds redundant for the government to tax money they've handed out, but I think governments need to feel the pain of working to get the money in the first place.
I'm also convinced you would dramatically reduce the amount of fraud and favoritism that occurs since decision making will end up being decentralized.
Here's a "hot take" example. The federal government funding child care is a dumb idea.
1) Not everyone needs child care.
2) Not everyone needs child care in the way the federal government wants to provide it.
3) An entire bureaucratic apparatus needs to be developed to define what child care is, what constitutes valid child care, who can provide child care, blah, blah, blah. This will be expensive to manage and will metasticize in its own way over time.
So why not just give people money to people who have young children to do whatever they want to do with it?
Maybe you add some provisions to prevent people from making babies to cash in checks, but I'm assuming writ large I can trust my fellow citizen to make better decisions about their child care than whatever "governmental apparatus" we want to create to do that for them.
Well intentioned thoughts like these are a good default for the government running in cruise control - when there is no financial volatility. A stimulus is only required during a recession. In each recession, we have only allowed the Fed to print more money, which hasn't turned out well. Instead of printing this money and raising asset prices, during each recession, fiscal policy should help increase the supply of things direly in need. If a recession is causing food shortages, we don't want printed money to increase demand for food. We would do much better by literally subsidizing X units of food for the next 1 year.
In both cases you give money to food producers and in turn they increase production. The only difference is in your case the price signal is entirely lost.
For example, say we decide to subsidize corn. In theory, the government is taking money out of your pocket and giving it to the corn farmer who in turn gives corn to you a lower cost. So you're still effectively paying more for the same damn thing, the government just did it for you! Over time a massive bureaucracy and incentive structure will grow around corn farming and special interest groups will fight to the death to make sure corn subsidies never go away. Oh, wait, that's actually the world we live in.
Now imagine I give you cash for food--not specifically corn--you get to decide which food you spend it on. Say everyone can't get enough of corn. Sure, you're right, everyone will pay more for corn the difference is though we also see the price go up instead of the government hiding it. This price signal is very important. Once the price of corn gets too high for you, you will switch to some other food, and in turn different areas of the economy will be stimulated.
Food subsidies are exactly how you get big agriculture. Certain players know how to play the government game better and take advantage of it.
If I give everyone money, sure prices go up, but everyone has gained voting power against existing institutional players, and in my opinion, that is exactly how you get competition and growth.
Subsidizing production by incentivizing number of units is different from just creating demand and waiting for producers to match up.
By incentivizing number of units of production, say x% incentive for per 1000 bushels of corn AFTER 10k bushels, you are literally incentivizing production of food and suppressing prices. You are asking farmers to use as much land as possible to produce corn. This is assuming that there is a shortage of corn in the market. In this way, the market is flooded with cheap corn and prevents recession caused by corn. The benefit of this approach is that something useful actually got produced besides money.
By only creating demand, production is not guaranteed to ramp up. Many farmers will be happy to take more dollars for the same amount of corn, causing inflation, thus causing fed to raise rates, thus causing recession. The disadvantage of this is that nothing got produced except money.
This fiscal support should be timeboxed (say 1-year during a recession) to prvent the big ag monopolies you are talking about.
We don't even need to think in hypotheticals. Today, the biggest cause of inflation (and thus fed rate hikes and thus recession) is housing. There is some merit to raising rates and flattening demand. But the biggest solution would be to flood the market with supply of housing. Just incentivize builders to build 2 million units within a year with fiscal policy and bam, inflation is gone.
> Just incentivize builders to build 2 million units within a year with fiscal policy and bam, inflation is gone.
Why fiscal policy and not zoning laws or something? Why would giving money to developers lead to zero inflation?
The fiscal policy is meant to be a one-time, short term boost to the exact items that is causing CPI to go higher. The fiscal policy is meant to be timeboxed. A zoning law is a much more long term thing.
Your industries of the future won't operate well if the basics aren't kept up.
Of course, if this mattered, people would have already installed window blinds, which are cheap and easy. External eyebrows and eaves also work. "Smart" glass is an expensive solution, it's been around for 25 years, and nobody wants it.
Unless there's a downside that I'm not aware of, that seems like a reasonable thing to do?
"Among the Inflation Reduction Act's little-noticed yet potentially game-changing provisions: a big incentive for "smart glass," which can make buildings significantly more energy efficient."
I've seen smart glass demoed at a home show 25 years ago. I thought it was way cool, until they quoted the price. It's no surprise it hasn't gotten any traction since. Oh, it also consumed electric power when in dark mode, as much as a light bulb. It's not a passive system.
Window blinds, louvers, eyebrows, shades, etc., all work fine and are cheap.
BTW, when I lived in Phoenix in the 1970s, people would tape aluminum foil or newspapers on the windows to cut the heat intake. The newspapers would block most of the solar heat, but would let the light through.
Here in Seattle I made some reflective panels I can just stick on the windows when we have a heat wave. Plenty of light still gets in.
Technological progress is the secret to price reduction. No government interaction required or even wanted, it's usually much more likely to create problems...
That's generally true, but there are exceptions. Solar panels are very cheap now because of decades of government subsidies. Battery electric vehicles are still more expensive than their regular counterparts, but certainly one day they'll be cheaper (they have many more fewer moving parts). But would they have caught on without government subsidies?
Same amazing price reductions with li-ion batteries which are used in every mobile device. EVs? Who knows - but since the government is subsidizing gas prices, that market is already corrupted beyond salvation.
Governmental subsidies managed to skew demand and create market aberrations like the rainy Germany covered in solar panels while their nuclear sector was being closed.
A problem has been kicked down the road for years, it was always going to blow up in our faces.
IMO, Powell wanted to keep raising rates in 2018, but was hamstrung by Mnuchin and Trump who wanted to keep rates low and the dollar weak. The mini market panic at the time did not help. The COVID meltdown is why we went back to zero. Now he has the perfect excuse to return back things to a normal economic mode.
Only the parts involving housing, education, transportation, employment, and investments.
1) Federal loans do not have limits on amount.
2) Loans are non-discharged (you can't shed them in bankruptcy).
3) There is no intensive for schools to charge less. (schools likely should have skin in the game if borrowers end up shedding debt through time expiration or bankruptcy).
4) Loans or the amount of the loans are not weighted at all by the future prospects of the person.
I have other issues with college today. They weren't originally set up for getting people trained for work, but many people now look at them as a form of trade school. But many of the majors available aren't actually job training in any fashion. Most people would be better served by trade schools or apprenticeship, but the US hasn't figured out how to do this well yet. This is more of a cultural problem, that I hope employers can figure out. Coding bootcamps seem to be an answer for the software industry, but we need to push more people that way, rather than college.
This is false.
> Loans are non-discharged (you can't shed them in bankruptcy).
They’re also not collaterized. As a taxpayer, I’d be very much against a non-collaterized loan that anyone can get without much care for credit risk, that’s dischargeable in bankruptcy. In private sector, dischargeable debt with no collateral, like credit card debt, has 20%+ rates for people with low credit scores.
> 3) There is no intensive for schools to charge less. (schools likely should have skin in the game if borrowers end up shedding debt through time expiration or bankruptcy).
If debt is held by federal government, the students defaulting will not be much of an incentive to the school.
> Loans or the amount of the loans are not weighted at all by the future prospects of the person
Indeed. The most recent loan forgiveness plan is basically mechanical engineers subsidizing drama majors.
Employers including technology companies used to provide training and apprenticeships but purposely shifted their job training costs on to job seekers and the education system. You are in effect looking to those that are largely responsible for the current situation to provide the solution.
AFAIU, both historically and today, most apprenticeships are managed by unions through programs funded (in part) by union-contracting companies. This benefited companies as they didn't have to maintain apprentice programs themselves; and it benefited unions and especially apprentices as apprenticeships weren't tied to any specific company, providing some (albeit limited) employment mobility from the outset.
As unions have receded, so to have these programs, or at least the visibility of these programs.
Most people would be better served by trade schools or apprenticeship, but the US hasn't figured out how to do this well yet.
This may apply to college dropouts, but college still pays way more than trades, and also trades work req. a lot of training and time and you have to join a guild.
Coding bootcamps seem to be an answer for the software industry
Except that bootcamp grads tend to be woefully deficient in skills and also have a hard time finding jobs, also bootcamps can be very expensive and inflate their success metrics. I am not saying that college is the answer, but it's not bootcamps.
Most of these unicorns simply can't turn a profit with their current cost structures. And even if they do, the profits will be so small that the valuations will simply not be justifiable.
The bubble can clearly be seen by the disassociation of valuations from the underlying value, which for many new companies is nothing.
The hope is that everyone is going to march in line and not go out asking for raises due to inflation; so that we end up with "hyper-inflation" before the supply chain system stabilizes, maybe the Russo-Ukraine conflict sees some light, and the U.S. Treasury can decide they can't sustain this any longer.
Thus, we are praying for all these pieces to kinda fall into place, so we don't end up with hyper-inflation, recession and interest rates going down all at the same time.
P.S. You can follow the target to actual rates here https://www.newyorkfed.org/markets/desk-operations/reverse-r...
Click All to see the difference in scale we are talking about to the past. 2 Trillions are parked to the Fed by banks, accumulating the new high interest, waiting for a signal to be re-enter.
If you look at discounted future cashflow, a startup as an investment opportunity is much more influenced by the interest rate than an established company because a larger % of the value is coming from money farther in the future.
Basically 20% of net present value of Microsoft comes from the money it'll make next year and 5% from the money it'll generate 5 yrs from now.
But a startup is the opposite where 0% of the value of the startup comes from the profit it'll make next year, and 20% from the profit it'll make in 5.
And when interest rates change it reduces the present value of the profits in 5 years by far more than it reduces the profits next year. Reducing the value of the startup relative to Microsoft, reducing the startups ability to get funded more than Microsofts.
So for 99% of startups (who don't raise venture capital anyway) there is no difference. But for Microsoft there is a huge difference, which is why the big tech companies are doing layoffs. Whereas we're not seeing many Indiehackers posts about people working out of their parents' basements who are laying themselves off.
The moment the economy tightens up, suddenly the venture funds have less money.
I'm not sure what's causal in it all, but from the outside it certainly looks like that's what happens.
It's not that they have less money, it's just that when 1yr treasuries are paying over 4%, the returns in risk-adjusted investments need to either return a lot more or die.
This is happening to me right now with my parents not being able to help as much with my kids' college tuition.
Estimating the neutral interest rate, i.e. "the real (net of inflation) interest rate that supports the economy at full employment/maximum output while keeping inflation constant" [1], is closer to art than science. It's almost certainly not a simple historical average, particularly not in a dynamic economy.
The Fed does not need to skew the market for money by conducting QE or QT, or manipulating short term rates.
I'm not a "no-Fed"-type of guy. The Fed is great at a lot of things. Their research arm is top-notch. They regulate and oversee banks. They are the bank of the commercial banks; in particular they are a lender of last resort for them. Also they can be a lender of last resort for US dollars for other central banks, and for the World Bank and the IMF. They can monitor and interdict financial crime. There are lots of things to do.
Stimulating the economy should not be their business.
Not a monetary expert here, but do we? Japan has been at zero/near zero since the mid 90s.
I only know the major bullet points though, and I haven't found this terribly easy to parse myself. I'm also quite confident that stagnation in the US would manifest differently (not that it must but that it would) so this is really just overall curiosity.
[0]https://www.oecdbetterlifeindex.org/countries/japan/ [1]https://www.oecdbetterlifeindex.org/countries/united-states/
That's a pretty ungenerous response when I was asking in good faith to understand, even expressing my own ignorance. I only know people that hold dual citizenship, and their experience of Japan certainly isn't some big step down from the US.
However, the world isn't equal, nor is the wealth equally distributed. If all of the rich, developed world was to slow down and become stagnant like Japan, where will the demand for goods and commodities made by the developing world come from?
Huge western demand helped lift hundreds of millions in China and India out of poverty, for instance.
Stagnant growth might be good for an individual country, but it can doom developing countries to similar stagnancy.
Edit: @Analemma That's just the extreme end of the scale. 30yr fixed mortgage rates were above 10% during all the 1980s[♤]. I'd like to see a return to that.
[1]: https://advisor.visualcapitalist.com/wp-content/uploads/2020...
We are at the moment in time when we can make the most out of “thin air”. It makes no sense that the rate is effectively zero.
Fractional reserve banking (which, by definition, the Fed is) creates money. If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money.
While you are right about fractional reserve creating money, this example is a common misconception. When you deposit $1000, the bank assumes a reserve of $1000 and lends out $9000. This, is assuming the bank has enough reserves on hand. And reserves for the bank is either central bank money (given by fed) or treasury bonds (bought from your $1000 deposit) or MBS (bought from your deposit).
The bank might turn around and borrow from the Fed and use the deposits as reserves, but that has more to do with rates markets and nothing to do with FRB.
> If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money
Money is created and destroyed all the time.
But under your argument, then the Fed doesn’t technically create money either. It lends money like any other bank. Now this money is created out of thin air, but in theory it’s eventually repaid.
Only the Fed can create money out of nowhere. They can create endless dollars and owe nothing, diluting the currency permanently. Inflation and other metrics keep them in check. The common sense is actually right, not the overly technical explanation of lending that somehow concludes that the Fed isn't special.
> in theory it’s eventually repaid
It doesn't have to be, and it hasn't been. M2 has generally just gone up.
Why resource-constrained? It's money, not something with utility. In any expanding economy, you generally get more buying power spending later rather than now, regardless of changes in money supply. Only if the currency is being diluted too much, you have to park your savings in something scarce instead, like land or low-risk stocks. It's not all that different from just using a fixed supply of currency (I'm not counting lending as creating money; it's not the same thing).
You're both right? I suspect that means there must be a third option.
Basically, ridiculous startups and ridiculous corporate projects get funding when they shouldn't.
If you want persistently higher long interest rates then you want persistently higher inflation expectations.