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It's called "kicking the can" and the only reason it looks like a sustainable system is because we haven't hit the end of the runway yet. But now that we're tra

It's called "kicking the can" and the only reason it looks like a sustainable system is because we haven't hit the end of the runway yet. But now that we're trapped at the zero bound and cannot normalize, the next few years should see the beginning the end of the debt supercycle and the USD as world reserve currency.

kortilla 8y ago
Please explain what you mean by “trapped at the zero bound”. It can’t possibly mean interest rates.
- jcriddle4 8y ago
  I think he does mean interest rates, which are not currently at the zero bound, as the fed has raised them several times lately. I think he probably should have written "trapped too close to the zero bound" which would actually make more sense. For instance the last round of interest rate increase look like they caused the markets to get very sick. That puts pressure on the Fed not to do any more raises. However if the Fed does not raise rates and if some nasty down-turn happened at this point then would the fed accomplish much by dropping rates to zero? Another idea here being that if you muck around all the time with interest rates to solve problems the effectiveness of the medicine may wear off, particularly if this medicine has delayed people from making needed structural reform. By structural reform I mean rebuilding the middle class not cutting social security or crap like that. Let me put forward a very radical idea. I suspect we need to actually restrict the amount of debt that people can accumulate as it make the system as a whole incredibly brittle. Think of consumer debt like a sort of "tragedy of the commons" situation. An individuals debt load should be their own business but if just about everyone is loading up on debt then the overall economy could explode which is everyone's business. In addition if a creditor can resell bad debt to other unsuspecting buyers then they have an incentive to give toxic loans and credit cards to people as long as they aren't holding the large amount of toxic debt on their own books for very long.
  - StuntPope 8y ago
    Yes, sorry I meant interest rates. Maybe a poor choice of words. I wrote another article years ago positing that once you hit zero on interest rates, it's looking like you may never be able to normalize again (see Japan). We're at 2.4% (In the US) but that's still too low and the Fed is trapped. They can't go higher, they've paused and depending on what happens over the next while, they may very well have to cut. So I use the phrase trapped at the zero bound because once you actually touch that bound I think you get stuck there. That old post was: https://www.zerohedge.com/news/2016-01-14/trapped-inside-zero-bound-crossing-economic-event-horizon https://www.zerohedge.com/news/2016-01-14/trapped-inside-zer...
toastermoster 8y ago
When you say "trapped at the zero bound" are you saying the control output is saturated basically? I'm thinking in terms of feedback control loops. I would agree that the FOMC doesn't have a lot of room to work with if we were to enter another downturn but they do have some range left in their controller. During the last downturn they reduced the federal funds rates to 0% and that stayed there for years but they are now back up to 2.4% I think. When dropping rates to 0% wasn't enough in 2008 they also reduced longer term rates by buying Treasury securities (operation twist etc). The ended up adding $4.5T of Treasury securities to their balance sheet by the end of it. They have been unwinding those positions for over a year now but the balance is only slightly less than $4T. So I guess one could say there isn't much left in the accelerator pedal if we need it again. Especially given the recent tax reductions while the economy was already improving. That's just one less tool that can be used for the next time. Hopefully we won't have a next time until the Fed is able to get rates over 5% and the Fed balance sheet under $1T. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
- zozbot123 8y ago
  From a feedback control perspective, it amounts to trying to balance an inherently unstable system. Think of a cart-and-pole apparatus where the top end of the "pole" (that is, the natural rate) is constantly being pushed around by unpredictable, outside shocks, and you have to move the "cart" (the policy rate) in the same direction to make up for those and keep the whole thing from falling over (into hyperinflation or extreme deflation - an illusory "boom" or a very real and persistent "bust"). The zero bound is only a leftwards boundary for the "cart", not the "pole" - but when it's hit, you do need something like QE to push the top end of the "pole" rightwards again independently of the "cart". (The way out of the mess is to stop trying to use monetary policy to manipulate market interest rates, and to instead shift to a short-term policy target that fosters stability rather than instability. Such as, e.g. the money-price of gold. Or some measure of the money supply. Or the market forecast of nominal incomes x months in the future. There are lots of plausible choices!)
manfredo 8y ago
And what exactly does "hitting the end of the runway" entail? Alarmist calls about the economy suddenly running out of resources and an ensuing global collapse have been around for decades. Centuries, really. Remember when we thought that we'd all be fighting over oil by 1995[1]? That sovereign debt is going to collapse? The US at least, has debt figures as a percentage of GDP that are a fraction of plenty of other countries mostly regarded as stable. I'm going to need more info before I believe someone telling me the end is neigh. 1. https://en.wikipedia.org/wiki/Peak_oil https://en.wikipedia.org/wiki/Peak_oil

kortilla 8y ago

Please explain what you mean by “trapped at the zero bound”. It can’t possibly mean interest rates.

jcriddle4 8y ago
I think he does mean interest rates, which are not currently at the zero bound, as the fed has raised them several times lately. I think he probably should have written "trapped too close to the zero bound" which would actually make more sense. For instance the last round of interest rate increase look like they caused the markets to get very sick. That puts pressure on the Fed not to do any more raises. However if the Fed does not raise rates and if some nasty down-turn happened at this point then would the fed accomplish much by dropping rates to zero? Another idea here being that if you muck around all the time with interest rates to solve problems the effectiveness of the medicine may wear off, particularly if this medicine has delayed people from making needed structural reform. By structural reform I mean rebuilding the middle class not cutting social security or crap like that. Let me put forward a very radical idea. I suspect we need to actually restrict the amount of debt that people can accumulate as it make the system as a whole incredibly brittle. Think of consumer debt like a sort of "tragedy of the commons" situation. An individuals debt load should be their own business but if just about everyone is loading up on debt then the overall economy could explode which is everyone's business. In addition if a creditor can resell bad debt to other unsuspecting buyers then they have an incentive to give toxic loans and credit cards to people as long as they aren't holding the large amount of toxic debt on their own books for very long.
- StuntPope 8y ago
  Yes, sorry I meant interest rates. Maybe a poor choice of words. I wrote another article years ago positing that once you hit zero on interest rates, it's looking like you may never be able to normalize again (see Japan). We're at 2.4% (In the US) but that's still too low and the Fed is trapped. They can't go higher, they've paused and depending on what happens over the next while, they may very well have to cut. So I use the phrase trapped at the zero bound because once you actually touch that bound I think you get stuck there. That old post was: https://www.zerohedge.com/news/2016-01-14/trapped-inside-zero-bound-crossing-economic-event-horizon https://www.zerohedge.com/news/2016-01-14/trapped-inside-zer...

toastermoster 8y ago

When you say "trapped at the zero bound" are you saying the control output is saturated basically? I'm thinking in terms of feedback control loops. I would agree that the FOMC doesn't have a lot of room to work with if we were to enter another downturn but they do have some range left in their controller. During the last downturn they reduced the federal funds rates to 0% and that stayed there for years but they are now back up to 2.4% I think. When dropping rates to 0% wasn't enough in 2008 they also reduced longer term rates by buying Treasury securities (operation twist etc). The ended up adding $4.5T of Treasury securities to their balance sheet by the end of it. They have been unwinding those positions for over a year now but the balance is only slightly less than $4T. So I guess one could say there isn't much left in the accelerator pedal if we need it again. Especially given the recent tax reductions while the economy was already improving. That's just one less tool that can be used for the next time. Hopefully we won't have a next time until the Fed is able to get rates over 5% and the Fed balance sheet under $1T. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

zozbot123 8y ago
From a feedback control perspective, it amounts to trying to balance an inherently unstable system. Think of a cart-and-pole apparatus where the top end of the "pole" (that is, the natural rate) is constantly being pushed around by unpredictable, outside shocks, and you have to move the "cart" (the policy rate) in the same direction to make up for those and keep the whole thing from falling over (into hyperinflation or extreme deflation - an illusory "boom" or a very real and persistent "bust"). The zero bound is only a leftwards boundary for the "cart", not the "pole" - but when it's hit, you do need something like QE to push the top end of the "pole" rightwards again independently of the "cart". (The way out of the mess is to stop trying to use monetary policy to manipulate market interest rates, and to instead shift to a short-term policy target that fosters stability rather than instability. Such as, e.g. the money-price of gold. Or some measure of the money supply. Or the market forecast of nominal incomes x months in the future. There are lots of plausible choices!)

manfredo 8y ago

And what exactly does "hitting the end of the runway" entail? Alarmist calls about the economy suddenly running out of resources and an ensuing global collapse have been around for decades. Centuries, really. Remember when we thought that we'd all be fighting over oil by 1995[1]? That sovereign debt is going to collapse? The US at least, has debt figures as a percentage of GDP that are a fraction of plenty of other countries mostly regarded as stable. I'm going to need more info before I believe someone telling me the end is neigh. 1. https://en.wikipedia.org/wiki/Peak_oil https://en.wikipedia.org/wiki/Peak_oil