4 ms·

QE is 'over'(for now), but it has shaped today's economy. There may have QE4. Artificially low interest rates is the main cause of most malinvestment and infla

by dataker 11y ago

QE is 'over'(for now), but it has shaped today's economy. There may have QE4. Artificially low interest rates is the main cause of most malinvestment and inflating assets. Usually ends with a pretty rough recession. For debt, I could just say 'Greece/Argentina/Brazil/Japan/...', but(yes) these aren't the world's reserve currency. U.S could just pay its debt to China by 'printing money' Still, it also severely hurt Americans and is probably the main problem for the middle class. Wages don't keep up with inflation and assets are inflated, so their purchasing power is smaller and citizens usually get indebted themselves.

dllthomas 11y ago
"'Greece/Argentina/Brazil/Japan/...'" ... were all just barely over 100% debt / GDP when things went bad? I don't recall that being the case. It is surely true that there can be unsustainable levels of debt. You have not made the case that those are anywhere near 100% GDP. I would be surprised if there were any fixed number of GDP where it goes from good to bad - it's going to at least depend on the cost of borrowing that money, and that also looks much different between the US and many other countries (very much including the countries you listed).
- forgetsusername 11y ago
  >were all just barely over 100% debt / GDP when things went bad? Indeed. It's amazing to me that people don't blink an eye at borrowing 8-10x their annual income to buy a home in California, but think the US economy, which can print its own currency, is going to fold with debt levels at 1x income and rates at historic lows.
  - sillygeese 11y ago
    Perhaps those are not the same people? Bear in mind that printing currency is not without consequences either. It's not like each printed (and used) dollar is worth exactly as much as the previous one - otherwise hyperinflations could not happen.
  - dllthomas 11y ago
    I think that metaphor is useful for driving intuition about how it might not be a problem, if people aren't seeing that. I do worry about relying on it much beyond that. Households, companies, and governments all have balance sheets, but there are tremendous differences.
  - bsbechtel 11y ago
    Actually, debt is held by the US Government, which has had historic average revenues of ~18% GDP. Therefore, to have 100% debt/GDP is actually the US Government borrowing 5.5x their annual income.
- thecage411 11y ago
  Not only that, but cause and effect isn't obvious either. Let's say there's some correlation between high ratios of debt / gdp (our proxy for "unsutainable levels of debt") and low growth. Is the low growth caused by the high debt or did the country get into high debt because they've had low growth (and thus lower than expected revenues)?
forgetsusername 11y ago
>"Artificially low interest rates is the main cause of most malinvestment and inflating assets." Rates aren't "artificial" (there is huge demand for treasuries) and malinvestment occurs at any time. Sure, it makes it "cheaper" to spend money stupidly, but it's also cheaper to spend money "smartly" -- to take risks and chances to do big things. You know, what places like SV are all about. I'm agnostic as to what the rates are, because our economy requires lenders and borrowers. Right now it favors borrowers. >"Wages don't keep up with inflation and assets are inflated" Who owns all these inflated assets, the houses, the stocks?
- smitherfield 11y ago
  >Rates aren't "artificial" (there is huge demand for treasuries) Of course they're "artificial." There may be huge demand for treasuries, but not enough to maintain a constant ~0% interest rate - that's the Fed's doing. The Fed certainly is not allowing treasuries to drop to their true market value, as Volcker did.
  - jazzyk 11y ago
    You are mixing up interest rates and government debt yields. Interest rates are set artificially by the Fed. Because they are set almost at zero, this causes run on government debt as the only "safe" source of interest income, lowering yields thus making it inexpensive for the government to acquire even more debt. The result (in the US) is skyrocketing government debt (from 64% of GDP in 2008 to 103% in 2015) We. Are. So. Fucked.
    - smitherfield 11y ago
      Government debt yields are a nearly 1 to 1 function of the interest rate, assuming there's confidence in the currency and the government's ability to tax and print money.
      - hollerith 11y ago
        You mean "nearly the identity function". A 1-to-1 function is something different (((namely, a function f such that whenever f(a) = f(b), a = b))).
ajmurmann 11y ago
There was actually a very interesting discussion on econtalk that easily came to the conclusion that interest rates aren't artificially low. The primary, possible reasons they saw were that new industries in the West need fewer initial investments than traditional industries (compare the cost of starting a new refrigerator factory to starting a tech startup) and that Asian countries with much higher saving rates are making up a larger portion of the economy. One point they made is that interest rates were already very low before the recession and QE.
otis_inf 11y ago
> these aren't the world's reserve currency. U.S could just pay its debt to China by 'printing money' China isn't the entity which holds the US debt, the US citizens do. Besides, printing money doesn't make you able to pay debt, it just devaluates the money you already have. The early 20th century has shown us all that printing money won't help you.

by dataker 11y ago

dllthomas 11y ago

"'Greece/Argentina/Brazil/Japan/...'" ... were all just barely over 100% debt / GDP when things went bad? I don't recall that being the case. It is surely true that there can be unsustainable levels of debt. You have not made the case that those are anywhere near 100% GDP. I would be surprised if there were any fixed number of GDP where it goes from good to bad - it's going to at least depend on the cost of borrowing that money, and that also looks much different between the US and many other countries (very much including the countries you listed).

forgetsusername 11y ago
>were all just barely over 100% debt / GDP when things went bad? Indeed. It's amazing to me that people don't blink an eye at borrowing 8-10x their annual income to buy a home in California, but think the US economy, which can print its own currency, is going to fold with debt levels at 1x income and rates at historic lows.
- sillygeese 11y ago
  Perhaps those are not the same people? Bear in mind that printing currency is not without consequences either. It's not like each printed (and used) dollar is worth exactly as much as the previous one - otherwise hyperinflations could not happen.
- dllthomas 11y ago
  I think that metaphor is useful for driving intuition about how it might not be a problem, if people aren't seeing that. I do worry about relying on it much beyond that. Households, companies, and governments all have balance sheets, but there are tremendous differences.
- bsbechtel 11y ago
  Actually, debt is held by the US Government, which has had historic average revenues of ~18% GDP. Therefore, to have 100% debt/GDP is actually the US Government borrowing 5.5x their annual income.
thecage411 11y ago
Not only that, but cause and effect isn't obvious either. Let's say there's some correlation between high ratios of debt / gdp (our proxy for "unsutainable levels of debt") and low growth. Is the low growth caused by the high debt or did the country get into high debt because they've had low growth (and thus lower than expected revenues)?

forgetsusername 11y ago

>"Artificially low interest rates is the main cause of most malinvestment and inflating assets." Rates aren't "artificial" (there is huge demand for treasuries) and malinvestment occurs at any time. Sure, it makes it "cheaper" to spend money stupidly, but it's also cheaper to spend money "smartly" -- to take risks and chances to do big things. You know, what places like SV are all about. I'm agnostic as to what the rates are, because our economy requires lenders and borrowers. Right now it favors borrowers. >"Wages don't keep up with inflation and assets are inflated" Who owns all these inflated assets, the houses, the stocks?

smitherfield 11y ago
>Rates aren't "artificial" (there is huge demand for treasuries) Of course they're "artificial." There may be huge demand for treasuries, but not enough to maintain a constant ~0% interest rate - that's the Fed's doing. The Fed certainly is not allowing treasuries to drop to their true market value, as Volcker did.
- jazzyk 11y ago
  You are mixing up interest rates and government debt yields. Interest rates are set artificially by the Fed. Because they are set almost at zero, this causes run on government debt as the only "safe" source of interest income, lowering yields thus making it inexpensive for the government to acquire even more debt. The result (in the US) is skyrocketing government debt (from 64% of GDP in 2008 to 103% in 2015) We. Are. So. Fucked.
  - smitherfield 11y ago
    Government debt yields are a nearly 1 to 1 function of the interest rate, assuming there's confidence in the currency and the government's ability to tax and print money.
    - hollerith 11y ago
      You mean "nearly the identity function". A 1-to-1 function is something different (((namely, a function f such that whenever f(a) = f(b), a = b))).

ajmurmann 11y ago

There was actually a very interesting discussion on econtalk that easily came to the conclusion that interest rates aren't artificially low. The primary, possible reasons they saw were that new industries in the West need fewer initial investments than traditional industries (compare the cost of starting a new refrigerator factory to starting a tech startup) and that Asian countries with much higher saving rates are making up a larger portion of the economy. One point they made is that interest rates were already very low before the recession and QE.

otis_inf 11y ago

> these aren't the world's reserve currency. U.S could just pay its debt to China by 'printing money' China isn't the entity which holds the US debt, the US citizens do. Besides, printing money doesn't make you able to pay debt, it just devaluates the money you already have. The early 20th century has shown us all that printing money won't help you.