5 ms·

> Economists have been casting around for the answer, a theory to explain their inability to peer accurately in the months ahead, let alone the years. ... No m

by aazaa 7y ago

> Economists have been casting around for the answer, a theory to explain their inability to peer accurately in the months ahead, let alone the years. ... No mention of "quantitative easing" anywhere. QE ran in various forms from 2008-2013. Short term rates were held at zero in the US from 2008-2015. Several industrialized areas now have negative nominal rates. The Fed has started QE back up again to prop up the failing repo market, insisting that what's happening isn't another round of QE. None of these unusual activities were considered worth discussing by most economists prior to 2008. No wonder why their predictions are so off the mark. Can ultra-loose monetary policy lead to marketplace distortions? Can it lead to malinvestments like we see in the tech sector? Can it lead companies into a false sense of security, delaying and scaling back layoffs, because the usual economic signals have been swept under the rug by government policies? Of course. The only surprise here is that the WSJ chooses to completely ignore these completely obvious distortions.

ambernightcruse 7y ago
There's no mention about QE because QE is only about lowering the cost for the private sector to borrow money. The main threat to QE is inflation, which is hovering around 2% and stubbornly low, so QE is in the clear. The repo purchases are operating as intended, with new liquidity requirements for banks from Basel 3 reforms. Also you complain about negative nominal rates, which make banks less likely to lend; then you speculate on malinvestments and market distortions. So which way do you want it, is money too tight or too loose?
- Retric 7y ago
  Banks are far from the only lender. The US bond market is 40 trillion dollars worth of loans, where banks are closer to 14 trillion in loans.
- tenpies 7y ago
  > The main threat to QE is inflation, which is hovering around 2% and stubbornly low, so QE is in the clear. Obligatory comment that the measure of inflation used by the Fed - core inflation - intentionally under presents inflation. It literally takes a basket of all goods, sorts by least volatile, and picks the least volatile items possible.
  - esoterica 7y ago
    Discarding the most volatile categories is not the same as throwing out the ones that increase the most. Energy prices fluctuate both up and down, so throwing out energy will frequently increase, not decrease the measure of core inflation.
- roenxi 7y ago
  > The main threat to QE is inflation, which is hovering around 2% If I lent money at 6% interest from 2007 to today, I would have performed about the same as the capital gains from owning an equivalent amount of everyone's Favourite Shiny Rock, gold. Not including the recent price jump from QE4. Owning a rock should not be generating a real return. In reality, it probably isn't. Real inflation is likely different from consumer price inflation. It isn't perfect evidence, but gold is basically as pure an asset as we can get and it lines up with what should be happening if the government is printing money with its ears pinned back. No practical uses, easy to store, rare enough to be valuable. Anyone who is interested in saving for their retirement would be unwise to treat CPI as inflation in their calculations.
  - esoterica 7y ago
    Gold is fairly volatile and you are cherry picking dates. The spot price of gold fell 45% from 2010 to 2015, do you think consumer prices fell 45% over the same period?
    - edoceo 7y ago
      It didn't https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/ https://www.usinflationcalculator.com/inflation/consumer-pri...
    - roenxi 7y ago
      No, I specifically said the gold price change suggested the consumer price inflation rate wasn't measuring real inflation; so obviously I don't think changes in the gold price are having an immediate reflection in consumer prices. And I think in the timeframe you indicate they stopped QE and people noticed the gold price had risen much faster than new money had been created so scaled back. Picking 2010-2015 is cherry picking the date substantially more than 2007-early 2019 when we're talking about QE spurred inflation. If I were cherry picking I'd go 2000 to late 2019 and get 19%. I'm just going a little pre-QE and then the lowest rate of return post-QE so people can't accuse me of cherry picking in favour of my argument. If you pick practically any pre-financial crisis to basically any post-crisis date it looks like a real rate of return. 4-5% real inflation lines up pretty well with what we'd expect inflation to be if we assumed doubling the money supply halved the value for money. So if asset inflation is a little high and consumer price inflation is a little low the theory seems reasonable.
JamesBarney 7y ago
Why is QE a market distortion? Is all monetary policy a market distortion? If we used a gold standard is that not a market distortion? If the price of gold changes drastically due to gold mines closing/opening changing interest rates is that a market distortion?
- deevolution 7y ago
  "Government manipulation"
- lmm 7y ago
  QE is a market distortion because it consists of orders intended primarily to manipulate prices.
  - JamesBarney 7y ago
    Which basically includes all monetary policy.
- mindslight 7y ago
  Technically getting $50 in a Christmas card is a market distortion. What matters is the scale of it. With technology and economic optimization (eg offshoring), we expect the cost of production to continually drop. Yet the Fed has seen fit to declare that the exact opposite should generally occur to consumer prices. How this plays out is obvious if you draw a diagram of the feedback loop that is the CPI. Prices of manufactured goods do go slowly down. To keep the overall average rising other components have to go up, and the natural ones are where consumers have access to newly-created money (debt). Easy credit then prices straightforward cash out of the market, pushing us all to sign up for more overfinancialized monthly payments instead of simply saving for a rainy day.
cletus 7y ago
One huge issue I've seen as a result of near-zero interest rates is how this has hit tax collection from corporations and the very wealthy. Currently, if a company earns profits overseas and doesn't repatriate those funds then the IRS doesn't tax them. This all came about due to ridiculous IP licensing that tech companies engaged in (eg sell their IP to an Irish subsidiary and then license it as a form of transfer pricing, essentially). So companies are faced with a choice of repatriating "foreign" profits at 21%+ or just borrowing money locally at 1-2% to cover local cash needs. This is a big reason why corporate debt has ballooned: it's essentially just deferring tax obligations for years, hopefully long enough so they can buy another Congress to pass a "one-time" tax holiday. Then rinse and repeat. What the US needs to do is to treat all borrowings as the repatriation of that same amount of money of foreign profits.
- dragonwriter 7y ago
  > What the US needs to do is to treat all borrowings as the repatriation of that same amount of money of foreign profits. That would be ludicrously punitive to entities using debt financing that aren't shielding foreign profits from taxation. If the US wants to tax foreign profits without repatriation, it should just do that.

by aazaa 7y ago

ambernightcruse 7y ago

There's no mention about QE because QE is only about lowering the cost for the private sector to borrow money. The main threat to QE is inflation, which is hovering around 2% and stubbornly low, so QE is in the clear. The repo purchases are operating as intended, with new liquidity requirements for banks from Basel 3 reforms. Also you complain about negative nominal rates, which make banks less likely to lend; then you speculate on malinvestments and market distortions. So which way do you want it, is money too tight or too loose?

Retric 7y ago
Banks are far from the only lender. The US bond market is 40 trillion dollars worth of loans, where banks are closer to 14 trillion in loans.
tenpies 7y ago
> The main threat to QE is inflation, which is hovering around 2% and stubbornly low, so QE is in the clear. Obligatory comment that the measure of inflation used by the Fed - core inflation - intentionally under presents inflation. It literally takes a basket of all goods, sorts by least volatile, and picks the least volatile items possible.
- esoterica 7y ago
  Discarding the most volatile categories is not the same as throwing out the ones that increase the most. Energy prices fluctuate both up and down, so throwing out energy will frequently increase, not decrease the measure of core inflation.
roenxi 7y ago
> The main threat to QE is inflation, which is hovering around 2% If I lent money at 6% interest from 2007 to today, I would have performed about the same as the capital gains from owning an equivalent amount of everyone's Favourite Shiny Rock, gold. Not including the recent price jump from QE4. Owning a rock should not be generating a real return. In reality, it probably isn't. Real inflation is likely different from consumer price inflation. It isn't perfect evidence, but gold is basically as pure an asset as we can get and it lines up with what should be happening if the government is printing money with its ears pinned back. No practical uses, easy to store, rare enough to be valuable. Anyone who is interested in saving for their retirement would be unwise to treat CPI as inflation in their calculations.
- esoterica 7y ago
  Gold is fairly volatile and you are cherry picking dates. The spot price of gold fell 45% from 2010 to 2015, do you think consumer prices fell 45% over the same period?
  - edoceo 7y ago
    It didn't https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/ https://www.usinflationcalculator.com/inflation/consumer-pri...
  - roenxi 7y ago
    No, I specifically said the gold price change suggested the consumer price inflation rate wasn't measuring real inflation; so obviously I don't think changes in the gold price are having an immediate reflection in consumer prices. And I think in the timeframe you indicate they stopped QE and people noticed the gold price had risen much faster than new money had been created so scaled back. Picking 2010-2015 is cherry picking the date substantially more than 2007-early 2019 when we're talking about QE spurred inflation. If I were cherry picking I'd go 2000 to late 2019 and get 19%. I'm just going a little pre-QE and then the lowest rate of return post-QE so people can't accuse me of cherry picking in favour of my argument. If you pick practically any pre-financial crisis to basically any post-crisis date it looks like a real rate of return. 4-5% real inflation lines up pretty well with what we'd expect inflation to be if we assumed doubling the money supply halved the value for money. So if asset inflation is a little high and consumer price inflation is a little low the theory seems reasonable.

JamesBarney 7y ago

Why is QE a market distortion? Is all monetary policy a market distortion? If we used a gold standard is that not a market distortion? If the price of gold changes drastically due to gold mines closing/opening changing interest rates is that a market distortion?

deevolution 7y ago
"Government manipulation"
lmm 7y ago
QE is a market distortion because it consists of orders intended primarily to manipulate prices.
- JamesBarney 7y ago
  Which basically includes all monetary policy.
mindslight 7y ago
Technically getting $50 in a Christmas card is a market distortion. What matters is the scale of it. With technology and economic optimization (eg offshoring), we expect the cost of production to continually drop. Yet the Fed has seen fit to declare that the exact opposite should generally occur to consumer prices. How this plays out is obvious if you draw a diagram of the feedback loop that is the CPI. Prices of manufactured goods do go slowly down. To keep the overall average rising other components have to go up, and the natural ones are where consumers have access to newly-created money (debt). Easy credit then prices straightforward cash out of the market, pushing us all to sign up for more overfinancialized monthly payments instead of simply saving for a rainy day.

cletus 7y ago

One huge issue I've seen as a result of near-zero interest rates is how this has hit tax collection from corporations and the very wealthy. Currently, if a company earns profits overseas and doesn't repatriate those funds then the IRS doesn't tax them. This all came about due to ridiculous IP licensing that tech companies engaged in (eg sell their IP to an Irish subsidiary and then license it as a form of transfer pricing, essentially). So companies are faced with a choice of repatriating "foreign" profits at 21%+ or just borrowing money locally at 1-2% to cover local cash needs. This is a big reason why corporate debt has ballooned: it's essentially just deferring tax obligations for years, hopefully long enough so they can buy another Congress to pass a "one-time" tax holiday. Then rinse and repeat. What the US needs to do is to treat all borrowings as the repatriation of that same amount of money of foreign profits.

dragonwriter 7y ago
> What the US needs to do is to treat all borrowings as the repatriation of that same amount of money of foreign profits. That would be ludicrously punitive to entities using debt financing that aren't shielding foreign profits from taxation. If the US wants to tax foreign profits without repatriation, it should just do that.