4 ms·

Glad to hear that someone on the Fed has some sense. The confusion of "target" with "ceiling" has been disastrous for the economic recovery. Raising rates now i

Glad to hear that someone on the Fed has some sense. The confusion of "target" with "ceiling" has been disastrous for the economic recovery. Raising rates now is a terrible idea. Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Running under 2% core inflation for the past nine years has destroyed any chance of wage growth or natural debt relief. If anything, we need a few years of 3-4% inflation to make up lost time. Wages need to go up and relative debt loads need to go down, but they never will at 1% inflation when the Fed tightens the screws anytime we get close to 2%.

bbcbasic 10y ago
Doe low rates necessarily cause wage inflation? It might cause inflation in the price of assets or goods while wages stay steady.
- micahbright 10y ago
  Why would the price of labor be treated any differently than any other price. In general, inflation is more dollars chasing less goods and services(where services includes, but is not limited to, individual labor of any sort). To be fair to your question, inflation does not necessarily mean any individual price will rise, but all of them generally more or less. For example, market forces may cause the price of labor to decrease while most other prices are increasing.
  - bbcbasic 10y ago
    Product inflation could be caused by exchange rate changes, increasing the price of imported goods for example. Low interest rates could funnel more into asset prices than it does to wages. Wages can be competing with foreign labour, automation etc.
gozur88 10y ago
>Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Inflation is good for borrowers and bad for lenders. I don't see any reason to prioritize borrowers.
- nhaehnle 10y ago
  By their very nature, borrowers tend to spend money while lenders don't. The total sum of spending in the economy is equal to GDP, so if you care about increasing GDP, prioritizing borrowers makes sense. At least, that's the basic argument. In practice, what might happen is that the borrowers mostly borrow to make asset purchases in financial markets rather than in the real economy, which is a kind of spending that doesn't count towards GDP.
  - brutus1213 10y ago
    Savers build up capital stocks. When you consider domestic savers vs external ones, you start to see a weird problem: over time, you sell out all your assets. We're sort of seeing this in real-estate in major cities.
YZF 10y ago
Raising rates signals things are "normalizing". It may be what's necessary to convince everyone that they really are. A lot of this is about the psychology of the market and sometimes the psychology has to lead the change. When companies feel things are "normal" they will become less conservative with their investments. With a low interest rates, somewhat counter-intuitively, everyone has been in a fight or flight mode, sitting on troves of cash just because it seems too risky an environment to invest. My personal psychology here has been that if I can't get a good return on my investments I need to build them up rather than spend them. I am also concerned about exposing myself to bubbles. While in theory I should be encouraged to take risks in practice the risks in a low rate environment seem too high, especially if you consider one day the rates must go up. Historically we've had high inflation with significantly higher rates so I don't think the argument that low rates are a necessary condition for inflation holds. If anything the low rates appear to create deflationary pressure. Wages aren't rising because people and companies are not spending. Japan had low rates for 20 years and that hasn't done them much good. The last 10 year we had unusually low rates and by all accounts other than keeping the ship afloat not too much to show for those. It's time to try something else. Low rates inflate bubbles. Student loans. Car loans. Real estate. Stock market. Keeping rates too low for too long has many risks and those will grow. The current rates are still historically very low.
- tempestn 10y ago
  The essay actually addresses this right at the end, in the last paragraph before the conclusion: > One additional consideration that I think about is the possibility that low rates are scaring people and causing them to save more and invest less, while conventional wisdom is that low rates should lead to more investment and less saving. It is not a crazy argument because negative rates seem to be having unexpected results in some countries that have adopted them. If negative rates can scare people into saving more, perhaps very low rates can too? This would be an argument to raise rates just so people can feel more confident. However, it is hard for me to see how high rates by themselves can lead to more confidence, more spending and more investment. Take Japan: Should the Bank of Japan increase rates dramatically to send a confident signal? Does anyone think that would work in jump-starting Japan’s economy? I doubt it. A signal of confidence from higher rates must be coupled with strong underlying economic fundamentals. When the data indicate that we are approaching our dual mandate targets, I do believe markets will take some confidence from our rate increases because those higher rates will reflect strong economic fundamentals. I don’t find a strategy of raising rates purely as a psychological tool a compelling argument.
xapata 10y ago
Growth is a lagging indicator. By the time the economy is growing too fast, it's too late to yank on the brake. Or maybe we need a little more boom and bust to stay healthy, like the occasional isolated brush fire that prevents the whole prairie from going up in flames. It could be that Greenspan kept us too steady for too long. Mini-crashes burn away the rotten companies. Ok, I've changed my mind -- you're right, let it heat up.
patrickg_zill 10y ago
What is the source of your view, that supports your pro inflation statements? I have heard this argument before, but only get arguments from authority when I ask for actual data that shows this.
- aidenn0 10y ago
  On a microeconomic scale, at least, it should be self-evident that higher inflation benefits debtors, and hurts creditors: If I owe you $100, and a dollar becomes worth less, I'm better off (since I'm paying you back in dollars that have less real value than what I borrowed). There is a macroeconomic argument that a predictable and modest inflation rate is good for the economy. Some of the points are: 1) If both parties can accurately predict future inflation, it becomes much easier to negotiate an interest rate for borrowing; if there is much uncertainty about future inflation, then there is extra currency risk added to both the borrower and lender. 2) In the case of deflation, investors will be very cautious, since they become more wealthy just by holding cash. 3) In the case of very high inflation, currency becomes useless as a store of value, so people will rush to convert their currency to something less inflationary. So if you think that currency should be a useful store of value, that we should encourage those with wealth to invest it in possibly risky endeavors and you want to encourage free-flow of credit by removing some of the risks involved, then those 3 points will be pro modest inflation. There are of course counterarguments: A) Free flow of credit has downsides as well as upsides; in particular households with lower net worth have less ability to absorb economic downturns. B) Forcing wealthy people to invest to preserve their wealth by taking risky investments can create bubbles C) B+1 means that the bubbles can become highly leveraged.
- jfoutz 10y ago
  I think it's just basic macro. Interest rates are low, it's easy to get loans. Interest rates are high, and it's hard. Excessively low, and maybe people make 20-30 year commitments that they aren't ready for. Like, would we all be better off if maybe student loans were a little tougher to get? Also, lowering rates speeds up the economy a bit. It's probably better to run a little high, so interest rates can be dropped a little when bad things happen; that'll goose the economy, and power through small rough patches.
petters 10y ago
Perhaps the yearly targets should accumulate, so that if the actual inflation one year was 1%, the target for the next year becomes about 3%.
edblarney 10y ago
"so when so many individuals are overburdened by overwhelming student loan debt" They are taking it on because it's cheap. Low interest rates are like heroin: sooner or later you have to quit. All things considered, the time would definitely be now.
heisenbit 10y ago
Agree but the real issue here is that the Fed seems helpless with their tool set. They can pump money into the economy but that money is not used for productive but only for speculative purposes. By pushing in more money at the asset side of things they devalue relatively the labor side of things. Re-balancing would require enabling more small scale capital accumulation vs. the current policy of supporting large economic entities.

bbcbasic 10y ago

Doe low rates necessarily cause wage inflation? It might cause inflation in the price of assets or goods while wages stay steady.

micahbright 10y ago
Why would the price of labor be treated any differently than any other price. In general, inflation is more dollars chasing less goods and services(where services includes, but is not limited to, individual labor of any sort). To be fair to your question, inflation does not necessarily mean any individual price will rise, but all of them generally more or less. For example, market forces may cause the price of labor to decrease while most other prices are increasing.
- bbcbasic 10y ago
  Product inflation could be caused by exchange rate changes, increasing the price of imported goods for example. Low interest rates could funnel more into asset prices than it does to wages. Wages can be competing with foreign labour, automation etc.

gozur88 10y ago

>Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Inflation is good for borrowers and bad for lenders. I don't see any reason to prioritize borrowers.

nhaehnle 10y ago
By their very nature, borrowers tend to spend money while lenders don't. The total sum of spending in the economy is equal to GDP, so if you care about increasing GDP, prioritizing borrowers makes sense. At least, that's the basic argument. In practice, what might happen is that the borrowers mostly borrow to make asset purchases in financial markets rather than in the real economy, which is a kind of spending that doesn't count towards GDP.
- brutus1213 10y ago
  Savers build up capital stocks. When you consider domestic savers vs external ones, you start to see a weird problem: over time, you sell out all your assets. We're sort of seeing this in real-estate in major cities.

YZF 10y ago

Raising rates signals things are "normalizing". It may be what's necessary to convince everyone that they really are. A lot of this is about the psychology of the market and sometimes the psychology has to lead the change. When companies feel things are "normal" they will become less conservative with their investments. With a low interest rates, somewhat counter-intuitively, everyone has been in a fight or flight mode, sitting on troves of cash just because it seems too risky an environment to invest. My personal psychology here has been that if I can't get a good return on my investments I need to build them up rather than spend them. I am also concerned about exposing myself to bubbles. While in theory I should be encouraged to take risks in practice the risks in a low rate environment seem too high, especially if you consider one day the rates must go up. Historically we've had high inflation with significantly higher rates so I don't think the argument that low rates are a necessary condition for inflation holds. If anything the low rates appear to create deflationary pressure. Wages aren't rising because people and companies are not spending. Japan had low rates for 20 years and that hasn't done them much good. The last 10 year we had unusually low rates and by all accounts other than keeping the ship afloat not too much to show for those. It's time to try something else. Low rates inflate bubbles. Student loans. Car loans. Real estate. Stock market. Keeping rates too low for too long has many risks and those will grow. The current rates are still historically very low.

tempestn 10y ago
The essay actually addresses this right at the end, in the last paragraph before the conclusion: > One additional consideration that I think about is the possibility that low rates are scaring people and causing them to save more and invest less, while conventional wisdom is that low rates should lead to more investment and less saving. It is not a crazy argument because negative rates seem to be having unexpected results in some countries that have adopted them. If negative rates can scare people into saving more, perhaps very low rates can too? This would be an argument to raise rates just so people can feel more confident. However, it is hard for me to see how high rates by themselves can lead to more confidence, more spending and more investment. Take Japan: Should the Bank of Japan increase rates dramatically to send a confident signal? Does anyone think that would work in jump-starting Japan’s economy? I doubt it. A signal of confidence from higher rates must be coupled with strong underlying economic fundamentals. When the data indicate that we are approaching our dual mandate targets, I do believe markets will take some confidence from our rate increases because those higher rates will reflect strong economic fundamentals. I don’t find a strategy of raising rates purely as a psychological tool a compelling argument.

xapata 10y ago

Growth is a lagging indicator. By the time the economy is growing too fast, it's too late to yank on the brake. Or maybe we need a little more boom and bust to stay healthy, like the occasional isolated brush fire that prevents the whole prairie from going up in flames. It could be that Greenspan kept us too steady for too long. Mini-crashes burn away the rotten companies. Ok, I've changed my mind -- you're right, let it heat up.

patrickg_zill 10y ago

What is the source of your view, that supports your pro inflation statements? I have heard this argument before, but only get arguments from authority when I ask for actual data that shows this.

aidenn0 10y ago
On a microeconomic scale, at least, it should be self-evident that higher inflation benefits debtors, and hurts creditors: If I owe you $100, and a dollar becomes worth less, I'm better off (since I'm paying you back in dollars that have less real value than what I borrowed). There is a macroeconomic argument that a predictable and modest inflation rate is good for the economy. Some of the points are: 1) If both parties can accurately predict future inflation, it becomes much easier to negotiate an interest rate for borrowing; if there is much uncertainty about future inflation, then there is extra currency risk added to both the borrower and lender. 2) In the case of deflation, investors will be very cautious, since they become more wealthy just by holding cash. 3) In the case of very high inflation, currency becomes useless as a store of value, so people will rush to convert their currency to something less inflationary. So if you think that currency should be a useful store of value, that we should encourage those with wealth to invest it in possibly risky endeavors and you want to encourage free-flow of credit by removing some of the risks involved, then those 3 points will be pro modest inflation. There are of course counterarguments: A) Free flow of credit has downsides as well as upsides; in particular households with lower net worth have less ability to absorb economic downturns. B) Forcing wealthy people to invest to preserve their wealth by taking risky investments can create bubbles C) B+1 means that the bubbles can become highly leveraged.
jfoutz 10y ago
I think it's just basic macro. Interest rates are low, it's easy to get loans. Interest rates are high, and it's hard. Excessively low, and maybe people make 20-30 year commitments that they aren't ready for. Like, would we all be better off if maybe student loans were a little tougher to get? Also, lowering rates speeds up the economy a bit. It's probably better to run a little high, so interest rates can be dropped a little when bad things happen; that'll goose the economy, and power through small rough patches.

petters 10y ago

Perhaps the yearly targets should accumulate, so that if the actual inflation one year was 1%, the target for the next year becomes about 3%.

edblarney 10y ago

"so when so many individuals are overburdened by overwhelming student loan debt" They are taking it on because it's cheap. Low interest rates are like heroin: sooner or later you have to quit. All things considered, the time would definitely be now.

heisenbit 10y ago

Agree but the real issue here is that the Fed seems helpless with their tool set. They can pump money into the economy but that money is not used for productive but only for speculative purposes. By pushing in more money at the asset side of things they devalue relatively the labor side of things. Re-balancing would require enabling more small scale capital accumulation vs. the current policy of supporting large economic entities.