4 ms·

Game over happens when, fiat money seems to have, on a risk adjusted, liquidity adjusted basis, a better return and better appeal than holding existing real pri

Game over happens when, fiat money seems to have, on a risk adjusted, liquidity adjusted basis, a better return and better appeal than holding existing real private assets, therefore a process starts where people, businesses and banks try to hoard government paper all at the same time instead of holding private assets. Demand shifts so far towards government paper and away from private assets that the supply of the later assets go in steep decline (eg. businesses close, people are laid off etc.). Basically fiat's appeal as an asset, its above market return, puts the private asset market in a gridlock. It's normal for private asset returns to go negative in a crisis. Before paper money existed, losses on assets were a common thing. Your land would suffer from drought, your live stock would get an infection. You didn't stop working and shut everything down because you temporarily expected to get a poor return. You still wanted to eat something at the end of the year. The existence of an artificial government asset that has difficulty following the private assets rate of return into the negatives, can sometimes block a large part of the private asset market from existing. Business owners choose to stop any investment, wind down their business and sit on cash. The world moves towards everybody holding pieces of paper and nobody producing anything you could buy with these pieces of paper. Counter intuitively, in order to prevent people from holding too much government paper, you have to print a lot of it very early to make it seem less appealing. For example, if toilet paper companies had been ahead of the curve and kept the shelves stocked, they probably wouldn't have needed to manufacture so much toilet paper because fewer would have hoarded it if it didn't look scarce. The fact that they didn't produce enough early enough, means they ended up having to produce more overall.

AnthonyMouse 7y ago
> Game over happens when, fiat money seems to have, on a risk adjusted, liquidity adjusted basis, a better return and better appeal than holding existing real private assets, therefore a process starts where people, businesses and banks try to hoard government paper all at the same time instead of holding private assets. This is what happened in the 1930s. But as you say, counteracting it is as easy as printing money. Which normally has the disadvantage of causing inflation (this is what they were excessively afraid of in the 1930s), but when there are existing deflationary forces in effect, all it does is even things out. The real question is, what happens to the money they print? Buying treasuries with it is the usual option, which isn't a total disaster (it pushes investment back into stocks by lowering the yield on bonds), but a better option right now might be paying out the new money as a UBI. That would serve two purposes at once. One, you fight the deflationary effect, and two, you help people out whose businesses are suffering, both by giving the proprietors a UBI and by giving their customers one as well so they then have some more money to patronize businesses with. So instead of propping up stock prices artificially, you maintain their value organically by strengthening consumer demand. This also provides a nice answer to the question, what do we do once interest rates are already zero? At that point we can use any additional new money to fund a UBI instead of driving interest rates negative.
- dharma1 7y ago
  It will be used to monetise government debt. You will see targeted fiscal action announced tomorrow, to the tune of perhaps a hundred billion or more, aiming to help the businesses (and employees of those businesses) that are (and will be) decimated by the freeze in economic activity, and the crash in demand. From the announcement on Friday it sounded like the financial aid to companies that need it will be distributed through IRS as tax credits, or directly as cash to those companies with cash flow issues. I don't know how they aim to decide which companies qualify for the aid. There will be several similar fiscal stimulus measures announced over the coming weeks, perhaps even bailouts.
  - AnthonyMouse 7y ago
    "Monetize government debt" is just another way of saying buy treasuries. Which makes some sense as long as the interest rate on treasures is positive -- the people who sell them to the Fed will then have cash and want something else to invest it in, and the Fed (and therefore the US treasury) effectively gets to collect the interest on those bonds. But how much sense does it really make to have the Fed buy treasuries at a negative interest rate? They'd be paying someone else for the treasuries which they'd then have to pay interest on (instead of collecting interest), for the sole purpose of getting new money out into the economy. Obviously at that point it's time to consider alternate ways of getting the new money out there -- like just giving it out to everybody in the country as a UBI. Or if you want to do something equivalent with slightly different accounting, have Congress pass a UBI funded entirely with debt, but then the Fed monetizes the debt (and the new debt causes treasury rates to be zero instead of negative against the monetization). Doing some kind of "targeted tax cuts" along the same lines might also work, but probably not as well, because governments suck hard at detail-oriented master plans like that and usually just end up creating a lot of harmful economic distortions. Across-the-board even distribution reduces the incentive for people to change their behavior in order to get the money while still getting the money out there, and not putting it disproportionately in the hands of the rich.
igonvalue 7y ago
Is there a specific name for this general phenomenon?
- BenoitEssiambre 7y ago
  Low aggregate demand. Note that when they talk about low aggregate demand they mean demand for stuff versus money. So low aggregate demand for stuff (this includes consumables but also investments stuff such as factories) is the same as high aggregate demand for money (including money like instruments such as gov bonds).

AnthonyMouse 7y ago

> Game over happens when, fiat money seems to have, on a risk adjusted, liquidity adjusted basis, a better return and better appeal than holding existing real private assets, therefore a process starts where people, businesses and banks try to hoard government paper all at the same time instead of holding private assets. This is what happened in the 1930s. But as you say, counteracting it is as easy as printing money. Which normally has the disadvantage of causing inflation (this is what they were excessively afraid of in the 1930s), but when there are existing deflationary forces in effect, all it does is even things out. The real question is, what happens to the money they print? Buying treasuries with it is the usual option, which isn't a total disaster (it pushes investment back into stocks by lowering the yield on bonds), but a better option right now might be paying out the new money as a UBI. That would serve two purposes at once. One, you fight the deflationary effect, and two, you help people out whose businesses are suffering, both by giving the proprietors a UBI and by giving their customers one as well so they then have some more money to patronize businesses with. So instead of propping up stock prices artificially, you maintain their value organically by strengthening consumer demand. This also provides a nice answer to the question, what do we do once interest rates are already zero? At that point we can use any additional new money to fund a UBI instead of driving interest rates negative.

dharma1 7y ago
It will be used to monetise government debt. You will see targeted fiscal action announced tomorrow, to the tune of perhaps a hundred billion or more, aiming to help the businesses (and employees of those businesses) that are (and will be) decimated by the freeze in economic activity, and the crash in demand. From the announcement on Friday it sounded like the financial aid to companies that need it will be distributed through IRS as tax credits, or directly as cash to those companies with cash flow issues. I don't know how they aim to decide which companies qualify for the aid. There will be several similar fiscal stimulus measures announced over the coming weeks, perhaps even bailouts.
- AnthonyMouse 7y ago
  "Monetize government debt" is just another way of saying buy treasuries. Which makes some sense as long as the interest rate on treasures is positive -- the people who sell them to the Fed will then have cash and want something else to invest it in, and the Fed (and therefore the US treasury) effectively gets to collect the interest on those bonds. But how much sense does it really make to have the Fed buy treasuries at a negative interest rate? They'd be paying someone else for the treasuries which they'd then have to pay interest on (instead of collecting interest), for the sole purpose of getting new money out into the economy. Obviously at that point it's time to consider alternate ways of getting the new money out there -- like just giving it out to everybody in the country as a UBI. Or if you want to do something equivalent with slightly different accounting, have Congress pass a UBI funded entirely with debt, but then the Fed monetizes the debt (and the new debt causes treasury rates to be zero instead of negative against the monetization). Doing some kind of "targeted tax cuts" along the same lines might also work, but probably not as well, because governments suck hard at detail-oriented master plans like that and usually just end up creating a lot of harmful economic distortions. Across-the-board even distribution reduces the incentive for people to change their behavior in order to get the money while still getting the money out there, and not putting it disproportionately in the hands of the rich.

igonvalue 7y ago

Is there a specific name for this general phenomenon?

BenoitEssiambre 7y ago
Low aggregate demand. Note that when they talk about low aggregate demand they mean demand for stuff versus money. So low aggregate demand for stuff (this includes consumables but also investments stuff such as factories) is the same as high aggregate demand for money (including money like instruments such as gov bonds).