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"Yes, we could be in for a lot of pain if inflation and interest rates rise over the coming years." This is true, but I think unlikely ... All macro trends -

by rsync 8y ago

"Yes, we could be in for a lot of pain if inflation and interest rates rise over the coming years." This is true, but I think unlikely ... All macro trends - especially demographics and birthrates - point to large deflationary headwinds. The little bit of inflation that we experience currently is the result of massive manipulations like quantitative easing and related policies. Just look at the price of oil ... even the peak 2018 price is quite low when compared against the last ten years.[1] Nobody can know how this will pan out, but I think a reasonable guess is that as QE is allowed to unwind we experience recessionary forces that we are no longer willing to accept or able to withstand - given the increased fragility and interconnectedness of our economies. And so we will see QE3 and QE4 and so on, with related ZIRP[2], until we finally see a deflationary collapse. That could play out over decades. I don't know how you could shrewdly prepare for such a sequence of events, since the correct way to prepare for deflation is to have liquid, cash assets and those assets would be almost completely idle during the ZIRP period (like the one we are living in). I suspect the only way we would see real inflation is if political actors made political decisions to massively overshoot the QE (and related) policies. Even then, we would not see high interest rates unless some later actor decided to "correct" that inflation. [1] https://www.macrotrends.net/1369/crude-oil-price-history-chart https://www.macrotrends.net/1369/crude-oil-price-history-cha... [2] https://en.wikipedia.org/wiki/Zero_interest-rate_policy https://en.wikipedia.org/wiki/Zero_interest-rate_policy

panarky 8y ago
> the correct way to prepare for deflation is to have liquid, cash assets I agree that we're more likely to struggle with deflation and stagnation, and holding cash is the textbook response. But in the last 10 years of ZIRP, cash underperformed every major asset class -- stocks, bonds, real estate, fine art, private businesses, precious metals, cryptocurrencies, even rare books [1]. Cash was the worst place to be. We can blame it on QE, but policymakers will do infinite QE before they'll allow asset prices to fall very far. So I'm not sure the textbook response is valid in the world we actually inhabit. [1] https://www.theguardian.com/books/2015/nov/10/index-reveals-popular-first-edition-novels-have-seen-value-double https://www.theguardian.com/books/2015/nov/10/index-reveals-...
- rsync 8y ago
  "But in the last 10 years of ZIRP, cash underperformed every major asset class -- stocks, bonds, real estate, fine art, private businesses, precious metals, cryptocurrencies, even rare books" Yes, that is my point - the correct response to deflation is a very painful experience (and has been, as you note). Since the deflationary collapse can be delayed be QE3, QE4, QE5, etc., that pain could last a very long time. I don't know how to properly prepare for / hedge against the scenario I outlined.
AnthonyMouse 8y ago
> Nobody can know how this will pan out, but I think a reasonable guess is that as QE is allowed to unwind we experience recessionary forces that we are no longer willing to accept or able to withstand - given the increased fragility and interconnectedness of our economies. And so we will see QE3 and QE4 and so on, with related ZIRP[2], until we finally see a deflationary collapse. It seems like the flaw is in the assumption that QE be required to "unwind" at all. When the fed creates/destroys money, there are at least two things it can do with it. One is to buy/sell treasury bills, the other is to lend more/less to banks (who use it to make loans to consumers). We currently have two problems: 1) too many loans to consumers, 2) too many outstanding treasury bills. So why doesn't the Fed set a near-zero interest rate for treasury bills but a higher interest rate for banks? That keeps them from having to destroy the money entirely and cause deflation to get consumer debt back to a rational level, while at the same time removing treasury bills from the market and reducing the interest rate the taxpayer has to pay on the outstanding debt -- solving both problems at the same time. The result would be for the Fed to hold trillions in treasury bills indefinitely, but so what? The "harm" is that it allows Congress to borrow money more cheaply. That seems like a benefit provided they don't abuse it to the point of causing too much inflation -- which certainly doesn't appear to be happening in practice. The debt numbers would continue to grow on paper, but if it's all just going to be held by the Fed using created money, and the amount of money being created isn't causing hyperinflation, are we not good?
cynicalkane 8y ago
I’ve noticed with doomsayers it’s always deflation or hyperinflation. It never occurs to them that the Fed can do something that’s in between the two, such as what they’ve been doing for almost forty years since Volcker stamped down inflation. Central banks in practice can print as much or as little money as they want. In the third world, they often do. Well-functioning banks like those we have in the Western world can do better, such as the way Iceland was able to deal with their entire financial system collapsing in one day. But it’s always intrigued me the way people talk about QE as though there’s something artificial. Artificial is exchanging pictures of George Washinton for goods and services. Everything else is an implementation detail.

by rsync 8y ago

panarky 8y ago

> the correct way to prepare for deflation is to have liquid, cash assets I agree that we're more likely to struggle with deflation and stagnation, and holding cash is the textbook response. But in the last 10 years of ZIRP, cash underperformed every major asset class -- stocks, bonds, real estate, fine art, private businesses, precious metals, cryptocurrencies, even rare books [1]. Cash was the worst place to be. We can blame it on QE, but policymakers will do infinite QE before they'll allow asset prices to fall very far. So I'm not sure the textbook response is valid in the world we actually inhabit. [1] https://www.theguardian.com/books/2015/nov/10/index-reveals-popular-first-edition-novels-have-seen-value-double https://www.theguardian.com/books/2015/nov/10/index-reveals-...

rsync 8y ago
"But in the last 10 years of ZIRP, cash underperformed every major asset class -- stocks, bonds, real estate, fine art, private businesses, precious metals, cryptocurrencies, even rare books" Yes, that is my point - the correct response to deflation is a very painful experience (and has been, as you note). Since the deflationary collapse can be delayed be QE3, QE4, QE5, etc., that pain could last a very long time. I don't know how to properly prepare for / hedge against the scenario I outlined.

AnthonyMouse 8y ago

> Nobody can know how this will pan out, but I think a reasonable guess is that as QE is allowed to unwind we experience recessionary forces that we are no longer willing to accept or able to withstand - given the increased fragility and interconnectedness of our economies. And so we will see QE3 and QE4 and so on, with related ZIRP[2], until we finally see a deflationary collapse. It seems like the flaw is in the assumption that QE be required to "unwind" at all. When the fed creates/destroys money, there are at least two things it can do with it. One is to buy/sell treasury bills, the other is to lend more/less to banks (who use it to make loans to consumers). We currently have two problems: 1) too many loans to consumers, 2) too many outstanding treasury bills. So why doesn't the Fed set a near-zero interest rate for treasury bills but a higher interest rate for banks? That keeps them from having to destroy the money entirely and cause deflation to get consumer debt back to a rational level, while at the same time removing treasury bills from the market and reducing the interest rate the taxpayer has to pay on the outstanding debt -- solving both problems at the same time. The result would be for the Fed to hold trillions in treasury bills indefinitely, but so what? The "harm" is that it allows Congress to borrow money more cheaply. That seems like a benefit provided they don't abuse it to the point of causing too much inflation -- which certainly doesn't appear to be happening in practice. The debt numbers would continue to grow on paper, but if it's all just going to be held by the Fed using created money, and the amount of money being created isn't causing hyperinflation, are we not good?

cynicalkane 8y ago

I’ve noticed with doomsayers it’s always deflation or hyperinflation. It never occurs to them that the Fed can do something that’s in between the two, such as what they’ve been doing for almost forty years since Volcker stamped down inflation. Central banks in practice can print as much or as little money as they want. In the third world, they often do. Well-functioning banks like those we have in the Western world can do better, such as the way Iceland was able to deal with their entire financial system collapsing in one day. But it’s always intrigued me the way people talk about QE as though there’s something artificial. Artificial is exchanging pictures of George Washinton for goods and services. Everything else is an implementation detail.