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We're basically running out of tools to combat an actual financial crisis. https://www.investopedia.com/terms/l/liquiditytrap.asp https://www.investopedia.com/t

by ptyyy 7y ago

We're basically running out of tools to combat an actual financial crisis. https://www.investopedia.com/terms/l/liquiditytrap.asp https://www.investopedia.com/terms/l/liquiditytrap.asp

thedudeabides5 7y ago
Hey look on the bright side, we have another 100bps left in rates and then QE4. After that, yeah then it gets tough, but then again, maybe we get some actual fiscal stimulus which maybe buys the US some China style infrastructure!
- andreilys 7y ago
  We will likely see negative interest rates before the Fed decides to raise
- Symmetry 7y ago
  We could always just end the practice of paying interest on excess reserves which the Fed started when they thought banks were collapsing but there wasn't any economic downturn back in 2008, so they needed to get the banks not to lend out the money they were pumping into them somehow. The Fed's inflation models have been predicting higher inflation than we've seen ever since. Currently the interest on required reserves (IORR) and interested on excess reserves (IOER) are both 1.6%, well above the Fed lending rate of 1.25%.
- bluedevil2k 7y ago
  A fiscal stimulus? Yes, let's go even more into debt than we already are.
  - learc83 7y ago
    It doesn't matter how much debt we are in provided the rate of return for the investment is greater than the interest on the new debt. And that's without considering that inflation is very low, so we can print our way out of some of it.
    - bluedevil2k 7y ago
      I find it ironic that the people who say "the government should just spend tons of money because the debt doesn't matter" and don't care about punting the problem to the next generation are the same ones who say how irresponsible the Baby Boomers are for punting the environment problem to the next generation.
      - learc83 7y ago
        And you managed to both completely avoid my point and bring up generational politics.
        bluedevil2k 7y ago
        You don't have a point, you have an opinion. You don't provide any facts or resources that prove the money spent in a fiscal stimulus returns a greater rate than the interest on it. You don't address the fact that the debt has gone up 300% over the last 20 years while the GDP is up only an average of 2.5% a year. Printing your way out of debt is not a solution, ask Argentina. Eventually your investors will lose faith in the value of the money they're getting back in return and the currency will collapse.
        learc83 7y ago
        > You don't provide any facts or resources that prove the money spent in a fiscal stimulus returns a greater rate than the interest on it. 1. I never said fiscal stimulus was guaranteed to return more than the interest to service the debt needed to pay for it. I said if it does that. My point is deficit spending == bad is not always true. 2. You didn't provide any facts or resources to prove that there exists no possible fiscal stimulus that could generate a greater return than the interest on the debt needed to pay for it. If you want resources, Google it. You'll find plenty of information backing up the claim that it is possible for deficit spending to pay for fiscal stimulus to be a net benefit. >You don't address the fact that the debt has gone up 300% over the last 20 years while the GDP is up only an average of 2.5% a year. Why are you quoting a 20 year value for the debt, but a yearly value for GDP? >Printing your way out of debt is not a solution, ask Argentina. Instead of looking at Argentina, why don't you look to the US? We've been effectively printing money since 2008 and inflation hasn't come close to going out of control. The US isn't Argentina, and saying look to Argentina is no better than people saying look to Somalia for an example of why small hands off government doesn't work.
liuliu 7y ago
It can go negative, or Fed can do another round of QE, there are plenty of tools. The real question is whether the deficit can grow indefinitely without consequences, and if this is a moral hazard (e.g. no risk priced in borrowing).
- cm2187 7y ago
  The European experience has shown that negative rates aren't really working, other than killing the local banking system.
  - misja111 7y ago
    Well that's not what the former ECB chairman Mario Draghi thought about it. According to him they were a success .. See e.g. http://www.ekathimerini.com/245837/article/ekathimerini/business/draghi-greece-selling-debt-at-negative-rates-is-a-success http://www.ekathimerini.com/245837/article/ekathimerini/busi... But even mr. Draghi might agree that right now the ECB is pretty powerless, given that it's rates are already below zero.
    - RobertoG 7y ago
      That's because it's not a monetary policy problem, but a fiscal policy problem. If you insist in fixing your home with your car jack, don't complain about the results.
      - cm2187 7y ago
        Worthwhile read: https://www.business-standard.com/article/finance/can-banks-survive-negative-rates-instability-in-global-financial-system-119091300319_1.html https://www.business-standard.com/article/finance/can-banks-...
        speedplane 7y ago
        When we design policy around increasing the value of the stock market, we effectively give stock-holders power. Good policy should create efficient markets, not "high value" ones.
JumpCrisscross 7y ago
> We're basically running out of tools to combat an actual financial crisis Not really. This was extensively explored following the Great Depression, in part by Ben Bernanke, which is how we got QE. In summary, the Fed can buy more than just short-dated government bonds. Moreover, "liquidity trap" doesn't refer to the central bank running out of tools per se. It refers to investors calling a central bank's bluff. A classic example is a stagflation-facing central bank cutting rates. The cut spurs inflation. Investors figure that will force the central bank's hand into a rate hike shortly. As a result, they hold. The cut thus fails to have an impact because the bank is perceived to be constrained. That doesn't apply here.
- tossAfterUsing 7y ago
  > That doesn't apply here. So long as the appearance of inflation never occurs.
pbrb 7y ago
I'm pretty worried about this. I don't think this rate cut makes any sense. You can't stimulus away a virus.
- pmart123 7y ago
  There seem to be economic ways to help curtail it though. - sick pay for hourly employees for next year - backstop airlines, event planning and travel businesses in some capacity - offer Netflix rewards for vaccines, testing methods or other applicable things - cover cost of insurance for massive testing
  - tossAfterUsing 7y ago
    > cover cost of insurance for massive testing how about just massive testing. no insurance necessary
  - belltaco 7y ago
    If done well, that would prove that Medicare4All works. Cannot have that happen.
- skybrian 7y ago
  Yes but it could avoid some bad effects. If a company temporarily can't manufacture something due to supply chain disruption, they could lose a lot of money and might need to borrow some. Getting by until things recover just got cheaper. I'd guess there are probably similar issues for restaurants, the tourist industry, maybe construction? But that assumes they're credit-worthy. It wouldn't help a company that can't borrow.
  - pbourke 7y ago
    Somehow I don’t think the ability to borrow money 0.5% cheaper than yesterday is going to make a material difference to a lot of firms.
- munificent 7y ago
  Trump isn't trying to stimulus away a virus. He couldn't possibly care less about COVID-19 unless he personally were to get infected. He's just trying to stimulus himself a re-election.
scottmcf 7y ago
We are in/at the start of an actual financial crisis, people just haven't internalized that yet.
- mywittyname 7y ago
  Who could have known that using debt to purchase back stock for the purposes of artificially increasing company value without building value would cause a crisis?
  - skybrian 7y ago
    It would be bad if they needed cash and couldn't borrow, but on the other hand borrowing just got cheaper. What evidence is there that companies who previously bought stock and issued debt are low on cash?
- asaph 7y ago
  I'll bite. How can you tell?
  - toomuchtodo 7y ago
    The entire world is about to have a supply chain disruption that you can't stoke into recovery using central bank policy. The Fed rarely lowers interest rates without notice. They're spooked.
    - asaph 7y ago
      What if this supply chain disruption is short term, and the world returns to business as usual soon?
      - toomuchtodo 7y ago
        That is a possible scenario, but not what market participant behavior is predicting. So, you either believe governments, or you believe the flow of trillions of dollars through the capital markets. The truth likely lies somewhere in the middle, waiting to be discovered.
atq2119 7y ago
Only because the toolset is artificially restricted for ideological reasons. Fiscal responses (having the government spend actual money, either on things like infrastructure it by just handing it out to the population, which will then largely spend that money as they see fit) rather than monetary policy responses (reduce rates and hope that people will borrow more) are known to work well in most cases. The Corona virus situation is slightly different than the financial mess of 2008 because it involves actual potential supply constraints. This means that a higher rate of inflation may have to be accepted temporarily. But inflation has arguably been far too low for far too long anyway...
- gdubs 7y ago
  Keynes famously said you could hire people to dig ditches and it would stimulate the economy. However, if we were to take aggressive action on Climate Change, there’s a lot of potential jobs there. A massive potential stimulus. Also, you know, public funding of basic research which could explore, I don’t know, pandemic response, new therapeutics, etc. Like you said, ideological barriers are what’s keeping us stuck. But before we went all in on finance we had a pretty epic run last century of productivity fueled by public investment (think 1940-1970).
  - trophycase 7y ago
    I mean half of the economy is digging ditches basically. A few small portions of the economy produce the necessities of life while nearly everyone else just circulates money around through entertainment, advertisement, etc.
  - paganel 7y ago
    Climate Change is doing just fine with us doing no work, notice the recent news about the satellite-detectable pollution levels in China being at lows not seen in a long while. Of course, that means us not being as product- and services-rich as we are right now (farewell to cheap airplane rides, disposable clothes and easily replaceable electronics) but at the end of the day something will have to give.
mindslight 7y ago
Because they've already been expended to keep the "growth" party going indefinitely, rather than ever letting things cool off. This includes 2008 - a short hiccup and then full speed ahead, culminating in VC's filling sidewalks and gullies with a glut of consumer goods, hoping for some kind of eventual profit. Eventually the bubble has to pop - when it's not allowed to do so relatively casually, it will do so catastrophically. When it's not allowed to do so at it's own time, it will do so at the worst time.
gscott 7y ago
The best tool is to let the virus shake things out in the economy. Well managed companies will survive those that are not go by the wayside.

by ptyyy 7y ago

We're basically running out of tools to combat an actual financial crisis. https://www.investopedia.com/terms/l/liquiditytrap.asp https://www.investopedia.com/terms/l/liquiditytrap.asp

thedudeabides5 7y ago

Hey look on the bright side, we have another 100bps left in rates and then QE4. After that, yeah then it gets tough, but then again, maybe we get some actual fiscal stimulus which maybe buys the US some China style infrastructure!

andreilys 7y ago
We will likely see negative interest rates before the Fed decides to raise
Symmetry 7y ago
We could always just end the practice of paying interest on excess reserves which the Fed started when they thought banks were collapsing but there wasn't any economic downturn back in 2008, so they needed to get the banks not to lend out the money they were pumping into them somehow. The Fed's inflation models have been predicting higher inflation than we've seen ever since. Currently the interest on required reserves (IORR) and interested on excess reserves (IOER) are both 1.6%, well above the Fed lending rate of 1.25%.
bluedevil2k 7y ago
A fiscal stimulus? Yes, let's go even more into debt than we already are.
- learc83 7y ago
  It doesn't matter how much debt we are in provided the rate of return for the investment is greater than the interest on the new debt. And that's without considering that inflation is very low, so we can print our way out of some of it.
  - bluedevil2k 7y ago
    I find it ironic that the people who say "the government should just spend tons of money because the debt doesn't matter" and don't care about punting the problem to the next generation are the same ones who say how irresponsible the Baby Boomers are for punting the environment problem to the next generation.
    - learc83 7y ago
      And you managed to both completely avoid my point and bring up generational politics.
      - bluedevil2k 7y ago
        You don't have a point, you have an opinion. You don't provide any facts or resources that prove the money spent in a fiscal stimulus returns a greater rate than the interest on it. You don't address the fact that the debt has gone up 300% over the last 20 years while the GDP is up only an average of 2.5% a year. Printing your way out of debt is not a solution, ask Argentina. Eventually your investors will lose faith in the value of the money they're getting back in return and the currency will collapse.
        learc83 7y ago
        > You don't provide any facts or resources that prove the money spent in a fiscal stimulus returns a greater rate than the interest on it. 1. I never said fiscal stimulus was guaranteed to return more than the interest to service the debt needed to pay for it. I said if it does that. My point is deficit spending == bad is not always true. 2. You didn't provide any facts or resources to prove that there exists no possible fiscal stimulus that could generate a greater return than the interest on the debt needed to pay for it. If you want resources, Google it. You'll find plenty of information backing up the claim that it is possible for deficit spending to pay for fiscal stimulus to be a net benefit. >You don't address the fact that the debt has gone up 300% over the last 20 years while the GDP is up only an average of 2.5% a year. Why are you quoting a 20 year value for the debt, but a yearly value for GDP? >Printing your way out of debt is not a solution, ask Argentina. Instead of looking at Argentina, why don't you look to the US? We've been effectively printing money since 2008 and inflation hasn't come close to going out of control. The US isn't Argentina, and saying look to Argentina is no better than people saying look to Somalia for an example of why small hands off government doesn't work.

liuliu 7y ago

It can go negative, or Fed can do another round of QE, there are plenty of tools. The real question is whether the deficit can grow indefinitely without consequences, and if this is a moral hazard (e.g. no risk priced in borrowing).

cm2187 7y ago
The European experience has shown that negative rates aren't really working, other than killing the local banking system.
- misja111 7y ago
  Well that's not what the former ECB chairman Mario Draghi thought about it. According to him they were a success .. See e.g. http://www.ekathimerini.com/245837/article/ekathimerini/business/draghi-greece-selling-debt-at-negative-rates-is-a-success http://www.ekathimerini.com/245837/article/ekathimerini/busi... But even mr. Draghi might agree that right now the ECB is pretty powerless, given that it's rates are already below zero.
  - RobertoG 7y ago
    That's because it's not a monetary policy problem, but a fiscal policy problem. If you insist in fixing your home with your car jack, don't complain about the results.
    - cm2187 7y ago
      Worthwhile read: https://www.business-standard.com/article/finance/can-banks-survive-negative-rates-instability-in-global-financial-system-119091300319_1.html https://www.business-standard.com/article/finance/can-banks-...
      - speedplane 7y ago
        When we design policy around increasing the value of the stock market, we effectively give stock-holders power. Good policy should create efficient markets, not "high value" ones.

JumpCrisscross 7y ago

> We're basically running out of tools to combat an actual financial crisis Not really. This was extensively explored following the Great Depression, in part by Ben Bernanke, which is how we got QE. In summary, the Fed can buy more than just short-dated government bonds. Moreover, "liquidity trap" doesn't refer to the central bank running out of tools per se. It refers to investors calling a central bank's bluff. A classic example is a stagflation-facing central bank cutting rates. The cut spurs inflation. Investors figure that will force the central bank's hand into a rate hike shortly. As a result, they hold. The cut thus fails to have an impact because the bank is perceived to be constrained. That doesn't apply here.

tossAfterUsing 7y ago
> That doesn't apply here. So long as the appearance of inflation never occurs.

pbrb 7y ago

I'm pretty worried about this. I don't think this rate cut makes any sense. You can't stimulus away a virus.

pmart123 7y ago
There seem to be economic ways to help curtail it though. - sick pay for hourly employees for next year - backstop airlines, event planning and travel businesses in some capacity - offer Netflix rewards for vaccines, testing methods or other applicable things - cover cost of insurance for massive testing
- tossAfterUsing 7y ago
  > cover cost of insurance for massive testing how about just massive testing. no insurance necessary
- belltaco 7y ago
  If done well, that would prove that Medicare4All works. Cannot have that happen.
skybrian 7y ago
Yes but it could avoid some bad effects. If a company temporarily can't manufacture something due to supply chain disruption, they could lose a lot of money and might need to borrow some. Getting by until things recover just got cheaper. I'd guess there are probably similar issues for restaurants, the tourist industry, maybe construction? But that assumes they're credit-worthy. It wouldn't help a company that can't borrow.
- pbourke 7y ago
  Somehow I don’t think the ability to borrow money 0.5% cheaper than yesterday is going to make a material difference to a lot of firms.
munificent 7y ago
Trump isn't trying to stimulus away a virus. He couldn't possibly care less about COVID-19 unless he personally were to get infected. He's just trying to stimulus himself a re-election.

scottmcf 7y ago

We are in/at the start of an actual financial crisis, people just haven't internalized that yet.

mywittyname 7y ago
Who could have known that using debt to purchase back stock for the purposes of artificially increasing company value without building value would cause a crisis?
- skybrian 7y ago
  It would be bad if they needed cash and couldn't borrow, but on the other hand borrowing just got cheaper. What evidence is there that companies who previously bought stock and issued debt are low on cash?
asaph 7y ago
I'll bite. How can you tell?
- toomuchtodo 7y ago
  The entire world is about to have a supply chain disruption that you can't stoke into recovery using central bank policy. The Fed rarely lowers interest rates without notice. They're spooked.
  - asaph 7y ago
    What if this supply chain disruption is short term, and the world returns to business as usual soon?
    - toomuchtodo 7y ago
      That is a possible scenario, but not what market participant behavior is predicting. So, you either believe governments, or you believe the flow of trillions of dollars through the capital markets. The truth likely lies somewhere in the middle, waiting to be discovered.

atq2119 7y ago

Only because the toolset is artificially restricted for ideological reasons. Fiscal responses (having the government spend actual money, either on things like infrastructure it by just handing it out to the population, which will then largely spend that money as they see fit) rather than monetary policy responses (reduce rates and hope that people will borrow more) are known to work well in most cases. The Corona virus situation is slightly different than the financial mess of 2008 because it involves actual potential supply constraints. This means that a higher rate of inflation may have to be accepted temporarily. But inflation has arguably been far too low for far too long anyway...

gdubs 7y ago
Keynes famously said you could hire people to dig ditches and it would stimulate the economy. However, if we were to take aggressive action on Climate Change, there’s a lot of potential jobs there. A massive potential stimulus. Also, you know, public funding of basic research which could explore, I don’t know, pandemic response, new therapeutics, etc. Like you said, ideological barriers are what’s keeping us stuck. But before we went all in on finance we had a pretty epic run last century of productivity fueled by public investment (think 1940-1970).
- trophycase 7y ago
  I mean half of the economy is digging ditches basically. A few small portions of the economy produce the necessities of life while nearly everyone else just circulates money around through entertainment, advertisement, etc.
- paganel 7y ago
  Climate Change is doing just fine with us doing no work, notice the recent news about the satellite-detectable pollution levels in China being at lows not seen in a long while. Of course, that means us not being as product- and services-rich as we are right now (farewell to cheap airplane rides, disposable clothes and easily replaceable electronics) but at the end of the day something will have to give.

mindslight 7y ago

Because they've already been expended to keep the "growth" party going indefinitely, rather than ever letting things cool off. This includes 2008 - a short hiccup and then full speed ahead, culminating in VC's filling sidewalks and gullies with a glut of consumer goods, hoping for some kind of eventual profit. Eventually the bubble has to pop - when it's not allowed to do so relatively casually, it will do so catastrophically. When it's not allowed to do so at it's own time, it will do so at the worst time.

gscott 7y ago

The best tool is to let the virus shake things out in the economy. Well managed companies will survive those that are not go by the wayside.